Director Expertise and Compliance to Corporate Social Responsibility Regulations

Abstract

We study compliance of Indian firms to the 2013 Corporate Social Responsibility (CSR) regulation that mandates qualifying firms to spend 2 percent of the pre-tax profits on CSR. We demonstrate that the formation of CSR committees and the appointment of directors with relevant experience (CSR-Directors) increase compliance to the CSR law by 11 percent. Further, we show that CSR-Directors improves compliance by implementing a cost-effective CSR strategy by reducing the number and geographic spread of CSR projects. CSR directors are more likely to implement a cost-effective CSR strategy for companies in more competitive industries, companies with high debt, and companies with no previous history of CSR. Companies with higher CSR compliance gain in value and have increased creditworthiness.