Take a closer look at the hand that gives; An arbitrary target for Indian corporate giving may do harm not good

August 14, 2013 4:07 pm

Take a closer look at the hand that gives

By James Crabtree

An arbitrary target for Indian corporate giving may do harm not good, writes James Crabtree

Last week, India’s ill-functioning parliament passed a bill rejigging the country’s companies laws. It included an especially eye-catching proposal: all businesses are now expected to give 2 per cent of their net profits to corporate social responsibility projects. The rule is not mandatory but even so, any large enterprise that fails to meet this minimum threshold will have to explain its shortcomings in its annual reports. If not, the company will be fined. It sounds like a splendid means of nudging stingy businesses to greater heights of public spiritedness. Unfortunately, the generally cozy, often inefficient and occasionally corrupt systems through which some Indian companies support worthy causes mean it may do more harm than good.The case for the new law is simple. India has myriad pressing social needs. Its businesses have become vastly richer in recent decades. They therefore have a responsibility to plough back some portion of their winnings to society at large. Mandatory reporting rules also operate in some European countries, and seem to work well enough.

Some Indian companies, such as the Tata and Birla conglomerates, already have genuinely impressive philanthropic records, much more so than many of their western peers. In 2011, Tata alone invested about $170m in such projects.

Historically, this stemmed as much from necessity as generosity. Industrial groups seeking skilled, healthy workers have often had to build local schools or hospitals themselves. Even so, visitors to India cannot but be impressed by the charitable projects such companies support, and the template they could provide to others.

Backers of the new law also cite more cynical reasoning, notably scepticism about the capability of India’s state. Better to let businesses deliver these projects, not inefficient public servants. Even Sachin Pilot, the minister behind the legislation, made a variant of this argument. “We have said the government will keep out of it. It is your money, your choice what you do with it,” he said last year.

Of course, Mr Pilot’s law may end up having little effect, in which case its worst fault will be simple pointlessness. But his government clearly hopes it will work, resulting in a sharp increase in spending as anxious companies seek to avoid the opprobrium that could come with miserly public disclosures.

If the desired does happen, however, much of the spending would be hurried and poorly targeted, and suck capital away from investments at a time when the country’s stuttering economy badly needs them. Others have argued that such a move would also divert funds from the people companies are primarily meant to serve: shareholders.

This last point is less convincing and there remains a strong moral case for cajoling companies to behave more responsibly. Yet in India, this is where the problem lies. About three-quarters of its businesses remain family-controlled or owned, and as a result the charitable arms of many companies often end up being well-intentioned sinecures, run by and employing relatives and friends.

Worse, many Indian corporate giving projects become handmaids to the murkier side of the country’s business culture. Good works are often used to placate local opposition in areas surrounding big industrial developments, for instance, or to support projects as a way of buttering up local politicians. In some cases such endeavours are even used as a covert means to funnel money for bribes to political or business figures. A sudden splurge in charitable spending could worsen such problems, not improve them.

A better approach would be gradual, with a much greater focus on accountability. Mandatory reporting has a role to play, although it would be wiser to focus on the outcomes, not just the amount of cash going into philanthropic projects.

Increased transparency could also help bring a measure of democratic oversight to the process, which would be missing if the state handed responsibility for social programmes to the corporate sector.

But the overwhelming priority remains ensuring that money earmarked for corporate giving is spent effectively and honestly. And that is an objective that an arbitrary 2 per cent target is not likely to achieve.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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