Strategic Corporate Social Responsibility

Strategic CSR

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Whatever I dig from Earth, may that have quick growth again.O Purifier, may we not injure your vitals or your heart

-Atharva VedaXII

Sarvo lokah Hitam-Rig Veda (1-

8)The King has to submerge his personality into the

development of his subjects -Arthasashtra, Chankya

Bahujana sukhaya, Bahujana hityacha-Arthasashtra, Chankya

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Strategic CSRNow What in God’s name is this

Incorporates both ethical CSRand altruistic CSR by performing activities that are advantageous to the community, as well as providing profit through goodwill.A well-known example of this is Toyota's development of the hybrid electric/gasoline car Prius. As environmental concerns have increased, Toyota stole a march on major competitors such as General Motors and Ford by creating a series of innovative car models that have both produced competitive advantage and environmental benefits.Similarly, Mexican construction company, Urbis, builds houses for disadvantaged buyers using different payment options such as flexible mortgages made through payroll deductions. The social impact is clearly around helping the disadvantaged afford decent homes whilst, at the same time, Urbis has business benefits.

Sub-category of Corporate Social Responsibility (CSR)

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Company Act 2013An Insight into CSR

What if they can’t SpendIf the company fails to spend this amount on CSR, the board must disclose why in its annual report (the act does not provide any guidance on what constitutes acceptable reasons for which a company may avoid spending 2 percent on CSR)

Setting UpSet up a CSR board

committee, which must consist of at least three

directors, one of whom must be independent.

How much to spendCompany spends “at least 2

percent of the average net profits of the company made during the three immediately preceding financial years” on

“CSR” activities

According to Indian Institute of Corporate Affairs, a minimum of 6,000 Indian companies will be

required to undertake CSR projects and CSR commitments from companies can amount to

as much as 20,000 crore INR

Any company that is incorporated in India, whether it is domestic or a subsidiary of a foreign company• net worth of Rs. 5 billion or more• turnover of Rs. 10 billion or

more• net profit of Rs. 50 million or

more

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Interpreting CSR Deep Dive into the Act

AO

P

Activities CSR as activities that promote poverty reduction, education, health, environmental sustainability,

gender equality, combating human immunodeficiency virus, ensuring environmental sustainability, social business project and employment enhancing vocational skills vocational skills development

OptionsCompanies can choose which area to invest in, or contribute the amount to central or state government

funds earmarked for socioeconomic development

PreferenceThe CSR Committee shall also prepare the CSR Policy in which it includes the projects and program. The act

specify that companies “shall give preference to the local area and areas around where it operates.”

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E

H

S

E

O

Environment• Environmental Sustainability• Sanitation and Hygiene

Others• Employment Enhancing Vocational

Skills• Contribution to Prime Minister’s

relief fund and other funds

Education• Promotion of Education• Creating Infrastructure

Health• Reducing Child Mortality and

improving maternal health• Combating HIV-AIDS, Malaria and

other diseases

Society• Social Business Projects

• Gender Equality and Women Empowerment

What ActivitiesThese are neither mutually exclusive nor collectively exhaustive ;)

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Key Points of the Act

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Surplus arising out of CSR activities will have to be reinvested into CSR initiatives, and this will be over and above the 2% figure

The company can implement its CSR activities through the following methods:• Directly on its own • Through its own non-profit foundation set- up so as to facilitate this initiative • Through independently registered non-profit organizations that have a

record of at least three years in similar such related activities • Collaborating or pooling their resources with other companies

Only CSR activities undertaken in India will be taken into consideration 34 Activities meant exclusively for employees and their families will not qualify

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Impact of the Act

Average CSR expenditure in India has gone up

Indian Firms are spending more than foreign firms

Public companies are spending more on CSR than Private companies

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Benefits of CSR

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Communities as SuppliersThere are certain innovative CSR initiatives emerging, wherein companies have invested in enhancing community livelihood by incorporating them into their supply chain. This has benefitted communities and increased their income levels, while providing these companies with an additional and secure supply chain

2Employer BrandingSeveral human resource studies have shown that companies that encourage and enable employees to participate in CSR activities are better at attracting, retaining and motivating them.

Avoiding community unrest:CSR initiatives in local communities by environmentally polluting companies also help in avoiding protest movements and future governmental regulations. The ‘license to operate’ is no longer given by governments alone, but communities that are impacted by a company’s business operations

Enhancing Corporate ReputationExpenditure on CSR increases firms’ profitability by building goodwill and a positive image in the eyes of consumers, suppliers and the government.

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Relationship between CSR & Profitability

Corporate groups have criticized the mandatory clause in the Act, as it will decrease the profitability of firms.

However, this doesn’t seem to be the case.

Not only is there a positive correlation between profit and CSR, the probability of higher spending on CSR increases as the firm becomes bigger.

Smaller firms with lesser resources at their disposal are less likely to adopt strategic CSR. They usually adopt philanthropy and community development activities such as schools for kids of employees, donations to religious organizations etc. Larger companies, on the other hand, indulge in strategic CSR activities that are closely linked to the company’s business goals and have higher payoffs.

Charity

Community Development

Strategic CSR

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Pattern of CSR by Major Sectors in 2013

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Oil&Gas Automobile ConsumerDurables

Iron&Steel Banking&FinancialServices

Power Infrastructure Cement Paper&Pulp Pharmaceutical

Health Education Community Development/Rural Development Environment

• Contrary to developed countries where CSR activities are undertaken mainly in the area of environment, in India it is mainly undertaken in the social sector.• Most firms undertake CSR expenditure for the welfare of rural communities, especially around their areas of operation. • A possible reason could be to generate goodwill amongst people in the neighborhood and become familiar with the area and its needs, which in turn would

minimize costs of providing services.

Source:AnalysisofCSRExpenditureInIndia,http://www.epw.in/web-exclusives/analysis-corporate-social-responsibility-expenditure-india.html

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Sector-wise CSR Community Development

Oil and Gas: PSUs have been found to spend the most on development of townships and community, with a special focus on education.

• They undertake community development in and around their areas of operation.

• This may be because the communities living close to their area of operation are most affected by negative production externalities.

• For example, the Indian Oil Corporation runs mobile medical units in Mathura and has setup a nurse training institute in Digboi, Assam. It has also spent a lot on the school education of children who live near their plants and in their townships.

• Power Sector: In the power sector, firms spend predominantly on community and rural development. • They undertake development measures for communities which stay close to

their plants through foundation and trusts. • They emphasize on the provision of educational facilities and skill

development programs. • For example, Jindal Steel carries out its CSR activities through its own

trusts, which lead to saving of transaction costs and creation of goodwill in the local area. Public sector units like NHPC and NTPC focus on rehabilitation and resettlement of the communities displaced by construction projects.

Automobile Sector: Most of the companies in the automobile sector spend mostly on environmental sustainability,

• Mahindra and Mahindra focuses more on environment by committing to reduce greenhouse gas emissions.

• It has introduced various sustainability measures in its plants like xeriscaping, green buildings and water efficient plants.

• This can be attributed to the fact that the automobile sector is one of the most polluting industries in India.

• Some like Tata Motors focus on education and skill development as well.

Cement Industry: Cement industry is another highly polluting industry. • Shree Cements which was given a very low rating by the CSE Green

Rating program has focused more on sustainability.• It has adopted the “triple bottom line” approach, where the focus is on

profit maximization, employee welfare and environmental sustainability.

• In its sustainability report, it has focused on climate change and reduction of greenhouse gases during production.

• Grasim Cements, which has a comparatively higher rating, has focused more on community development and rural development.

Sector-wise CSR Environmental Sustainability

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Sector-wise CSR Healthcare and Education

• Consumer Durables: In the consumer durables and fast moving consumer goods industry, companies focus on healthcare and education. • The Godrej group supports environmental sustainability by supporting

conservation of mangrove forests and undertakes philanthropic activities in the health and education sector.

• They conduct blood donation camps, conduct cleft lip surgeries with Smile Train, a NGO.

• Similarly, Hindustan Unilever (HUL) focuses on improving health and well-being and reducing the environmental impact of its production activities.

• Banking Sector: Companies in the banking sector spend mainly on priority sector areas. • They count the 40% mandatory priority sector lending as a part of

their CSR activities.• However, banks such as Jammu and Kashmir Bank undertake

activities other than priority sector lending also. • They support schools and provide funds for meeting educational

expenses. Studies have shown that banks spend more on education and environment in order to strengthen their image and increase consumer satisfaction.

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CommunitiesassuppliersITC e-Choupal

There are certain innovative CSR initiatives emerging, wherein companies have invested in enhancing community livelihood by incorporating them into their supply chain. This has benefitted communities and increased their income levels, while providing these companies with an additional and secure supply chain

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CSR Disparity Among States• Economic activityinastatedepends on2factors:

percapitaincomeandheadquarters oflargestcompanies

• Thetop10stateshaveanaveragepercapitaincomeof$2,073, welloverdouble thepercapitaincomeofthebottom10states—$944

• Statessuch asBihar,Assam, Jammu, Kashmir, andotherson thelower endwilllikely receiveamuchlowerinfusion ofcorporateCSRdistributions asfewercompanies haveoperations there

• Inthe10stateswiththehighestpercapitaincome levels, about 1.2percentofchildren areseverelymalnourished while forthebottom10,its3.6percent

• Povertyratesis12.3percentforthewealthierones ascomparedtopoorer states

• Infantmortality rateis30against46.5forwealthierstatesagainstnonwealthyones

• Eradicatinghunger, poverty, malnutrition,promoting healthcare,including preventivehealthcareandsanitation; andmakingavailablesafedrinkingwateraresixofthesocial issues highlighted intheCompanies Actforacompany’s CSRactivities

• Justseven states—Maharashtra,NewDelhi,Karnataka,TamilNadu,Haryana,West Bengal,andGujarat—arehometo87percentofET250companies

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Size and Economic Vibrancy of StatesWemakegreatsolutiontoyourproblem

LoremIpsumhasbeentheindustry'sstandarddummytexteversincethe1500s,whenanunknown.

Retro Product 2

18CSR Expenditure of India’s Largest Private-sector Companies

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40

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100

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Reliance Industries

Tata MotorsTata Steel Hindalco Bharti Airtel L&T TCS ICICI Mahindra & Mahindra

Sesa Sterlite

Adani Enterprises

Infosys JSW Steel HDFC Bank

2013-14 CSR Spending (USD Millions) CSR spending as Percentage of Net Profits

19CSR Expenditure of India’s Largest Public-sector Companies

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IOCL BPCL HPCL SBI ONGC

2013-14 CSR Spending (USD Millions) CSR spending as Percentage of Net Profits

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Mismatch

Mismatch prevails between regions with high levels of economic activity, and those areas with the most critical social development needs, such as public health, disease prevalence, gender equality, poverty, infant mortality levels, and other important indicators

Companies tend to spend in the areas where they have they have operations; yet many of India’s most serious social and health problems are located far away from key industrial centers

Companies may not have “operations” in an area that is critical to their growth, thereby limiting the benefit of brand exposure through doing CSR programs in that other region

The world is moving to a dematerialized form of commerce.

With the rise in electronic commerce, some of the world’s largest companies today and in

the future will have an even smaller operational footprint viz.

Flipkart, Amazon

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Role of SMEs

• Serve independently and also as ancillary to larger units

• Employ nearly 40% of India’s workforce and contribute around 45% to India’s manufacturing output

• CSR clause in the Companies Act, 2013 covers companies that have a net profit of five crore INR and above, it is expected many SMEs will

• Roadblocks in delivering values for SMEs in CSR• Fluctuations in profits affecting their capability• Limited human resources resulting in lack of professional approach

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Collboration Model

• Pooling resources with other SMEs in the cluster and create joint CSR programs managed by a single entity

• A common organization catering to a number of companies will take care of impact assessment studies, setting up of a CSR department etc and thus reduce the operational cost

• Long term programs have greater impact than short term ones. Profit fluctuations may hinder long term schemes. In collaborations, other partners can give larger share in case there is variation in allocation.

• A common entity with participants from different clusters will help assess a greater number of community issues

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Process of an SME

• First, they create an alliance of interested SMEs• Involvement of the cluster association will ensure that the local priorities are given due consideration while developing CSR

programmes

• In case a sufficient number of SMEs in a cluster do not wish to participate or are not required under the Companies Act, 2013 tospend on CSR activities, the boundary may be extended to other clusters, though this increases complexity

• In such a case, the alliance should form a steering committee with representatives from each SME to democratically decide theissues.

• The next steps involved in the due diligence of implementation or the concept development partner are:

• Project development ,Operationalizing institutional mechanism ,Contracting ,Budgeting and payments ,Monitoring ,Impact measurement ,Reporting and communication

• In cases where the total CSR funds are insufficient to cover the cost of collaboration, SMEs can also contribute to the PrimeMinister’s National Relief Fund or any other fund set up by the central government or the state governments as per activity ix of the Schedule VII of the Companies Act, 2013.

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Nestlé – Creating shared value

The Indian subsidiary of FMCG conglomerate Nestlé, believes in giving back to the society because of which they have such strong CSR activity culture. They call it creating shared value.

• Today Moga, a small town in Punjab produces 1.3 million liters of milk everyday. This volume is very huge in comparison to the volumes produced before Nestlé came to Punjab.

• In 1961 when Nestlé started its operations at the Moga factory, their were only 180 farmers who were willing to supply milk.

• Nestlé team went door to door educating people and teaching them ways to increase the Milk production.

• Over the years Nestlé investments in providing technical assistance to improve heard management, farm productivity and farm economics have continued to increase.

• Nestlé tries to help farmers by providing• Financial assistance• Farmer training and education

Milk Economy of Moga

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TATA SteelA detailed inspection was done by a team of experts around the TATA STEEL plant site assessing the needs of all the internal and external stakeholders at Gopalpur to create a CSR activity plan.

TATA Steel has taken steps in areas of

• Healthcare

• Education and Employability

• Livelihood

• Infrastructure development

• Sports and cultural integration

Project Gopalpur has contributed towards increasing growth and progress in the rural society and touched life of millions

Gopalpur Industrial Park & SEZ

Mobile Medical Units

In order to raise awareness of preventive healthcare and treatment ofcommon ailments TATA STEEL is running 3 highly equipped medical vans. Catering to 29 people of neighboring villages providing doorstep treatment along with free medicine. A total of 47474 people have been benefitted by this effort till 2013.

Tata Memorial Hospital Tata Steel is setting up a 500 bed ‘Tata Media Hospital’ at Sitallapalli under Luhajharpanchayat.

Mega Health CampsHuge health camps are being organized by TATA STEEL in collaboration with TATA steel rural development society in order to provide free medical assistance to the neighboring villages. Free medical assistance by specialist doctors from medicine, obstetrics and other field is being provided at these camps along with medicine.

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