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CSR’s problem with good governance

LiveMint logoLiveMint 01-05-2017 M.S. Sriram

There has been a debate in Bengaluru recently relating to a donation made by construction firm Puravankara to the Suchitra Cinema and Cultural Academy Trust. While the details of the organizational structure of the recipient are intricate, the debate has revolved around three contentious issues about the conditionality imposed on a corporate social responsibility (CSR) grant by the company.

The three conditions that the donor agency proposed (according to a communique by the trustees of the recipient organization) was: (a)The trust to be renamed to include the name of the donor; (b) A permanent place for the donor on the board of trustees; and (c) The land or building named after the donor.

Instead of getting into the specifics in this particular instance, we should examine the larger issues of governance from the perspective of the donor in the context of the CSR law. Companies donating to non-profits is not new; neither is the issue of conditionalities on how the grant would be utilized and how the oversight would be administered. We have multiple institutions bearing the Tata name as an example. Nor are they the only company to do so. We have many facilities that bear the name of a donor and have representatives of donors on the management board—particularly in charitable hospitals, hostels, etc.

However, donations in the past were a mutual contract between the donor corporation and a recipient not-for-profit and were not mandated by law. In principle, these were expenses of the corporation and the tax law accordingly interpreted whether such expenses would be allowed as valid business expenses for the purposes of taxation—usually disallowing these as business expenses, but providing exemption if the recipient institution had a exemption under the multiple clauses of the Information Technology Act. Therefore, bundling CSR with branding was okay under the old dispensation.

However, under the new CSR law, it is mandatory for corporations to spend 2% of their profits on CSR activities. The rules are silent on whether the philanthropic activities can align with the main business. However, the activities have been defined. It is natural for businesses to leverage their charity with business. At this juncture, we need to examine some issues.

The rules prohibit CSR expenses from being claimed as business expenditure. They are not expenses to be incurred in the normal course of business, but like tax, they are obligatory to be paid back to society at large, except for a small proviso: In the case of a tax, the payer does not have the liberty to directly determine the cause, purpose and methodology of its utilization, whereas in a CSR donation, the corporation can choose its favourite cause. By this logic, there should be no long- or short-term benefits for the corporation to be derived from the donations, and CSR donations are certainly not surrogate expenses for explicit brand building. The insistence on the name being inserted not only in the name of the trust, but also on the building is veering into the territory of brand building and advertising. If the donor is in the business of construction, the association of a physical asset with that of its name does convey more meaning than is obvious at first sight.

The intent of the CSR laws is largely to encourage corporate philanthropy. Therefore, it is important to ensure that donors do not use this as a proxy for promoting their brands. Certain types of permitted expenses—like contributions to the Prime Minister’s National Relief Fund—do not in any case give a brand promotion opportunity.

Similarly, on the matter of control: Why should philanthropy that is mandatory CSR spending net a board position? Would that result in the corporation also directing the activities of the charity to further its own interests? Is this arrangement a violation of the intent of the CSR mandate? Since the law is silent on this, it is natural for corporations and their board-level CSR committees to look at it as a tool to enhance their business interests. However from the perspective of good governance, it may make more sense for the corporation to maintain an arm’s length relationship with the organization that has received funds, and just ask for compliance with the utilization certificate which ensures that the donation is within the rules and used for permitted purposes.

This aspect is not specific to the corporate world. Let us also raise this question in another setting. The members of Parliament (or members of legislative assembly) local area development scheme is a facility extend to elected representatives to get works of public interest—as decided by a particular candidate—built or carried out in their respective constituencies. The current regulations mandate that the name of the elected representative be displayed on the works prominently. While it may be important to acknowledge the source from where the resources have come, should the state explicitly mandate the display of the name?

After all, it is the money of the exchequer and the MP only has the power to direct the funds to a certain project. It gives an unfair advantage to the sitting MP against his opponent in an ensuing election. It is time we ask some of these questions to clarify good governance practices in giving funds—both in the corporate world as well as the government, at least through an acceptable best practices code.

M.S. Sriram is visiting faculty, Centre for Public Policy, Indian Institute of Management, Bangalore.-

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