INTRODUCTION TO CSR

INTRODUCTION TO CORPORATE SOCIAL RESPONSIBILITY (CSR)

(Sample Study Note)

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1.0 INTRODUCTION Corporate social responsibility (CSR) is also known by a number of other names: corporate responsibility, corporate accountability, corporate ethics, corporate citizenship, sustainability, stewardship, triple bottom line and responsible business, to name just a few. Corporate Social Responsibility and Sustainability is a companys commitment to its stakeholders to conduct business in an economically, socially and environmentally sustainable manner that is transparent and ethical. Stakeholders include employees, investors, shareholders, customers, business partners, clients, civil society groups, Government and non-government organisations, local communities, environment and society at large. The idea of CSR first came up in 1953 when it became an academic topic in HR Bowens Social Responsibilities of the Business. Since then, there has been continuous debate on the concept and its implementation. Although the idea has been around for more than half a century, there is still no clear consensus over its definition. 2.0 DEFINITION OF CSR In 1984, Edward Freeman introduced the stakeholder theory and argued that socially responsible activities helped business in building strong relationships with stakeholders, and that management must pursue actions that are optimal for a broad class of stakeholders rather than those that serve only to maximise shareholder interests. In 1989 another prominent economist, Kenneth Andrews exhorted corporates to focus corporate power on objectives that are possible but sometimes less economically attractive than socially desirable. In 1998, John Elkington first introduced the concept of Triple Bottom line to emphasise that a companys performance is best measured by the economic, social and environmental impact of its activities. Definitions 1) Corporate social responsibility is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large, to improve their lives in ways that are good for business and for development (World Bank Group). 2) The social responsibility of business encompasses the economic, legal, ethical and philanthropic expectations placed on organizations by society at a given point in time (Carroll & Buchholz 1999:35) 3) Corporate Sustainability, and also CSR, refers to a companys activities voluntary by definition demonstrating the inclusion of social and environmental concerns in business operations and in interactions with stakeholders (Marrewijk & Were 2003)

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4) CSR is defined as the obligations or duties of an organization to a specific system of stakeholders (Vos, 2003) 5) Philip Kotler and Nancy Lee (2005) define CSR as a commitment to improve community well being through discretionary business practices and contributions of corporate resources 6) World Business Council for Sustainable Development Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.

3.0 IMPORTANCE OF CSR Many factors and influences, including the following, have led to increasing attention being devoted to CSR:

Globalization -- with its attendant focus on cross-border trade, multinational enterprises and global supply chains -- is increasingly raising CSR concerns related to human resource management practices, environmental protection, and health and safety, among other things. Governments and intergovernmental bodies, such as the United Nations, the Organisation for Economic Co-operation and Development and the International Labour Organization have developed compacts, declarations, guidelines, principles and other instruments that outline social norms for acceptable conduct. Advances in communications technology, such as the Internet, cellular phones and personal digital assistants, are making it easier to track corporate activities and disseminate information about them. Non-governmental organizations now regularly draw attention through their websites to business practices they view as problematic. Consumers and investors are showing increasing interest in supporting responsible business practices and are demanding more information on how companies are addressing risks and opportunities related to social and environmental issues. Numerous serious and high-profile breaches of corporate ethics have contributed to elevated public mistrust of corporations and highlighted the need for improved corporate governance, transparency, accountability and ethical standards. Citizens in many countries are making it clear that corporations should meet standards of social and environmental care, no matter where they operate.

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There is increasing awareness of the limits of government legislative and regulatory initiatives to effectively capture all the issues that corporate social responsibility addresses. Businesses are recognizing that adopting an effective approach to CSR can reduce risk of business disruptions, open up new opportunities, and enhance brand and company reputation.

4.0 BUSINESS CASE FOR CSR In what has become known as the business case for Corporate Social Responsibility (CSR) the pitch is that a company can do well by doing good: that is, can perform better financially by attending not only to its core business operations, but also to its responsibilities toward creating a better society. The business case for CSR differs from firm to firm, depending on a number of factors. These include the firm's size, products, activities, location, suppliers, leadership and reputation (as well as the reputation of the sector within which the firm operates). Another factor is the approach a firm takes to CSR, which can vary from being strategic and incremental on certain issues to becoming a mission-oriented CSR leader. The business case for CSR also revolves around the fact that firms that fail to engage parties affected by their activities can jeopardize their ability to create wealth for themselves and society. Taking into account the interests and contributions of those with whom one interacts is the basis for ethical behaviour and sound governance. CSR is essentially a strategic approach for firms to anticipate and address issues associated with their interactions with others and, through those interactions, to succeed in their business endeavours. There is growing consensus about the connection between corporate social responsibility and business success. The World Business Council for Sustainable Development has noted that a coherent CSR strategy based on integrity, sound values and a long-term approach offers clear business benefits to companies and contributes to the well-being of society. Ed Zander, Chairman and Chief Executive Officer of Motorola, states that strong economic performance and good social and environmental performance are not mutually exclusive. In fact, I believe that good corporate citizenship improves our bottom line. It's not surprising that many analysts and investors are paying closer attention to a company's corporate citizenship efforts for purely fiduciary reasons. Firms with social citizenship records and a real commitment to corporate responsibility are arguably more sustainable, better managed and, therefore, better long-term investments. As Tony Fell, Chair of RBC Capital Markets, has stated, the ongoing vitality of our communities is both in our long-term business interest and in the interests of a healthy, vibrant country. No enterprise operates in a vacuum.
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The recent progress of the socially responsible investment (SRI) movement at the domestic and international levels provides evidence that the marketplace is developing both social and environmental criteria and related information to supplement the traditional financial criteria used to make investment decisions. Market indexes and professional firms now provide information to mutual funds, private equity funds, venture capital funds, commercial banks and other financial market investors about a wide range of corporate characteristics, including governance, human resource management, health and safety, environmental protection and community development. Some examples of SRI indexes are the Dow Jones Sustainability index, FTSE4 GOOD 100 Index, Jantzi Social Index Canada, Innovest, Calvert CALVIN Social Index and KLD Domini 400 Index. The indexes, mutual funds and banks involved in SRI state how they define corporate responsibility and sustainability. Initially, SRI was about screening out potentially undesirable sectors (e.g. tobacco, gambling) but more recently SRI has moved to using positive criteria related to leadership approaches, planning processes and management practices in areas such as corporate governance and environment. 5.0 CSR IN INDIA The concept of CSR in India is not new, the term may be. The process though acclaimed recently, has been followed since ancient times albeit informally. Philosophers like Kautilya from India and pre-Christian era philosophers in the West preached and promoted ethical principles while doing business. The concept of helping the poor and disadvantaged was cited in much of the ancient literature. The idea was also supported by several religions where it has been intertwined with religious laws. Zakaat, followed by Muslims, is donation from ones earnings which is specifically given to the poor and disadvantaged. Similarly Hindus follow the principle of Dhramada and Sikhs the Daashaant. In India, in the pre independence era, the businesses which pioneered industrialisation along with fighting for independence also followed the idea. They put the idea into action by setting up charitable foundations, educational and healthcare institutions, and trusts for community development. The donations either monetary or otherwise were sporadic activities of charity or philanthropy that were taken out of personal savings which neither belonged to the shareholders nor did it constitute an integral part of business. According to Altered Images: the 2001 State of Corporate Responsibility in India Poll, a survey conducted by Tata Energy Research Institute (TERI), the evolution of CSR in India has followed a chronological evolution of 4 thinking approaches: Ethical Model(1930 1950): One significant aspect of this model is the promotion of trusteeship that was revived and reinterpreted by Gandhiji. Under this notion the
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businesses were motivated to manage their business entity as a trust held in the interest of the community. The idea prompted many family run businesses to contribute towards socioeconomic development. The efforts of Tata group directed towards the well being of the society are also worth mentioning in this model. Statist Model (1950 1970s): Under the aegis of Jawahar Lal Nehru, this model came into being in the post independence era. The era was driven by a mixed and socialist kind of economy. The important feature of this model was that the state ownership and legal requirements decided the corporate responsibilities. Liberal Model (1970s 1990s): The model was encapsulated by Milton Friedman. As per this model, corporate responsibility is confined to its economic bottom line. This implies that it is sufficient for business to obey the law and generate wealth, which through taxation and private charitable choices can be directed to social ends. Stakeholder Model (1990s Present): The model came into existence during 1990s as a consequence of realisation that with growing economic profits, businesses also have certain societal roles to fulfill. The model expects companies to perform according to triple bottom line approach. The businesses are also focusing on accountability and transparency through several mechanisms 6.0 PROVISION FOR CSR IN COMPANIES BILL 2012 The Companies Bill, 2012 incorporates a provision of CSR under Clause 135 which states that every company having - net worth Rs. 500 crore or more, or - a turnover of Rs. 1000 crore or more or - a net profit of rupees five crore or more during any financial year,

shall constitute a CSR Committee of the Board consisting of three or more Directors, including at least one Independent Director, to recommend activities for discharging corporate social responsibilities the company would spend at least 2% of its average Profit After Tax (PAT) of the previous three years on specified CSR activities.

The detailed rules are under processing after it passed of Companies Bill 2012 by Rajya Sabha during August, 2013 to give effect to this provision. According to Schedule-VII of Companies Bill, 2012 the following activities can be included by companies in their CSR Policies:(i) eradicating extreme hunger and poverty; (ii) promotion of education;
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(iii) promoting gender equality and empowering women; (iv) reducing child mortality and improving maternal health; (v) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; (vi) ensuring environmental sustainability; (vii) employment enhancing vocational skills; (viii) social business projects; (ix) contribution to the Prime Ministers National Relief Fund or any other fund set by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Caste, the Scheduled Tribes, other backward classes, minorities and women; and (x) such other matters as may be prescribed The Companies Bill, 2012, Clause 135 also provides for constitution of a CSR Committee of the Board. The CSR Committee is required to; (a) formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII; (b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and (c) monitor the Corporate Social Responsibility Policy of the company from time to time. (d) The format for disclosure of CSR policy and the activities therein as part of Boards report will be prescribed in the rules once the Bill is enacted9. Similarly As per central government guidelines all Central Public Sector enterprises would need to allocate a percentage of profit for CSR and sustainable activities. The ranges of these financial allocations are as follows:

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7.0 CHALLENGES OF CSR IMPLEMENTATION IN INDIA As the latest Forbes India cover story shows- we expect INR 63 billion to flow in from Indias top 500 listed companies, going by the governments 2% norm. If we expand this list to the top 1,000 corporations, add MNCs, co-operative banks and SMEs, and then it is talked about at least INR 120 billion. Not a bad number for a country of 1.2 billion. If it can be further extrapolated this calculation by geography- each of Indias 660 districts could get over INR 18 crore of this investment. Though the bill promises to bring a paradigm shift- it will also change the face of CSR activity as we know it. Both the primary stakeholders are tentative about the Bill, and its not surprising that doubts still remain. Challenges for the Government The new Companies Bill has been passed only in the Lok Sabha. One is not sure if it will be passed by the Upper house in this session or the next. Or indeed, if we will have to wait for the next government before it becomes law. From my conversations with senior corporate executives- there are many doubts that remain about the new bill. Here are some of the most prominent ones# Will the charity or donations be made mandatory eventually? The current draft Bill only recommends the 2% spend. But is there a chance that this could be made compulsory in the future. It would be better if there was clarity on this. # Is the 2% PAT related to the profits generated in India or the corporations overall profit from global operations? As India Incs revenues from international operations grow, this question becomes very relevant. # If only prescribed activities under Schedule VII of Section 135 (Health, education, skill development) are considered as CSR, what about corporate support for issues not covered under this schedule? Should they stop their investments and focus only on mandated areas? The NGOs and communities they support, could find themselves stranded if this happens. Most of the activities mentioned in the Schedule VII seem to come from the Millennium Development Goals, our national commitment for 2015. Post this, will the priorities change and if they do, companies could find it difficult abandon their communities. # Can companies claim the financial equivalent of volunteering hours as part of their CSR spend? # Can investment in CSR infrastructure related to the activities mentioned in Schedule VII be accepted? Challenges for Indian companies An analysis of CSR spend of the top 500 listed companies in India shows most do not spend even 1% of their PAT on CSR. Increasing this to the government
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recommendation, will in most cases, mean more than doubling CSR budgets. Lets analyse some of the immediate implications of this. # Many stakeholders accuse companies of treating CSR as a kind of public relations exercise. They say companies do not let go of the smallest opportunity to get mileage from CSR. As of now, not even 50% of the top 100 report their CSR budgets in their annual report. And whatever is reported could well be inaccurate, because there are no norms yet, on what should be included. # Corporates demand financial accountability from their NGO partners. And rightly so. But the boot will soon likely be on the other foot, with increased spends- investors are sure to ask companies for similar accountability on how the money is used. Like their global counterparts, Indian business needs to engage with the investors and other stakeholders and report this much better. # Companies should look at CSR as a 360 degree perspective- including their business processes, people & planet policies, regulations and compliance. Right now it is largely charity and donations. # CSR teams in most companies are headed by people with corporate communications or HR background. These teams are usually small and get little time to update themselves with the Social, Environmental & Economic Canvas of India. This, and the pressure on these teams to please every branch or location with some CSR budget, means that of the 660 districts of India, only 100 odd districts gets CSR funding. Sadly, the activity does not reach the really backward areas. # While MNCs talk about thinking global and acting local, most seem to follow the same philanthropic issues as their parent companies. While India needs investments in a vast spectrum, these funds have the opportunity to get invested in lots of issues to fill the gaps in development funding. # Most corporates depend on their NGO partners to arrive at the number of beneficiaries. Only a few carry out external audits to figure out the real impact. And in many cases, the donation amounts are so small, that it is difficult even to measure them. Add to this, the policy of many companies to support NGOs for not more than three years. How on earth, can you ever arrive at the impact of your money, which supported a student only for three years! # Corporates often underplay the strength of their biggest asset their employees, when it comes to engaging with communities. Analyse the volunteering hours reported by companies and you will find that most activity is limited to one global community day. They rarely promote core competency volunteering, where employees can share their business competencies with NGO partners. If this is done- it will surely ensure greater return on social investments.

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8.0 CSR Case Studies 8.1 CSR by Tata Group Tata Group has emerged over the years as a company which people trust. As the mission statement states at Tata Group, our purpose is to improve quality of life of the communities we serve, the Group has been effectively involved in nation building and socioeconomic development of the country. The group is diversified across 80 sectors and has transformed from a product-driven business to a brand-driven business based on innovation, growth and development. The Tatas, over the years, have built an image of trustworthiness that makes them the company most preferred by consumers and workers alike. Though the group has not integrated CSR into its core business strategies, it has institutionalized CSR which has helped the group to gain and maintain corporate reputation. Since its inception, Tatas have given equal importance to improving financial returns as well as fulfilling the social and environmental responsibilities. 63% of the equity capital of the parent firm, Tata Sons Ltd., is held by Tata Trusts whose combined development-related expenditure amounts to around 4% of the groups net profit. Though initially Tata Iron and Steel Company Limited (TISCO) emphasized on charity and dependence, it has transformed over the years to empowerment and partnership. TISCO has pioneered initiatives for the empowerment of women in the rural sectors. Being strong proponents of equal opportunities for all, they developed a program to train women from deprived communities into professional drivers of heavy motors like tractors and automobiles. For the propagation of inclusive growth, the company hires semi-skilled and unskilled workers from the local community. Skill enhancement programs are also undertaken to increase employability and standard of living. Social organizations and small-scale local industries which meet the required standards are included in the supply chain of the company. Raw materials are given to these companies for manufacturing and supply of finished goods, spares and consumables. This helps them tackle the working capital requirement. The triple bottom line was a remarkable step towards the harmonization of social, economic and environmental objectives. It has taken noteworthy initiatives to minimize the negative impact of commercial activities and promoted environmentfriendly practices. The group also facilitates the building of social capital in the country by encouraging employees to share their skill and engage themselves in community-based organizations. It also emphasizes on creation of profitable

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employment opportunities to improve the quality of life of the community for sustainable livelihood. The Tatas also engage in socioeconomic development of the communities around their industrial unit. The best example of this is the adoption and development of the city of Jamshedpur. The group till date bears all health and education expenses of the employees, runs schools and a 1,000-bed hospital. Tata Motors people-oriented policies and business transparency made it the most preferred company in the acquisition of Daewoo and Jaguar-Land Rover. The group companies employee-committed policies attract the best talents in the country even when they pay below the industry average. The reputation of the company as a responsible corporate citizen enhances its attractiveness as a prospective employee. The groups commitment to society is best reflected by the Tata Council for Community Initiatives which coordinates and integrates the social projects within the group. 8.2 CSR by Maruti Udyog Ltd (MUL) CSR at MUL is based on a policy statement which, among other things, identifies MULs key stakeholders, including, employees and their families; customers and their families; shareholders and investors; dealers, suppliers and other business partners; local community and society; and environmental and regulatory authorities. As per the policy statement, the company not only tries to follow responsible business practices in all its functions and practices, but also pledges to show its appreciation of the local community by undertaking initiatives that might not be linked directly to its business. The most ambitious and unique CSR initiative undertaken by MUL has been its activities in promoting road safety. This is in line with the companys belief that in addition to finding support, one of the best ways for corporate to fulfill their social responsibilities is by offering their managerial and technical skills to the society. This is a significant step as Indian roads are probably one of the most accident-prone anywhere in the world. A report in the Times of India puts the figure at 14 deaths per hour in 2008, totaling 1.8 lakh deaths due to road accidents annually (as reported by the National Crime Records BureauNCRB), with a majority of the deaths (40%) caused by truck and lorries and other commercial vehicles. In fact, as per the NCRB Report, road accidents have the maximum cause of unnatural deaths in India. In this context, MULs initiative to set up projected 8 to 10 new Institutes of Driving Training and Research (IDTR) and 110 Maruti Driving Schools (MDS) across the country is both innovative as well as relevant. The IDTR at Loni, set up in the year
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2000 in collaboration with the Delhi government, caters primarily to the commercial vehicles drivers, while that at Sarai Kale Khan, South Delhi, focuses on training drivers of personal cars and light motor vehicles. The training fees at these facilities range from as low as 100 per day to as high as 600 to 700 per day, depending on the financial background of the people who enroll for the training programs. Taking its driving training program a step further, MUL has signed a Memorandum of Understanding (MOU) with the Gujarat Government to set up, manage and run the Gujarat Regional Automobile Training Institute (GUJRATI) at the Gajadara village in Vadodara district. A first of its kind initiative in the country, it seeks to import both driving training and automobile technical training to Gujarats tribal underprivileged youth to strengthen their employability. All the above-mentioned facilities include world-class scientifically laid out test driving tracks, advanced computer simulators and theory training modules for classroom training on a par with international standards. Through these kind of facilities (like IDTRs and MDSs), the company has brought international standards in driving training and state-of-the-art training infrastructure in the country. Besides the above-mentioned pioneering initiatives, MUL has also undertaken other socially beneficial activities well-integrated with its operations and aims to implement them with the help of its suppliers, dealers and other business partners. Some of these initiatives include practicing 3R (Reduce, Reuse and Recycle)this is a policy whereby MUL has been able to recycle 100% of its treated wastewater as well as reduce its fresh water consumption. The company has also implemented rain water harvesting to recharge its aquifers. Besides, MUL actively promotes recyclable packaging for its bought out components. Green supply chainin strategic partnership with its suppliers, MUL has been facilitating the implementation of Environmental Management System (EMS). EMS training is conducted for all suppliers and surveys are made to identify vendors who need further assistance. MUL has adopted a three-coat-one-bake painting system at its Manesar facilities instead of the conventional two baking steps before final finish. This painting process involves applying three wet on wet coats which are baked together. This innovative system on the one hand helps lower energy consumption while improving productivity levels, and on the other hand, it is more eco-friendly than the conventional two bake system.

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References: 1) http://forbesindia.com/blog/business-strategy/challenges-of-the-2-csrparadigm/#ixzz2eDWk4Buf 2) Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises 3) Corporate Social Responsibility: An Implementation Guide for Canadian Business: http://www.ic.gc.ca/eic/site/csr-rse.nsf/eng/rs00126.html?Open&pv=1 4) KPMG-ASSOCHAM Report Corporate Social Responsibility To-wards a Sustainable Future 5) Integrating Corporate Social Responsibility Initiatives with Business Strategy:A Study of Some Indian Companies by Munmun Dey* and Shouvik Sircar, 212, IUP

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