Abstract

The question we raise is what to do when companies fail to keep pace with societal expectations with respect to their corporate social responsibility (CSR). The response of the Indian government was to make it mandatory for large corporations to spend funds on CSR activities. In this paper, we investigate the success of this legislation both for the companies and the intended beneficiaries. We find that the impact of the legislation has fallen short of expectations both in terms of the volume of CSR expenditure generated and the activities to which it has been directed. In particular, we find that the legislation has had a negative corporate profitability which can impact on the willingness of companies to spend in this area. We conclude that greater care must be taken when implementing mandatory CSR if it is to be effective.

Introduction

Corporate Social Responsibility (CSR) 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 as a whole (Holme & Watts, 2000). One of many important questions this raises is whether corporations are expected to voluntarily make this commitment or whether they need encouragement to do so. The European Commission (2016) was clear on this matter when they described CSR as a “concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment.” However, several governments have lost patience with the willingness of corporations to make sufficient voluntary contributions to CSR and have taken steps to mandate such expenditures. The focus of this paper is on gaining insights into the effectiveness of making CSR expenditurei mandatory and it implications for corporate profitability. A scattering of nations including India, Indonesia and the Philippines have undertaken national-level legislative initiatives that mandate CSR expenditures by corporations (Congress, 2013; Gowda, 2013; Waagstein, 2011). The analysis in this paper is based on the Indian experience where legislation was passed in August 2012 that mandated all publicly listed Indian companies and private enterprises whose net worth exceeds INR 5000 million, whose annual turnover exceeds INR 10000 million, or whose profit exceeds INR 5 million during any financial year, must spend two per cent of their profits, averaged over the past three years, on CSR expenditureii. The companies are required to disclose such expenditures in both their financial statements and a separate individual CSR report (Subramaniam, Kansal, & Babu, 2017). The approach taken with the CSR provisions is best described as “comply or explain” where if a company is not in a position to spend the prescribed amount on CSR, the board is required to disclose and report the specific reasons for not doing so. Failure to report CSR spending, or the reasons for failing to spend the required amount, constitutesk a violation of Section 134 of the Companies Act, and the company shall be punishable with a fine that shall not be less than INR 50 000 but which may be as much as INR 2.5 million and every officer of the company who is in default shall be punishable by imprisonment for a term which may not exceed three years, or by a fine which shall not be less than INR 500 000, or both (Ernst & Young, n.d.).