Corporate Social Responsibility and its Judicial Enforcement
The author is a first-year law student at Ram Manohar Lohiya National Law University Lucknow.
Corporate social responsibility (CSR) refers to the self-regulation of private businesses, the aim of which is to contribute to sustainable development, by being accountable and contributing to society’s wellbeing. The concept of Corporate Social responsibility has a history of around two centuries. We find evidence of industrialists showing concern for employees’ productivity and welfare in the second half of the 19th century. The activities carried out with the purpose of betterment of the industry and employee welfare were considered to be a combination of business acumen and humanitarianism at that time. We also witness a rise in philanthropic activities in the late 19th century. Industrialists like John D. Rockefeller and Andrew Carnegie donated for various social causes including education, religion and scientific researches. Official coinage of the term Corporate Social Responsibility was done in 1953 by the American economist Howard Bowen, in his publication ‘Social Responsibilities of the Businessman’. He is also commonly known as the father of corporate social responsibility. The primary focus of CSR in the 1950s was on businesses’ responsibilities to do good deeds for the society. Various social changes were brought about in the 1960s, by various key events, people and ideas. In the US, it was not until 1970s, when the concept of CSR truly began to develop extensively. The Committee for Economic Development introduced the concept ‘social contract’ between business and society in 1971. Through this concept of social contract, the notion that the industries and businesses arise out of and thrive because of public consent and therefore they have an obligation to pay back by contributing to fulfilment of the needs of the society, was put forth. Companies began demonstrating responsibility towards stakeholders by the 1980s. An increasing number of organisations had begun incorporating social interests in their business practices by then. The concept of CSR became widespread in the 1990s. Professor Donna J. from the University of Pittsburgh published ‘Corporate Social Performance Revisited’ in 1991. This provided a framework for assessing the impacts and outcomes of CSR activities and programs, which served the purpose of improving and expanding pre-existing models of CSR. Also in 1991, professor Archie B. Carroll from the University of Georgia, who was also a business management author, published an article titled ‘The Pyramid of Corporate Social Responsibility’, in which he expanded on crucial areas in the implementation of CSR. CSR gained the status of an essential strategy in many organisations by the early 2000s, which can be witnessed in multi-million-dollar companies like Wells Fargo, Coca-Cola, Walt Disney and Pfizer, which incorporated CSR into their business processes.
The people and governments of different countries approach CSR in their own different ways. Also, the objectives of the firms and the benefits they derive from engaging in CSR activities are different in different countries.
In the United States, the citizens are aware of the importance of CSR and they expect the businesses to generate a profit and also conduct themselves in an ethical and socially responsible manner. Thus, CSR has an important role to play in the firms of the United States. It is vital for organisations to engage in CSR activities for ensuring corporate growth and maintaining a competitive edge. The companies in the United States prefer value-driven CSR. In the US, CSR is enforced through various environment protection and investor protection legislations and regulations. American regulatory authorities have made mandatory regulations for preventing societal harm arising out of corporate activities. Legislations like the National Environment Protection Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act and the Safe Drinking Water Act protect the environment from harm caused by corporate activities in the US. There are many laws that protect people from harmful actions or processes of corporates like the Sarbanes-Oxley Act (mandates creation of a detailed standard of corporate activities and the implementation of related regulations), Securities Laws, Securities and Exchange Commission Act, etc.
The idea that companies can contribute to societal well-being has been prevalent in Europe for a long time. Proactive strategies adopted by businesses, institutions and national governments along with external pressures from other stakeholders like people of the society and investors has driven the development of the concept and practices of CSR in Europe. UK follows a mix of performance-driven and stakeholder-driven approaches. In the European Union, The CSR Directive of 2014 is the primary regulation governing CSR. In this region, the companies are given the freedom to develop their own CSR policies and methods which are suitable for their respective circumstances, while the public authorities are expected to provide support to them. This support can be provided through “a smart mix of voluntary policy measures and, where necessary, complementary regulation, for example to promote transparency, create market incentives for responsible business conduct, and ensure corporate accountability.” Individual countries that are part of the EU also have their own legislations and regulations to enforce CSR. For example, France adopted the duty of vigilance law in 2017, which requires companies to identify environmental and social risks arising from its business operation and establish and execute reasonable plans to prevent negative effects of these risks.
After the Sichuan earthquake in 2008, the concept of CSR gained importance in China. The middle-class Chinese are aware of global CSR norms and recent developments. Thus, the expect companies to produce safer products, provide better services and contribute to maintaining a healthy environment. Companies that prioritise profits over human and environmental welfare are not tolerated by the growing middle class in China. Chinese businesses have worked over the last decade to ensure incorporation of environmental, social, and governance (ESG) issues in their decision-making process. The Chinese government has enforced CSR through its rules and regulations. The Chinese corporate law was revised in 2006, to include CSR. Recently, harsher punishments like higher fines and jail sentences to higher officials were introduced by the government for companies that do not meet the ESG (Environmental, Social and Governance) standards.
There is growing awareness about environmental conservation, inclusive growth and sustainable development in the Indian society. The significance given to CSR over the years has changed the attitude of businesses towards CSR. India is a country where CSR is a well-established phenomenon and it has a rich tradition of CSR. Corporate philanthropy (occasional donations to charity by business households) and the Gandhian Trusteeship Model (the notions of generosity and trust put forth by Gandhiji inspired business leaders) were the prevalent forms of CSR in pre-independence India. The CSR activities carried out by early businessmen in India stemmed from religious beliefs and culture, but as times changed, this approach has witnessed significant changes. The economic reforms of 1991 and subsequent liberalisation of the economy shifted the focus of CSR from philanthropy-based model to a multi-stakeholder approach. Multi-stakeholder approach holds that the company has responsibility towards all stakeholders like investors, employees and the community. Liberalisation also led to many multi-national corporations like Microsoft and IBM operating in India, which exposed our country to a highly developed CSR initiative regime. The increasing competition in the market and high ambitions have also led Indian businesses into adopting a coherent and sustainable business strategy. Public and private enterprise now believe that satisfying stakeholders is essential for their long-term success and that ignoring the stakeholders can have dire consequences on the company’s future prospects in the community. Thus, we find that many Indian companies pursue CSR activities voluntarily, with the complementing their initiatives. In the India sustainability and CSR chart of 2020, published by ‘thecsrjournal’, Infosys Ltd., Mahindra & Mahindra Ltd. and Tata Chemicals Ltd. occupied the first three places respectively, as far as CSR performance was concerned.
Section 135 of The Companies Act, 2013 is the primary legislation which currently deals with CSR in India. In 2009, the Ministry of Corporate Affairs issued ‘Voluntary Guidelines on Corporate Social Responsibility, 2009’. In 2011, this was refined further and put forth as ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011’. This finally evolved into Mandatory provision of CSR under Section 135 of the Companies Act, 2013, which came into effect from 1st April, 2014.
On analysing Section 135 of The Companies Act, 2013, we can observe the following-
• A Corporate Social Responsibility Committee made up of at least 3 directors (of which at least one should be an independent director) needs to be formed by companies that qualify the criteria mentioned under Sec.135(1) of the Companies Act (net worth of rupees five hundred crores or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crores or more during the immediately preceding financial year).
• The committee must formulate a Corporate Social Responsibility Policy according to the requirements specified under Sec.135(3).
• The board of the company is responsible for approving, disclosing, and implementing the policy formulated by the committee.
• Board must also ensure that at least 2% of the average net profits of three preceding financial years or as many years as the company has been operating (if less than three), is spent on CSR activities each financial year.
• Areas local to the operating location of the company must get preference in driving benefits out of its CSR policy.
• If the company fails to spend on CSR, the board must state reasons for the same and must transfer the unspent amount to a Fund within six months after the end of the financial year, unless this amount has been used for certain specific purposes mentioned sub-section 6.
• If a company spends more than the required amount on CSR in a financial year, it can be compensated with the amount to be spent in the subsequent years.
• Profit, for the purpose of this section, is calculated according to provisions of Sec. 198.
The SC decisions in the Bhopal Gas Leak case and M.C. Mehta v UOI, which established the principle of absolute liability, are in favour of holding corporations responsible for harmful effects caused to the society and environment by their actions.
We can identify few strengths and weaknesses of the CSR provisions in Companies Act, 2013, such as
• The Act helps in fulfilment of various rights of people such as the right to life (including right to a clean environment), right to education, etc.
• The act is flexible, as it provides a six-month period for transferring unspent amount to the Fund.
• The Act also approves the adjustment of excess amount spent in a particular with the amount required to be spent in the subsequent years.
• Even if a partnership firm/LLP fulfils the criteria mentioned in Sec.135(1), the CSR rules do not apply to it.
• If after meeting the requirements of Sec.135(1) in a certain year, a company fails to meet the requirement in a subsequent year, it is still required to spend on CSR in accordance with the Act.
• Loss making enterprises are also required to spend on CSR.
• It compromises the individual rights of the company.
Thus, although the statute is a great initiative, there are a few aspects on which improvisation is needed.
Suggestions to improve the provisions-
• Bringing about equality by including all types of firms (including partnerships) under the ambit of CSR rules.
• Re-evaluation of a company’s situation each financial year to ascertain if it still meets the criteria as specified in Sec.135(1) of the Companies Act, 2013.
• Relieving loss-making companies from CSR obligations.
Also, a constant effort is to be made to ensure that the society, businesses and authorities act in unison towards the creating an environment and stakeholder-friendly and sustainable economy.
Corporate social responsibility, available at: https://en.wikipedia.org/wiki/Corporate_social_responsibility (Visited on October 17, 2021)
A Brief History of Corporate Social Responsibility (CSR), available at: https://www.thomasnet.com/insights/history-of-corporate-social-responsibility (Last Modified September 25, 2019)
Historical background of corporate social responsibility, available at: https://www.emerald.com/insight/content/doi/10.1108/1747111111117511/full/html (Last Modified October 4, 2011)
Corporate Social Responsibility In The United States And Europe: How Important Is It? The Future Of Corporate Social Responsibility, available at: https://www.researchgate.net/publication/297754923_Corporate_Social_Responsibility_In_The_United_States_And_Europe_How_Important_Is_It_The_Future_Of_Corporate_Social_Responsibility (Last Modified July 2013)
Mandatory Corporate Social Responsibility Legislation Around the World, available at: https://clsbluesky.law.columbia.edu/2020/11/20/mandatory-corporate-social-responsibilitylegislationaround-the-world/ (Last Modified November 20, 2020)
Mandatory Corporate Social Responsibility Legislation around the World: Emergent Varieties and National Experiences, available at: https://www.law.ox.ac.uk/business-lawblog/blog/2020/11/mandatory-corporate-social-responsibility-legislation-around-world (Last Modified November 18, 2020)
National CSR Data Portal, available at: https://www.csr.gov.in/index16.php (Visited on October 22, 2021)
Top 100 companies in India for CSR in 2020, available at: https://thecsrjournal.in/top-indiancompaniesfor-csr-in-2020/ (Last Modified November 3, 2020)
The Evolution Of Chinese Corporate Social Responsibility, available at: https://www.chinawaterrisk.org/opinions/the-evolution-of-chinese-corporate-socialresponsibility/ (Last Modified March 19, 2020)
17 US Law and CSR Implementation, available at: https://lawexplores.com/us-law-and-csrimplementation/ (Last Modified November 9, 2015)
The EU’s CSR policy, available at: https://www.csr-in-deutschland.de/EN/Policies/CSRinternational/The-EUs-CSR-Policy/the-eus-csr-policy-article.html (Visited on 22nd November, 2021)
Corporate Social Responsibility in India: An Overview, available at: https://scholar.smu.edu/cgi/viewcontent.cgi?article=1317&context=til (Last modified December, 2009)
Companies Act, 2013, available at: http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17518 (Visited on 21st November, 2021)
4 thoughts on “Corporate Social Responsibility and its Judicial Enforcement”
I have read so many posts about the blogger lovers however this post is really a good piece of writing, keep it up
whoah this blog is wonderful i really like reading your articles. Keep up the great paintings! You realize, a lot of people are hunting round for this info, you could help them greatly.
I have read so many posts about the blogger lovers howeverthis post is really a good piece of writing, keep it up.
Great selection of modern and classic books waiting to be discovered. All free and available in most ereader formats. download free books