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Social Audit for Corporate Social Responsibility – An Overview

March 20, 2017[2017] 79 taxmann.com 225 (Article)
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MEENU GUPTA

CS, MBA(F)

SOCIAL AUDIT FOR CSR

"Businesses need to go beyond the interests of their companies to the communities they serve".

Ratan Tata

Former Chairman of the TATA Group

As rightly said, businesses need to undertake CSR not only because it is a right thing to do but also because is good for the business. India is the first Country in world to introduce statutory Corporate Social Responsibility (CSR) through new Companies Act, 2013. Prior to this landmark development, CSR activities by corporates was more of a philanthropic exercise; an exercise for building research and educational institutes. The thinking has now changed. Corporates have now understood that consumers and people at large in Country are highly tuned to the fact whether a business house is a responsible co-citizen of world or not. Much of the debate has been conducted whether companies are meeting their mandatory spending requirement of 2% of profits; there is an immediate need to focus on whether these investments are making an impact, i.e conducting social audit to manage and measure CSR sponsored social development projects. With this in view, article aims to focus on scope and procedure of conducting social audit in context of CSR.

Introduction

As is common wisdom, Indian Companies have been engaged in CSR/Charity/Philanthropy since time immemorial. Whether it was the factory investing in communities around them to reduce dependence on a migratory workforce and for having happier families and hence happier employees; or businessmen giving back to their communities or causes near and dear to their hearts; or foundations building places of worship to bring communities together; or a whole host of other methods through which we had corporates giving back to society in some shape or form. In most instances these were treated as acts of charity or philanthropy, or owners giving back to society.

However, with the introduction of mandatory CSR under Section 135 of Companies Act, 2013, CSR is no longer just a public convenient relationship tool mandated by Act. It is more than that. It is now a vital component of success in modern business world. It is a strategic philanthropy linked with responsibility and veering towards community development through various projects. The change in thought process is due to fact that though being a responsibility, CSR is not compulsory. It is 'comply or explain'. It is not they "must do it" but "will do it or explain why we failed to do it."

Many companies work on CSR activities which have a direct bearing on their business like pollution control or protection of environment as a whole while others focus on general activities not related to their business like education, health, sanitation etc. Whatever may be the area of implementation, it is necessary that CSR principles are part of company's values and strategic planning. Also, it is important that CSR strategy is aligned with company's objectives and core competencies.

But most of these activities like promotion of education, eradicating poverty, combating diseases were traditionally addressed by Government. However, big corporates can have substantial impact in the solution of social causes as they are using resources of country, are causing damages to environment, so it is the obligation of these organisations to improve working conditions and quality of life of its employees and ensure environment sustainability. From one perspective, companies may be poorly equipped to address some of the social or environmental problems, but from another perspective, no matter how poorly equipped, companies may still be best positioned to find solutions to such problems.

Another reason why companies should perform CSR activities is that if companies are not working on CSR activities, they will suffer the most. A company cannot ignore the problems of environment in which it operates. If people of country are poor, if the environment is not sustainable or if natural resources of country are diminishing, it can have destructive effects on financial performance of company. These conditions will impose an extra cost to the corporations and may force them to relocate or to cease operations.

Also, following CSR companies in addition to protecting environment and control pollution can reduce their cost and improve their quality, example being using jute bags for packing instead of plastic to improve efficiency of finished goods.

A study analysed by NextGen Pvt Ltd, a Bengaluru-based CSR management firm, as per the data sourced from annual reports of top 91 NSE-listed companies by market capitalisation. In previous year 2014-15, when CSR rules came into force, top 100 firms listed on NSE spent a total of Rs. 4,760 crore on CSR activities which rose to Rs. 6,033 crore in 2015-16. Twenty-six of 91 firms showed their total spending had exceeded 2% of their profits which stood at 21 in FY'15.

Growth in CSR Expenditure for 2014-15 & 2015-16

Source: www.livemint.com dated 3rd August'2016

Education, health, sanitation and rural development remained key focus areas of CSR initiatives. CSR spending of firms on education and skill development was Rs. 1,703.9 crore in FY'16 being an 11% jump from Rs. 1,532.2 crore in 2014-15, as per the data analysed by Next Gen. However, the substantial amount of around 25% total CSR spending in India in 2015-16 which has been directed towards education is not creating an impact given that nearly half of Class 5 children cannot read a Class 2 textbook, according to the Annual Status of Education Report (Aser). Yet, several rigorous evaluations have shown that many of traditional investments in educational inputs like more textbooks or computers have had little impact on learning outcomes.

CSR Rules, which came into effect on 1 April, 2014, state that Companies with a net worth of Rs. 500 crore or turnover of Rs. 1,000 crore or net profit of Rs. 5 crore should spend 2% of their average profit in last three years on social-developmental-related activities such as sanitation, education, health-care, and poverty-alleviation, among others which are listed in Schedule VII of the Rules. The increase in overall spending by companies (as shown in chart above) is impressive, however, it is less clear if CSR spending is creating the impact it seeks as many companies do not base their decisions on rigorous evidence.

By definition, companies affected by CSR rules are healthy and profitable where business decisions are based on hard data and return on investment calculations. CSR decisions need to be subject to same rigour as other business decisions. As before launching new products, successful companies conduct due diligence: exploring the market and understanding competition, similarly this iterative rigorous approach is critical to CSR investments.

Growing evidence from impact evaluations can guide companies towards implementing solutions with proven impact, and allow them to steer clear of well-intentioned, but ultimately ineffective, ideas.

Since the CSR regulation is enforced, CSR symbolism represented by corporate managed hospitals and technical institutions, pictures of smiling villagers, mobile health vans and classroom full of well-oiled children is no longer adequate proof of CSR activity. Civil society organisations are demanding that living conditions of communities affected by an industry improve and in no case worsen. Affected citizens are questioning the extent of work done in the name of CSR. How were the beneficiaries selected? What did they have to say about the impact of CSR efforts? They are demanding a social audit of processes and outcomes something which until now was only reported to shareholders-but never discussed. A system of social audits would necessarily have to be in place to oversee the fulfillment of rules.

It is important for programmes to be piloted and evaluated. An evaluation can provide real-time feedback on implementation issues and, crucially, an assessment of programme impact. Beyond informing internal programme decisions, rigorous evaluations can also serve as a public good by answering critical policy questions. As an example, Tata Trusts is partly funding a rigorous randomized evaluation of a programme to reduce anaemia by introducing fortified rice in Tamil Nadu's public distribution system.

After developing a successful product, companies know it cannot be taken to scale without ensuring what sells in market A can also sell in Market B. Similarly, in social sector, a health programme that works in Tamil Nadu may not necessarily work in Punjab. A programme should demonstrate results in multiple contexts before significant resources are spent scaling it up.

Strategic approach to CSR should be followed through integrating it with core business strategies to gain competitive advantage. It should be part of company strategy and budget and be treated like an actionable business agenda.

Scope of Carrying out Social Audit in context of CSR

Social Audit is not specifically defined in Companies Act 2013. However, on perusal of Section 135, we can find the intention of legislature in indirectly enforcing social audit.

Companies Act, 2013 makes it mandatory for the companies covered under Section 135 of Act, to ensure that prescribed CSR amount is spent on CSR activities prescribed under Schedule VII of Act, thereby extending the boundaries of companies into the society at large. For CSR, many companies engage with local communities in surrounding areas, so the beneficiaries of CSR activities are generally from the local population. So to ascertain how these CSR activities bring changes in the lives of community at large and specifically the disadvantaged and deprived people, social audit may become imperative.

Also, considering the huge amount spending on various social activities by the corporate sector as well as the depth involved with respect to social activities, Social Audit becomes even more prominent to track and report the progress.

In the context of Section 135 and Schedule VII of Companies Act 2013, Social Audit is a tool through which companies can plan, manage, and measure CSR sponsored social development projects. It also helps to monitor consequences of intended and unintended impacts of social development projects their geographies. Social Audit initiated by corporates may also include financial audit geared towards verification of reliability and integrity of financial information.

While a financial audit provides verification of financial statements provided by a company, and provides an assurance that financial statements are true and accurate, thus increasing the value and credibility of statements, a social audit can verify the CSR of a company by demonstrating how social and environmental projects are being arrived at and will focus on data verification and evidence gathering for all significant assertions in CSR reports.

Social Audit is an instrument of social responsibility of an organization, a process to find out whether the benefits of relevant projects and activities reach the beneficiaries for whom they are directed. It provides critical inputs to correctly assess the impact of government activities on social well-being of citizens, determines the social cost and measures the benefit accruing to society. It refers to a process for measuring, understanding, and improving the social performance of an activity of organization. It also measures and reports the social performance in order to achieve improvement and suggest course direction. It enables an organization to assess and demonstrate its social, economic and environmental benefits. It is a way of measuring and evaluating the extent to which an organization or an entity has lived up to the agreed common social objectives.

In India, the concept of social audit is by and large targeted in the cases of public works by government applying the methodology of involving public through physical verification of works, records assessment, public hearing and mass mobilization, etc. Production of Social Audit Report by Indian Corporates regarding their CSR project is comparatively a lesser practiced phenomenon.

The rationale for its thrust is the vast divide between what people want and what do they get. Under the Government of India's Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005, conduct of social audit has been made mandatory, further ensuring accountability from those involved in implementation of scheme. Social Audit generates room for civil society's contributions, ensures social relevance of programmes, improves satisfaction of people about services provided and ultimately contributes to social capital.

Objectives

Social Audit is conducted to check how well the concerned organization has performed in meeting the needs of target beneficiaries of a given CSR project and the improvements required, if any, and thereby to increase the efficacy/effectiveness of concerned development programmes carried out by the company.

It will aid companies to understand the current impact and limitations to expected impact. It will also provide multi-stakeholder perception of CSR projects and inputs to CSR policy. Internally, it helps ensure greater verifiability of data and accountability. It's important to have strict and accurate monitoring and evaluation plan as part of any successful project implementation and CSR projects are no exception. It not only helps to be assured of implementation of policies as planned but also helps address intense public scrutiny and legal compliance. Social Audit should:

  Assess the physical and financial gaps between needs and resources available for local development.
  Create awareness among beneficiaries and providers of local social and productive services.
  Increase efficacy and effectiveness of local development programmes.
  Scrutinize various policy decisions, keeping in view stakeholder interests and priorities, particularly of rural poor.
  Estimate opportunity cost for stakeholders of not getting timely access to public services.
  Track, assess and report the progress of sponsored project and undertake course corrections.
  Facilitate CSR team to understand how each stakeholder has met assigned responsibilities.
  Assist CSR sub-committee plan and execute CSR activities in a transparent and fair way
  Assess the capabilities of implementing partners and plan future CSR projects based on their strengths.

Advantages of Corporate Social Audits

If conducted, Social Audit of CSR is advantageous as follows:

  It provides information about organisation's ethical performance ad stakeholders' perception which in turn is helpful to organization in reshaping its priorities in tune with people's expectations. It promotes community participation, social awareness and local democracy resulting in company's fulfillment of social responsibility, accountability, and thereby the reputation and financial performance of the concerned company also increases.
  It identifies certain improvement goals and emphasizes progress on the same, leading towards positive organisational changes.
  It helps organization to act with greater confidence in social areas neglected so far or having been given low priority.
  Corporate Social Audits are often pursued by key management personnel in the organization who seek details about its operations. Such an audit ensures safer working environments and employees gaining motivation.
  Customers view organisations more favourably that appear to be ethically conscience. These companies, for instance, don't exploit children for manufacturing their products.

Social Auditor

The auditing procedure may be conducted internally by the company contributing. However, it is advisable to be conducted by an outside adviser, including Practicing Chartered Accountant, or Company Secretary or Cost Accountant to reduce biases. It could be a not for profit organization or a private entity specialized in conducting social audits having a general understanding of social responsibility issues that affect their organization and industry. Consider the fact that as with a financial audit, an outside auditor brings credibility to evaluation. This credibility is essential if management is to take the results seriously and if the general public is to believe company's public relations, social cause activities, and social cause marketing.

It would be appropriate to hire an agency that has worked with United Nation bodies or World Bank or large scale organization that has undertaken impact assessments as they have one of the strongest and detailed social audit tools built in to undertake audits. The audit report also helps in drafting Board of Directors report in compliance to Companies Act, 2013 and an integral part of company's annual report devoted to social responsibility activities.

Steps to conduct Social Audit

Social Auditor should consider following components for audit of CSR project:

1.   Collecting primary information of concerned CSR programme, its objectives, delivery system, budgets and allotment of responsibility for conducting the social audit.
2.   Determining purpose, key issues and stakeholders for consultation.
3.   Deciding about the use of existing data, additional data to be collected, selection of performance indicators for social accounting and preparation of social accounting plan and timeline.
4.   Based on data collection, views of stakeholders, social accounts to be prepared with key issues for action and future targets.
5.   Presenting social accounts to social auditors for their verification, recommendations and then to disseminate the social auditor's consolidated report.
6.   Feedback to fine-tune the CSR policies-programmes towards social ends, follow up actions, reviewing stakeholder's reports for their participation ultimately resulting in institutionalization of social audit process.

Corporate Sector on its own can decide the depth of social problem and can select any of these social activities but after considering the amount to be spent as per Section of Companies Act, 2013. The implementation of programme can also be as per the discretion of Management of companies. They may take into confidence the relevant stakeholders and the areas for implementation of such social activities and programmes. All these programmes and activities are required to be disclosed by Management of company in its Annual Report to Shareholders.

The management of company is also required to take into account the likely benefits of such social programmes and activities to the relevant stakeholders. For that purpose, each and every activity is required to be properly planned. It should go into details of requirements as stated in Section 135 and activities that are clearly stated in said section. This will help the company to concentrate on particular areas where it can effectively contribute.

After going through above points, Social Auditor should make summary of findings/observations he has confronted while carrying out the audit of Social and CSR activities of corporate sector. The conclusion of this type of audit can be in form of sensitivity of corporate sector about the social problems of India and their contribution to these problems to solve the same to some extent alonwith the Central Government. The conclusion of this Audit shall be addressed to the Shareholders of company as well as to Central Government in form of a Report as is now mandatory for companies which are covered under Section 135 of Companies Act, 2013.

Such a Social Audit programme of company's CSR activities may subscribe to good governance principles of participation, inclusiveness and consensus.

Certain CSR issues that a CSR audit should cover:

CSR programs can operate at different levels according to the policy adopted by the organization. At the basic level, organizations have some level of community awareness, public service, or charitable contributions as part of good corporate citizenship. Examples include scholarships for students, adoption of parks or highways, sponsorship of charity events, and gifts to arts. Such initiatives are also subject to internal controls and should be considered for periodic review of their accounting and oversight processes. CSR activities cover a variety of additional issues including:

i.   Protection of human rights: Denial or prevention of legal or social rights of workers. Examples include fair wages for factory workers with reasonable work conditions, including restrictions on child labor.
ii.   Destruction of Natural Habitat or Resources: Depletion of natural habitats, wildlife, and large surfaces. Examples include strip mining, protection of endangered species, deforestation and pollution.
iii.   Free Market Development: The mega corporation that significantly impact developing market economies are under fire regarding fair trade policies. Less developed countries and their marketplace communities should have opportunities for healthy economic growth that do not exacerbate wealth disparities or exploit people. Examples include exploitation of poor country labor or agricultural markets.

At the highest level, CSR strategy is closely integrated with business objectives, creating 'virtuous circle' for all the stakeholders. This is a highly sustainable model as the success of business is integrated with CSR initiatives and there is high commitment from the business at all levels.

Conclusion

"We make a living by what we get, but we make a life by what we give". –Winston Churchill. With the appropriation of prescribed amount for CSR now a statutory requirement, there may be a possibility for emergence of gap resulting from statutory allocation of amount for CSR and utilization of same in execution of concerned projects due to various controllable /uncontrollable reasons where social audit may prove to be an efficient instrument to map such gaps. It is high time for CSR personnel to level-up their conceptual clarity in differentiating traditional ways of monitoring and evaluation vis-à-vis social audit practices for better project management.

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