Over 30% of Egyptians are now officially living under poverty line. The Egyptian government has launched a far-reaching economic reform program that, despite greatly improving macro-economic indicators, has made life harder for most Egyptians — at least for the time being. The private sector should take this opportunity to step in with increased CSR spending. This poses a question: should Egypt follow in the footsteps of India (whose business ecosystem has many similarities with that of Egypt’s) in legally obliging private sector companies to have a minimum annual CSR spending budget?
How and why did India do it?
“In 2013, India implemented new Corporate Social Responsibility (CSR) regulation, the
Companies Act 2013, requiring companies whose net worth exceeds INR 5 billion ($70 million), or whose annual turnover exceeds INR 10 billion ($140 million), or whose profit exceeds INR 5 million in any financial year, to spend two percent of their profits, averaged over the past three years, on CSR,” read the intro of “Did Mandatory CSR Compliance Impact Accounting Conservatism? Evidence from a Natural Experiment”, a research paper presented to researchers and faculty members of AUC’s business school by visiting professor Gopal Krishnan of Bentley University in early October.
The rationale for the law is simple. If a company is generating massive profits, it has to pay back to society – not merely on a whim or when it suits its own interests. In Egypt, for instance, a recent CSR campaign by a massive foreign bank that placed billboards to light up dark areas in the North Coast during summer. The campaign, much like most other CSR campaigns in Egypt, is directed at higher-income Egyptians who can afford to summer in North Coast – rendering it useless to the 32% of Egyptians that need it most, the ones below the poverty line.
Did it work?
Applying the law wasn’t that simple, however. Professor Kirshnan and his team examined how enforcing CSR compliance may have had a direct impact on increased accounting conservatism in such companies – the accounting practice of focusing on potential fiscal shortcomings rather than earnings.
They found that companies which generate the minimum amount mandated by the law to comply with CSR spending started reporting lower earnings. Not that they earned less, but more like they began focusing on highlighting potential losses rather than profit. “They strategically used accounting conservatism to mitigate the cost of CSR,” read the research paper.
The strategy works. Earning less means paying less. But soon they found out that it affected other very important areas negatively, like investments and the company’s stock market valuation. Confidence of investors, naturally, shifts downwards when companies seem to be earning less and less. Accessing loans at low interest rates has become more of a struggle for such companies because of their apparent decreased earnings. And, by attempting to skirt the compulsory 2% on CSR spending , companies made macroeconomic sectors, such as the stock market and foreign direct investment (FDI), vulnerable and exposed.
What does that mean for Egypt?
As mentioned, Egypt’s economic reform program has mostly been great for macroeconomic indicators. Mandating such laws with the purpose of forcing the private sector, which accounts for almost 70% of Egypt’s GDP, to share the burden of social responsibility, could prove ineffective in the case of Egypt such as it did in India. What should be the way forward, then? For starters, and most significantly, the private sector should realize that extra CSR spending has massive indirect benefits to the overall economy, which first and foremost benefits the private sector.
“In any diagnostic review of the Egyptian corporate sector, an evident distinction is drawn between export-oriented businesses and those operating on the local market. The former tend to abide by international standards of compliance in order to match the criteria set by the global markets or corporations they supply,” read a research paper issued by Egypt’s Ministry of Investment, titled “Expanding Horizons in Development: the Rising Role of Egypt’s Private Sector”. It went on to say that Egyptian businesses which focus on the local market have a tendency to avoid these international standards under the pretence that local clients don’t prioritise them. However, the ministry’s research also revealed that “in a pragmatic way corporations tend to better respond to compliance parameters when linked to a solid business case.”
What this basically means is that Egypt needs a living example of how increased CSR spending can benefit a company’s financial standing. As pragmatic and profit-oriented private businesses usually are, there needs to be a compelling case from the local market which proves the benefits of CSR financially. Such cases can’t, as we’ve seen with India, be presented in a top-down approach (government mandate).