Mandatory CSR is theft and distorts the philanthropic landscape
I had a few interactions on Twitter today in response to this tweet. Some were quite angry with my position.
The Congress led UPA government introduced Sec 135 into the Companies Act. This mandated all eligible companies to set aside 2% of their pre-tax profit towards Corporate Social Responsibility programs. In between my campaigns against even more egregious laws like the Right to Education, I have tried to spread awareness of this ill conceived scheme. In this post, I collect all my thoughts on why CSR needs to be repealed forthwith. I hope our new dispensation gets wind of the real dangers of this scheme.
What is CSR?
Essentially all companies meeting certain arbitrary threshold criteria must spend atleast 2% of their pre tax profit on social work. The current thresholds are
The new law mandates that all companies, including foreign firms, with a minimum of Rs.500 crore, turnover of Rs.1,000 crore and net profit of at least Rs.5 crore, spend at least two percent of their profit on CSR.
It is estimated that anywhere from 6000 to 8000 companies fall into this criteria for a net yield of USD $ 2.5B to USD $8B. The beauty is as the economy grows more companies make more profits and more funds are released for social work. This should suffice for the purposes of this post, there is plenty of info on Google and Corp Affairs Website if you want more.
Key confusion – whose money?
A lot of folks on Twitter were angry with my tweet. They wondered “Why are you attacking a noble philanthropic gesture from Ms Murty?” They forget that the money donated by CSR activities is 2% of the pre tax profits of the companies and not their personal money. This distinction can be hard to get.
Let me explain this further : Say a company makes 2500Cr/Q in pre tax profits. They have to set aside 2% = Rs 200Cr/Yr for CSR activities. If there were no CSR – this 200Cr would normally be paid out as extra dividend to shareholders. The promoters and board of directors are also shareholders but they are spending the Rs 200Cr/Yr that belongs to all shareholders. In my view ; this is simple breach of trust and theft of shareholder money.
Good vs Bad CSR
What I am about to say is very counter intuitive. There are two types of CSR, with examples.
CSR activities that have a hidden motive of profit. Working with villagers whose lands were acquired for cheap, providing safe transport for women employees, training local unskilled labour for use in factory.
CSR that are done out of real heartfelt concern for social good. These activities have no hidden profit motive and are done to purely uplift the underprivileged, provide scholarships to needy students, provision hospital equipment in far off places. They are not designed to increase profits.
The upside down thing is this : The second type of CSR done out of pure concern for the underprivileged is breach of shareholder trust and theft of their money. The former type of CSR with hidden profit motive is understandable !!
Therefore my main problem with all CSR including those from Infosys Foundation, Reliance Foundation , Shiv Nadar, Bharti Foundation and all the rest is that they are indulging in philanthropic activities.
Why is CSR philanthropy bad ? Better than tax which is eaten by the corrupt
There are actually two issues here. First Ipso Facto, mandatory CSR is undesirable as a philanthropic pursuit as I will explain. Second, the counter argument assumes a scenario where a 2% additional corporate tax replaces the 2% CSR. The argument is that money spent by well intentioned and people of integrity like Mrs Murty Ms Mazumdar Shaw or Mr Tata is far better then cycling the money through the corrupt govt delivery system.
As a purely social pursuit CSR is abhorrent because it substitutes the preferences of thousands of shareholders with that of a couple of promoters. This is not to say that minority shareholders need to have a veto power on day to day business judgments. The assumption is that minority shareholders trust the board of directors and company executives to be able to best deliver profits being in possession of the right information and technology. However, after having made profits – the minority shareholders have no such expectation on CSR money. They expect either dividends of reinvestments that would work to increase future profits. This is basic market mechanism. This is also why NO OTHER COUNTRY in the world has mandatory CSR.
Primary effects – skewed recipients
Say you did not have the CSR and simply distributed the net yield of Rs 25,000 Cr/yr to shareholders as extra dividend. Now those shareholders have extra money they can allocate to their favourite philanthropic activity. Many will allocate it to Hindu temples , others to Churches. Some will allocate to RSS – some may write a check in favour of, shudder; a non Idea of India think tank. The point is the masses decide the allocation and some of it will be for unpopular causes in the eyes of the “in crowd”. If you look at the law as well as the mission statements of these “foundations” – they explicitly rule out donating to religious trusts and those that dont sign up to ‘equitable society’ as defined by them. Here is a F.A.Q.
We do not partner with religious institutions or political parties, or provide assistance to individuals. We support apolitical and non-religious non-government organizations (NGOs) that are committed to the cause of an equitable society. FAQ from Infosys Foundation (not picking on anyone – everyone has the same rules)
Words like Equitable Society are controversial because they never tell you what it means in concrete terms. All we know is that in their worldview an equitable society isnt one where the profits are returned to investors.
To sum up , the skew is that recipients such as temples, village rituals, Hindu schools who would otherwise be beneficiaries of normal everyday people are now cut out of the loop. Secular and posh NGOs who would never be the recipient of normal everyday donors are now rolling in crores. This is an abhorrent and unacceptable skew. I do not even want to get into the outright communal and vitriolic campaign by the likes of Ram Guha who doubt the Hindu Societies willingness to be philanthropic.
Secondary effects – social status
With CSR money, an entire galaxy of corporate angels are born. They are able to project their philanthropy far and wide, in slums and forests, from billboards where Ambanis and Tatas and Mittals beam down on you hugging poor kids. They are almost the new government. They are accumulating enormous social and dare I say, political capital. To the extent it comes out of the 2% mandatory CSR it is social heroes created out of stolen money. Sooner or later, these larger than life angels will back political parties or think tanks and their aura rubs off on them. Worse they can condemn certain other types of thoughts and guide the dissent that way.
A tax is better
Contrary to what you think a 2% extra corporate tax is better than Mandatory CSR. An extra tax can help rationalize bring down, overall corporate tax rates for big and small corporates. Once the money is in the govt kitty we atleast have democratic institutions that determine how they get spent in accordance with wishes of the people.
The corruption argument is not worth responding to, because it would mean all income tax is bad and we should be allowed to buy gravel and tar with our money if we want public roads.
There is no principle behind the 2% number either. Why not 1% or 5%? Clearly companies with large social and environmental impact such as Mining, Meat Packing, large consumers of water, need to spend way more than 2% to get the folks in their impact area on their side.
Anyway you look at it. This mandatory CSR disrupts market mechanisms, creates uncertainty, skews philanthropic allocations, introduces more regulation and compliance, endless nuisance of NGOs bickering and fighting with each other, extortion.
But there is one bright spot. It applies to all religions. C’est la vie.