Pavan Sukhdev: Focus Should Be On Measuring Social Benefits Of CSR

Pavan Sukhdev, CEO – GIST Advisory & Goodwill Ambassador, UN Environment shares how companies can make the most of Section 135 of the Companies Act 2013, which he believes is a pathbreaking provision, and why it should not suffice to focus on measuring company costs in CSR - in this exclusive interview with Nidhi Singh, Executive Editor, CSRlive.in.

What do Corporations need to do in order to hasten the evolution to an inclusive green economy?

Most corporations today still follow the outdated philosophy of Milton Friedman and his free-market fundamentalist followers, which is that the only purpose of the corporation is the enrichment of its shareholders. This is a narrow-minded caricature of the corporation, whose real and larger purpose is community, in the words of J.R.D. Tata, the founder of the Tata group. In my book Corporation 2020 I have highlighted that tomorrow’s corporation, which will drive a new inclusive green economy, will be like a community that includes not just shareholders but its suppliers, customers, employees, regulators, the public, and future generations. It will be like an institute that provides skills training and develops its employees. It will be a responsible custodian of public wealth such as wild nature and public infrastructure, and not an irresponsible exploiter of public wealth for private profits. Its goals will be ethical and aligned with society, and through pursuing its wider purpose it will also make shareholder profits.

In order to evolve into this higher organization, changes in rules will be required from four important groups of regulators. (1) Accountancy Regulators such as the International Accountancy Standards Board (IASB) internationally, or the Institute of Chartered Accountants of India (ICAI) in India ought to publish rules for quantifying and disclosing the externalities of corporations, which impact stakeholders, and not just their shareholder performance. (2) Finance Ministries should reduce taxes on value-addition and profits, and instead, increase taxation on all forms of pollution and natural resource use, especially the usage of fossil fuels (3) Advertising associations such as the World Federation of Advertisers (WFA) internationally and the Indian Society of Advertisers (ISA) in India should make clear guidelines for ethical and accountable advertising by corporations. (4) G-20 central banks including the Reserve Bank of India should create a system of limits to leverage, through capital adequacy requirements for corporations which are too large and considered “too-big-to-fail”, imposing unreasonable demands on the public exchequer when they face bankruptcy – as did AIG, General Motors, Kingfisher and other large companies during various financial crises in the past. These changes in rules will cause long-overdue market corrections and create the right conditions for “Corporation 2020” style leaders to succeed, whilst the old guard “Corporation 1920” corporations will become defunct, as corrected markets punish their misallocation of capital.

The CSR law in India is now well over two years old, how do you view the CSR landscape evolving in India in light of this unique mandate?

S. 135 of the Companies Act 2013 is a pathbreaking provision, and it could result in significant benefits to the poor in India, and could give India a leading edge in the new “inclusive green economy” that a fossil-fuel-free world will engender as it delivers the agenda prescribed by the UN’s seventeen Sustainable Development Goals . However, at present, it does not have enough of a focus on measuring and delivering social value. Targets are based on spending, and so corporate managers are focused on CSR spending and accounting for corporate costs. That creates the wrong incentives for corporations. Instead, the Ministry of Corporate Affairs should issue guidelines and endorse an appropriate framework for Indian companies to deliver positive externalities to natural capital, human capital and social capital. It should not suffice to focus on measuring company costs: instead, the focus should be on measuring social benefits delivered by the CSR programmes in question. That will align the development needs of India with the objectives of corporations and their CSR and Sustainability managers.

Experts believe that without a coercive enforcement mechanism, it is unlikely that the CSR law will yield effective results. Would you agree?

I don’t believe we need a coercive enforcement mechanism, it should suffice to “report or explain” as s.135 requires. However, the CSR law should not merely be focused on targeting “spending”, as that can lead to inappropriate targeting and selection of NGO’s, manipulation of company accounting policy, or wasteful expenditure in the name of ‘CSR’. Instead, companies should be asked to focus on social value-addition, and asked to target and to measure the benefits of their CSR, in the form of positive externalities to natural, human and social capital. (see www.gistadvisory.com for a Valuation Framework for corporate externalities)

How can Indian companies turn their CSR strategy into a source of opportunity, innovation, and competitive advantage?

The purpose of CSR – as the term implies – is social responsibility. It can lead to better ethics in a corporation, and to a corporate culture of care for stakeholders (employees, customers, suppliers, and the society in which they operate) as against a culture of single-minded focus on shareholders, and therefore profits at the expense of all else. This change in culture is appropriate for a developing country, and we are not the only developing country where corporate leadership takes a keen interest in promoting social good and improving the lot of those at the bottom of the economic pyramid. If we can achieve this transition away from a mantra of “private profits, public losses” then we are much more likely to achieve the goals of sustainable development. And a more prosperous and well-governed country can only be a better opportunity for the corporations of tomorrow.