Date: 09/09/2022

Relevance: GS-2: Development Processes and the Development Industry — the Role of NGOs, SHGs, various groups and associations, donors, charities, institutional and other stakeholders.

Key Phrases: Corporate Social Responsibility (CSR), Non-Governmental Organisation, administrative and support expenses, Underfunding, program proponents, adaptive funders, organization builders, Pool the resources, financial analysis services, Learn from peer organizations.

Why in News?

• When COVID-19 spurred a nationwide lockdown in India in 2020, a grave need for localized social support emerged.
• Aid, both cash and kind, to private or public, flowed to NGOs working towards combating pandemic-induced challenges such as loss of livelihood for vulnerable communities, food banks, and health and medical support.

NGO’s true costs:

• In any social effort, programme expenses attract the big cheques - especially when they come from corporate social responsibility (CSR) initiatives in India.
  • For example, an NGO working on education outcomes might receive funding for books, other online resources, teacher training, curriculum design, etc. But NGOs have other expenses too.
• To achieve long-term and sustained impact, they need to pay for administrative and support expenses not specifically tied to programmes -  for instance, rent, electricity, technology, and human resource costs.
• These indirect costs, combined with program expenses, make up an NGOs’ true costs.
• Underfunding an NGO’s true costs reduces the efficacy and impact of the very programs that funders support.

The funder archetypes based on the survey:

• Based on a recent survey of nearly 80 diverse social sector funders, it is discovered that three distinct funder archetypes are:
  • programme proponents,
  • adaptive funders, and
  • organization builders.
• The three archetypes represent different beliefs in terms of how philanthropy becomes impact. And those beliefs manifest in different practices around funding indirect costs and organizational development.
• Programme proponents:
  • They value programme outcomes above all.
• Adaptive funders:
  • They are not rigid and support indirect costs and organizational development if the NGO makes a case.
• Organisation builders:
  • They see value in investing in stronger organizations in addition to programs.
• CSR funders, who now represent a fifth of all private giving in India, principally fall under program proponents.
• They mostly contribute little or no money to organizational development and limit what they pay for indirect costs to a fixed rate often below 5%.
• The 2020 primary research showed that NGOs’ indirect costs range from 5% to 55%, depending on their mission and operating model, much as a corporate’s sales and administration costs vary significantly by industry and product.

Issues with CSR Funding:

• Focus on regulatory compliance:
  • These practices are partly a consequence of CSR funders’ focus on regulatory compliance — amendments to the CSR law in 2021 include substantial financial penalties for non-compliance.
• No dedicated CSR committee:
  • Roughly 90% of the CSR funders are relatively small, unlisted companies — and companies that spend less than ₹50 lakh annually on CSR are not required by law to have a CSR committee.
  • They generally leave decision-making and action plans to company boards, who may have little to no experience working with NGOs or on social impact.
  • Hence, their priorities tend to sway towards risk avoidance, compliance, and cost minimization.
  • Several larger companies have added CSR to the responsibilities of their HR or administration or communications head, rather than hiring professional leads, experienced in the social sector.
• Unaware of complete CSR rules:
  • Not every company is aware of all the facets of the CSR rules they are complying with.
  • For instance, the 5% cap on administrative overhead costs applies only to a business’s internal CSR operation cost, not to the grantee’s administrative costs, as is widely perceived.
  • Many CSRs make errors on safety with the unintended consequence of leaving an NGO with unpaid bills or worse still, drawing on its scarce core funding from other donors to pay for these essential costs.

How might this change?

• Pool the resources:
  • For one thing, companies can pool their resources with other mission-aligned CSR or social sector stakeholders, increasing their collective impact potential, and also hiring or tapping into professionals with experience working with NGOs.
  • Since 2020, the number of philanthropic collaboratives, such as the Migrants Resilience Collaborative which supports migrant workers, or Revive Alliance which finances semi- and unskilled workers, has more than doubled.
• Learn from peer organizations:
  • CSR funders would learn from peers who view organizational development and indirect costs differently.

How vulnerable NGOs are to financial stress?

• The research revealed that 54% of NGOs had less than three months in reserve funds in September 2020.
• This number stood at 38% before the pandemic. Without adequate reserves, NGOs cannot pay salaries or bills when faced with an unexpected funding shortfall.

How can CSR program help?

• Covering indirect costs and organizational development:
  • The CSR programs cannot currently contribute to NGO reserves/corpus by law. However, by covering indirect costs and organizational development, they still help to relieve financial pressure and make organizations more resilient.
• Volunteer financial analysis services:
  • Corporates have considerable accounting and finance capabilities that they can offer to NGOs and their funding.
  • NGOs don’t have clear financial reporting standards and many lack the internal capabilities to undertake a true-cost analysis.
  • A corporation that has developed a relationship of mutual trust with an NGO could offer volunteer financial analysis services to help the NGO calculate true costs, communicate with other funders, and build financial resilience.

Conclusion:

• As the research has shown, more CSR decision-makers are shifting their focus from compliance with CSR laws to the social impact they are making.
• CSR funders are following several themes to make this transition, such as hiring professionals, coming together in collaboration, and defining and publishing their impact metrics to hold themselves accountable.
• The idea is to move beyond signing cheques to recognizing that, ultimately, what’s good for Indian society is also good for business.

Source: The Hindu

Mains Question:

Q. Businesses should go above and beyond the requirements of Corporate Social Responsibility (CSR) guidelines and allocate their spending in a way that truly benefits society. Comment.