Corporate Social Responsibility under Companies Act, 2013 – Implications and Corporate Perspective

In the words of our own JRD Tata:

“To enrich quality of life in the society we operate in, we need to give back to the society manifolds than what we get from it” And “No success in material terms is worthwhile unless it serves the needs or interests of the country and its people”

Though the concept of corporate social responsibility has only recently been enacted under Companies Act, 2013 and presently, I would say, is still in an evolving stage, there is a long history in both the East and the West of the Globe towards a humanitarian commitment to social philanthropy in the belief that the creation of wealth is primarily geared for social good.

The UN Global Compact was the first major initiative by the International organisation to lay down a charter of ten principles for all companies globally to respect and follow in their business operations. By asking companies to embrace, support and enact a set of core values in the areas of human rights, labour standards, environment and anti-corruption, it sets the agenda for corporate social responsibility for all corporate enterprises and provides a framework for initiation and practice of sustainability policies. The overwhelming endorsement which it received from the corporate world testifies that the UN Global Compact is the largest voluntary corporate responsibility initiative in the world that forges close linkage between business, society and environment in all development endeavours. Many other international bodies and associations like the OECD countries were quick in coming out with their set of guidelines for multinational corporations, largely in conformity with the principles of the UN Global Compact.

Traditional corporate philosophy takes care of only one of the three broad areas in which businesses/companies can, and should, discharge their social responsibility. These three areas are:

Traditional Corporate Philanthropy takes its root from the 19th century and has emerged out of a variety of factors viz.:

v  Concern for welfare of the immediate members of the corporate entity, i.e. the employees and their families;

v  Innovative contributions by visionary (and wealthy) business leaders in quest of personal satisfaction who created/invested in philanthropic institutions/pursuits;

v  Desire to establish a strategic relationship with the State or society has led some corporate bodies to invest in the establishment of institutions that fulfil the specific and critical requirements of the community at large;

v  Establishment of trusts and foundations for obtaining tax benefits, which, in hindsight, also support socially beneficial activities.

Corporate Social Responsibility is qualitatively different from the traditional concept of corporate philanthropy. It acknowledges the existence of a “debt” that a body corporate owes to the community within which it operates by considering the society as a stakeholder in corporate activity.

The Government perceives CSR as the contribution of the business houses towards achieving the nation’s sustainable development goals. Essentially, it is about how business takes into account the economic, social and environmental impact of the way in which it operates. This perception of the government about CSR gained shape and form under the Companies Act, 2013 which now mandates Companies to undertake Corporate Social Responsibility as one of the responsibilities of the Board.

Traditional expectations of business are also shifting from being a medium which employs people, earn profits and pay taxes to taking cognisance of the fact that it is socially responsible medium for the larger benefit of the community.

Corporate Social Responsibility is the manner in which companies manage their businesses to produce an overall positive impact on society through economic, environmental and social actions. Corporate Social Responsibility (CSR) is also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business which essentially takes its roots from long term prosperity of the society and ultimately of the nation, by and large.

European Union (EU) has thus defined CSR as “A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.”

The traditional concept of Business has come a long way since the famous economist and Nobel laureate, Milton Friedman famously proclaimed in 1970, “The business of business is to maximise profits, to earn a good return on capital invested and to be a good corporate citizen obeying the law – no more and no less”. In 1984, Edward Freeman introduced the stakeholder theory and argued that socially responsible activities helped business in building strong relationships with stakeholders, and that management must pursue actions that are optimal for a broad class of stakeholders rather than those that serve only to maximise shareholder interests.

Corporate Social Responsibility (CSR) is the responsibility of an organization for the impacts of its decisions and activities on society, the environment and its own prosperity, known as the “Triple Bottom Line” (TBL) of People, Planet, and Profit. Together, these “three Ps” are often referred to as “The Three Pillars’ of a business entity.  In 1998, a Briton Mr. John Elkington introduced the term (TBL) based on the premise that business entities have more to do than make just profits for the owners of the capital. Here, People (human capital) refers to the Society where the business conducts its operations, Planet (natural capital) refers to the sustainable environment practices, and Profit is the yield shared by all concerned. This principle emphasised that a company’s performance is best measured by the economic, social and environmental impact it created through its activities.

CSR is important to a corporate for its own sustenance, some are:

? Reduction in Operating Cost: This may include recycling, water conservation, energy efficiency, etc.

? Increased Sales and Customer Loyalty: In recent times, customers started recognizing those companies which are socially responsible which leads to increased sales and satisfied customers.

? Higher productivity and Quality: Company, as an essential part of its Triple Bottom Line, focuses on improving the working conditions of its employees, which helps in increased productivity with better quality, encouraging innovation, and attracting best industry talent as a socially responsible company;

? Access to Capital: Companies with strong CSR have increased access to capital that might not otherwise have been available. Even the lending institutions started considering this as an important parameter of granting credit facilities apart from private equity players, domestic as well as global;

? Boost in Brand Image and Reputation: CSR is an essential brand-building tool indirectly used by companies to enhance its reputation amongst the stakeholders leading to earning of public goodwill.

? Strengthening relationships with stakeholders – This may include shareholders, government, regulatory bodies, etc.

? Risk mitigation – As a result of an effective corporate governance framework

These benefits are important and most companies that are engaged in CSR are revisiting their strategies and expanding their operations to reap enhanced benefits and contribute to the inclusivity in growth.  

A Report by Goldman Sachs found that the companies that are considered leaders in environmental, social and governance (ESG) policies also lead the pack in their stocks’ performance on the bourses.

Ethical business is the more fundamental, emerging trend on the international scene. It focuses on social values and business is conducted in consonance with broader social values and the stakeholders' long-term interests.

Because corporates intervene in and impact so many areas of social life, they must be responsible towards society and the environment. In India, as in the rest of the world, there is a growing realisation that capital markets and corporate entities are, after all, created by the society and these must, therefore, serve it, not merely earn profit from it.

In the last 20 years, multinational corporations (MNCs) have played a key role in defining markets and influencing the behaviour of a large number of consumers. The rules of corporate governance have changed too. And there has been a range of reactions to this change. On the one hand, globalisation and liberalisation have provided a great opportunity for companies to be globally competitive by expanding their production-base and market share, while on the other hand, the same situation poses a great challenge to the sustainability and viability of such mega-businesses, particularly in the context of the emerging discontent against multinational corporations in different parts of the world. Labourers, marginalised consumers, environmental activists and social activists have protested against the unprecedented predominance of multinational corporations.

The concept of CSR is not new in India. This concept can be traced back to times immemorial, our Vedas say – “man can live individually but can survive only collectively”. Hence, the challenge is to form a progressive community by balancing the interests of individuals and that of the society. To meet this, we need to develop a value system where people accept modest sacrifices for the common good. A value system is the “protocol for behaviour” that enhances the trust, confidence and commitment of members of the community. It goes beyond the domain of legality. It includes putting the community interests ahead of our own.

It is the responsibility of the companies to not only shield the diverse stakeholders from any possible adverse impact that their business operations and activities may have, but also entails affirmative action by the companies in the social, economic and environmental spheres as expected of them by the stakeholders, to the extent of their organisational resource capabilities. This is besides corporate legal obligation to comply with statutory rules and regulations regarding the conduct of business operations, and the duty to compensate the stakeholders in the event of any harm or collateral damage.

Implications:

With coming into effect the provisions of Section 135 of the Companies Act, 2013 and Rules made thereunder, there were several queries and concerns of companies related to its applicability, implementation and likely impact. Accordingly, companies put in place some compliance procedures and has introduced an adequate governance framework. Basis that, projects that have a high social impact and are measurably addressing a social development issue would need to be undertaken. In order to do this, companies had to identify capable and eligible implementation partners based on a sound due diligence process and determine accountability of an organization before engaging with them.

Companies also need to monitor the CSR projects and evaluate effectiveness and measure the impact created. All of these actions are required to be documented, reported and disclosed formally to all stakeholders.

Perspectives on CSR

The emerging perspective on corporate social responsibility focuses on responsibility towards stakeholders (shareholders, employees, management, consumers and community) rather than on maximisation of profit for shareholders. There is also more stress on long-term sustainability of business and environment and the distribution of well-being to the society at large.

There is an increasing recognition of the Triple-Bottom Line: People, Planet and Profit. The Triple-Bottom Line stresses upon the following:

1.      Business stakeholders are not just the company's shareholders

2.      Sustainable development and economic sustainability

3.      Analysis of corporate profits juxtaposed with social prosperity.

There are three emerging perspectives that relates to corporate social responsibility (CSR):

One, a business perspective that recognises the importance of 'Reputation Capital' for capturing and sustaining markets. From this angle, CSR is basically a new business strategy to reduce investment risks and maximise profits by taking all the key stakeholders into confidence. The proponents of this perspective often include CSR in their advertising and social marketing initiatives.

The Second is an Eco-social Perspective which recognises the fact that increasing poverty can lead to social and political instability. Such eco-socio-political instability can, in turn, be detrimental to business, which operates from a variety of eco-socio-political and cultural backgrounds. When seen from the eco-social perspective, CSR is both a value and a strategy for ensuring the sustainability of business. It is a value because it stresses the fact that business and markets are essentially aimed at creating the well-being of society. It is a strategy because it helps to reduce social tensions and instability and facilitate markets. For the new generation of corporate leaders, optimisation of profits is the key, rather than the maximisation of profits. Hence, there is a shift from “accountability to shareholders” to “accountability to stakeholders” (including employees, consumers and affected communities).

There is a Third and growing perspective that shapes the new principles and practice of corporate social responsibility which is a Rights-based Perspective on corporate responsibility. This perspective stresses that consumers, employees, affected communities and shareholders have a right to know about corporations and their businesses. Corporations are private initiatives, but increasingly they are becoming public institutions whose survival depends on the consumers who buy their products and shareholders who invest in their stocks. This perspective stresses accountability, transparency and social and environmental investment as the key aspects of corporate social responsibility.

Global Perspective

The primary drive for ethical business and corporate social responsibility came from the USA and Europe in the '80s and '90s, from campaigns run by pressure groups such as Greenpeace and Friends of the Earth. Consumer boycotts, direct action, shareholder action, ethical shopping guides, ethical product labelling schemes, media campaigns and ethical competitors became increasingly effective in changing corporate perspectives.

The mid-'90s were the watershed years for the new consciousness in international corporate landscape. This was the time when two prominent MNCs were compelled by 'ethical market forces' to re-orient their business attitudes. In 1995, Shell dumped its Brent Spar oil platform in the North Sea. Public agitation in Europe was so intense that in Germany, its sales fell by 70 per cent within a fortnight. Similarly, Nike, the shoe and apparel giant, ran aground thanks to a campaign against child labour and worker exploitation.

In the early-'90s, Greenpeace commissioned a unit in eastern Germany to manufacture a CFC-free refrigerator. Within six months, mainstream manufacturers in Germany were manufacturing identical fridges.

In I991, because of an environmental audit of products which found that all the garments (including cotton clothing) produced by Patagonia Garments, cause pollution, the company sought replacement materials, dropped 30 per cent of its clothing line and planned for a restricted growth of its operations. The company's founder and president defended the principle of restricted growth, saying, "We also committed ourselves to a lifespan of a hundred years. A company that intends to be around that long will live within its resources, care for its people, and do everything it can to satisfy its community of customers."

Several efforts have been taken by various governments to encourage CSR spending, such as incentivizing companies who voluntarily report their CSR activities or by taking measures such as mandating CSR reporting. In 2007, the Malaysian government passed a regulation to mandate all publicly listed companies to publish their CSR initiatives in their annual reports on a “comply or explain” basis. In 2009, Denmark mandated CSR reporting, asking all state-owned companies and companies with total assets of more than €19 million, revenues more than €38 million and more than 250 employees, to report their social initiatives in their annual financial reports.

To enable transparency from businesses on the environment, social and governance front, France passed a law called “Grenelle II”, which mandates integrated sustainability and financial reporting for all companies listed on the French Stock exchanges, including subsidiaries of foreign companies located in France and unlisted companies with sales revenue of more than €400 million and more than 2,000 employees.

Although some CSR standards are mandatory, there are others, which comprise of both, mandatory and voluntary standards. For instance, in 2006 the new British Companies Act mandated all companies listed in UK to include information about their CSR activities in their annual reports; however, a full length CSR reporting was made voluntary.

Ministry of Corporate Affairs, Government of India, in July 2011, came out with the 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business'. These guidelines contained comprehensive principles to be adopted by companies as part of their business practices and a structured business responsibility reporting format requiring certain specified disclosures, demonstrating the steps taken by companies to implement the said principles.

In line with the above Guidelines and considering the larger interest of public disclosure regarding steps taken by listed entities from the Environmental, Social and Governance (“ESG”) perspective, in the year 2012, the Securities and Exchange Board of India (SEBI) mandated (Clause 55 of the then Listing Agreement) inclusion of Business Responsibility Reports (“BR reports”) as part of the Annual Reports for top 100 listed entities based on market capitalisation at BSE and NSE while making it a voluntary requirement for other listed entities.

Apart from that, the Government of India laid down the “Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises” much prior to the introduction of CSR in the Companies Act, 2013.

Emerging markets such as Brazil and South Africa have become forerunners in CSR reporting in the developing world in terms of their involvement in CSR-related activities in order to promote the listed companies’ credibility, transparency and endurance. The Johannesburg Stock Exchange was the first emerging market stock exchange to create a socially responsible investing (SRI) index in 2004. China has also encouraged CSR reporting in guidelines released through the Shanghai and Shenzhen Stock Exchange.

Corporates’ Adaptation to Changing Forces

The major MNCs have, in part, reacted positively to the new attitudes which have redefined the paradigms of social values and have thus redefined the norms of business. They had to take cognisance of the new forces in the consumer market, where the consumer-citizen is metamorphosing (albeit gradually in countries like India) into a citizen-consumer.

The major corporations have also realised that cause marketing, development partnerships and environmental concerns make good business sense -- particularly in terms of recycling materials, employee satisfaction and morale, building up reputational capital and as a distinctive brand marketing tool.

Recent trends indicate that a company’s corporate social responsibility and sustainability is not limited to its own operations and activities, but extends to its supply chain network, which includes service providers, vendors, contractors and other outsourced agencies. Therefore, companies, especially multinational companies, are now-a-days careful in their selection of partners, agents, vendors and contractors abroad and prefer to do a thorough check of their credentials in corporate social responsibility and sustainability.

The leading companies have discovered that working together with non-profit and government organisations to solve social problems can give them new insights and approaches to creating business opportunities as well. Solving community needs creates opportunities "to develop ideas and demonstrate business technologies, to find and serve new markets, and to solve longstanding business problems."

Growing awareness about corporate social responsibility and sustainability issues have resulted into devising of some common matrices for measuring the performance of companies in these areas. These underline the need for consistency, transparency and impartial measurement. A number of international private initiatives in this regard have led to the development of standards and benchmarks for voluntary disclosure, reporting and audit of corporate social responsibility and sustainability programmes. Notable among these are the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines; AccountAbility’s AA1000 standard based on John Elkington’s triple bottom line (3BL) reporting; Social Accountability International’s SA8000 standard; and the ISO 14001 environmental management standard.

THE WAY FORWARD

There is a need to develop and implement a more coherent and ethically-driven discourse on corporate social responsibility. CSR is, still sometimes seen as "eyewash" to clean the sins of pollution or to provide a facelift to the company's public image. It is often seen as “old wine in a new bottle” -- just another trendy name for good old philanthropic initiatives by companies. There is a need to move beyond such transitory illusions about corporate social responsibility.

Also, after around 4 years of the advent of the Companies Act, 2013, it is now high time that the Government should do away with the “comply or explain” paradigm of CSR implementation in India as India is such a country where the avenues for CSR activity are available in every nook and corner. The recent notices to many corporates for explaining the reasons for non-compliance or short-compliance of CSR laws by the Ministry of Corporate Affairs/Registrar of Companies has already paved the way for making CSR a mandatory thing. It is always heartening to know the manner in which a corporate’s CSR spend is taking care of various social causes and the outcome of such initiatives – A Happy Society – which provides a tremendous sense of contentment for a corporate rather than undertaking CSR activities in a “proxy” manner.

Similarly, the Government should look forward to provide complete exemption to all the eligible CSR spends (under Schedule VII to the Companies Act, 2013) from the applicability of the recent Goods and Services Tax (GST), a new problem which corporates have started facing this year post-implementation of GST laws in July 2017. Under that, any activity undertaken (except exempted activities) by a charitable institution, trusts, NGOs, etc. on behalf of a corporate entity shall attract GST though the corporate entity can avail input credit on the amount of GST paid but the question is why to complicate a simple process of plainly contributing for the betterment of the society at large that too given that India is fast moving to/implementing the phase of “ease of doing business”. This is to be considered that a corporate (making CSR contribution to an NGO) and that NGO cannot be termed as “service provider-service receiver” entities as the service is being provided by the said NGO to the society at large on behalf of the said corporate citizen, this service is purely of philanthropic nature on humanitarian grounds. At its core, CSR activities cannot be said to be in the nature of services provided for a “consideration by a corporate entity in the course or furtherance of its business” rather it is in the nature of “repayment/redemption of a debt a corporate entity owes to the society”.

Presently, the Government has notified exemption from GST applicability to only four Services which are covered under CSR activities. These are “Service relating to cultivation of Plant, Services by way of sponsorship of sporting events, Educational service & Services by way of public conveniences such as provision of facilities of bathroom, washrooms, lavatories, urinal or toilets”. The basic question emerges here is why there is a tax to be paid for undertaking a social cause.

CSR being a noble cause should be made mandatory by the Government (till the time it seeps into the genetic makeup of India Inc.) and any non-compliance/short-compliance should attract penalties/sanctions. All the banks and financial institutions should also stress upon its corporate clients to undertake CSR initiatives by giving those corporates weightage while extending credit lines. Similarly, Credit Rating Agencies (CRAs) should also take cognisance of this fact while undertaking rating of a corporate entity with the annual updates in such ratings. On the same lines, SEBI and stock exchanges should display some sort of ratings on its portal w.r.t. a given listed company (under Corporate Information page of their portals) while Ministry of Corporate Affairs (MCA) should also display some kind of ratings on its portal (under Master Data of Companies) for a CSR-compliant private/unlisted company. These things would go a long way in enhancing the brand image of a company as well as our country in various global forums. This would also play a significant role in increasing FDI inflows in India.

It is now universally accepted that corporate social responsibility is not a stand-alone, one time, ad hoc philanthropic activity. Rather, it is closely integrated and aligned with the business goals, strategies and operations of the companies. There is a close integration of social and business goals of companies.

Disclaimer: These are my personal views on the matter.

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