CSR expenditure needs to be made compulsory for companies

In August 2013, the Indian parliament passed the Indian Companies Act, 2013, replacing the previous Companies Act of 1956.The new act has made important changes affecting company formation, administration and corporate governance. However, perhaps the most significant change has been the imposition of mandatory corporate social responsibility (CSR) obligations on companies operating in India.  According to the new act, companies above a particular threshold (defined in terms of net worth, total yearly turnover, or net profit) are required to spend a mandatory minimum amount on CSR expenditure, formulate a CSR policy, and provide disclosures regarding their CSR activities in their annual reports. The act requires a company that falls above the threshold as specified by the act to spend at least 2.0 per cent of its average net profit for the previous three years on CSR activities. The act also defines the scope of CSR activities, and includes some interesting activities, such as ensuring gender equality and employment of ethnic minority groups as a part of a company's CSR activity, in addition to more traditional CSR functions such as spending on education, health and culture. The CSR committee, as required by the act, will comprise of three members, including one independent director. The committee will prepare a CSR policy for the company, and propose the annual CSR budget. The act also requires the CSR activities performed by a company to be reported in its annual report in a specified format.
The requirements of the Companies Act of 2013 makes India the first country in the world to make CSR spending mandatory. Therefore, the requirements are likely to have significant impact on the way CSR activities are conducted in India. As more data becomes available on the actual CSR activities of the Indian companies, we will be in a position to study the impact of the new companies act. However, theoretically, a number of possible impacts can be predicted. The new requirements are likely to increase corporate philanthropic behaviour. The imposition of a mandatory minimum CSR spending does suggest that voluntary CSR spending have been below par in India. Therefore, companies will now be forced to carry out more CSR activities. Normatively, this should benefit the society.  However, a critical perspective would suggest that such forced philanthropic behaviour could encourage a 'tick-box' approach, where companies would haphazardly carry out CSR activities for the sake of meeting the requirements. This will be completely against the spirit of CSR activities. Also, such an approach could encourage corruption, as companies may guise many commercial activities as CSR activities, as this would qualify for a tax exemption. The formation of a CSR committee could also be challenging. In many developing countries, companies have struggled to meet the requirement of qualified members to lead the audit committees. It would, therefore, be interesting to see if companies can find suitable independent directors who can sit in the CSR committee. Perhaps, a more important issue would be to ensure the authenticity of the CSR reports. Are audit firms and assurance providers in India suitably qualified to provide such assurance service? This remains to be seen.
Surely, the approach taken by the Indian government on CSR issues will be of interest for the policy makers in Bangladesh. CSR activities in Bangladesh are relatively new. However, in recent years, such activities appear to have gathered a lot of momentum, thanks to some commendable initiatives taken by the Bangladesh Bank. Research evidence suggests that CSR activities in the banking sector have seen significant growth, especially over the last three years.  Also, the National Board of Revenue (NBR) issued a statutory regulatory order in 2011 to provide tax exemptions for certain CSR activities. The Green Banking Policy of the Bangladesh Bank is another important initiative in this arena.  However, despite such initiatives, the dismal level of CSR activities of public limited companies in Bangladesh does suggest that a more concerted policy approach is warranted. Perhaps this coordination at the national level can be achieved through the formulation of a national CSR policy for Bangladesh.
There is nothing wrong with policy makers in Bangladesh in borrowing a leaf from India to make CSR expenditure mandatory for companies in Bangladesh. However, care needs to be taken to ensure that this does not become yet another ceremonial exercise. The factors that will make the implementation of the CSR policy in India difficult are also present, perhaps in a stronger form, in Bangladesh. There is no dispute that a large majority of CSR activities performed by Bangladeshi companies bring benefit to the society. However, there is also evidence that the CSR activities conducted by some companies in Bangladesh are not transparent. For example, in some cases, CSR activities are either confined to certain functions or are conducted only in certain locations so as to bring political benefit for the company management. The shareholders in Bangladesh are not sophisticated and vigilant enough to detect such abusive practices.
In the absence of suitably qualified assurance providers, who could have ensured the authenticity of CSR activities, the requirement of a mandatory minimum CSR spending could create the scope for further corruption and nepotism. Before proposing any radical changes in the area of CSR, the government, therefore, needs to ensure that proper institutional arrangements are in place to maximise the benefits of the regulatory changes. For example, the Institute of Chartered Accountants of Bangladesh could be consulted to ensure that the auditors have the right skill set to provide such assurance services. Otherwise, such a noble initiative may end up being rather counter-productive.
 
Dr Javed Siddiqui teaches auditing and corporate governance at the University of Manchester, UK.
javed.siddiqui@mbs.ac.uk