A stick in the global carrot patch: the business of corporate social responsibility in India's Companies Act 2013.

Author:McArdle, Alison E.
 
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I. INTRODUCTION

On August 29, 2013, India's Parliament passed the Companies Act 2013, overhauling how domestic and foreign business entities operate in India and boldly mandating Corporate Social Responsibility (CSR). (1) Touted globally as the first legislation of its kind, the Companies Act 2013, and specifically Section 135 which details the CSR requirements, has stirred the domestic and global discussion on CSR, corporate philanthropy, and the responsiveness of business to society. (2) Section 135 requires qualified business entities to dedicate 2% of profits to CSR endeavors in India. (3) The concept of CSR has taken many shapes throughout the decades and has ebbed and flowed in popularity, but never before has it been codified as a mandatory provision as in the India's Companies Act 2013. (4)

Historically, some business entities have engaged in a-political philanthropic endeavors, but the for-profit arm of a company was not necessarily in sync with the charitable or socially responsible side. (5) At times this arrangement is akin the proverb the "left hand doesn't know what the right hand is doing." (6) However, if the whole corporate enterprise is actually organized and operated in a responsible manner would that make it more or less competitive vis-a-vis its competitors? (7) This supposed competitive disadvantage of socially responsibility behavior is a barrier that India removed by expanding business engagement with society by making CSR mandatory. (8) As of April 1, 2014, India requires companies that make about USD78 million in India per year to dedicate at least 2% of those earnings to CSR programs. (9) This statute is the first of its kind in the world. (10)

This Note will explore whether India's CSR mandate, in its current form, is a model for developing countries to encourage highly profitable businesses to invest in CSR as a means to tackle dire social needs. (11) Part II presents the history of the movement for socially responsible business practices around the world, including their successes and shortcomings. (12) Part Ill of this Note will explore developments in India's history over the last century and how it primed the nation for this CSR mandate. (13) Part IV presents an analysis of the groundbreaking Section 135 of the Companies Act 2013, including its implementing rules, and questions whether the regulations are too onerous for affected businesses. (14) Then, Part V concludes that, in its present form, India's CSR mandate is too heavy handed and will drive companies to implement very discrete low cost CSR programs that will not support innovative programs that are needed for positive social change. (15)

II. FACTS

  1. What is Corporate Social Responsibility?

    1. Overview of Corporate Social Responsibility

      The idea of corporations owing duties to more than just their shareholders has taken many forms through the last century. (16) This concept has been hotly debated and continues to be nebulous because it tends to have a varied nomenclature and cyclical popularity. (17) Today, "corporate social responsibility," or CSR, is the term that encapsulates the idea that business entities owe some duty to the public at large. (18) While this concept has a wide range of champions, it is not without its critics. (19) At its core, the critics dismiss CSR a concept at odds with the "income producing" mission of corporation, so much so that it has been viewed as a breach of fiduciary duties to shareholders should a corporation mission creep into this realm of goodness. (20)

      The idea of CSR, in one form or another, has been percolating since the industrial revolution in the form of corporate philanthropy, but found its voice in the liberal movements of the 1960s and 1970s. (21) Each generation puts its own spin on the concept, but generally the idea is that corporations, and other large business entities, take from the greater public in forms other than financial contributions from direct investors. (22) Often cited examples of such taking of public resources include unsustainable environmental practices, human rights abuses, and pollution and its health effects. (23) Due to the impact on the public, the idea of promoting corporations to be accountable to more than just shareholders is construed by proponents as a logical thread. (24)

    2. Voluntary Corporate Social Responsibility

      Traditionally, a main tenet of CSR is that it is a voluntarily undertaken initiative. (25) According to the historical message from many CSR proponents, for a program or expenditures to be mandatory would compromise its integrity, and could be construed as tantamount to a tax. (26) Despite its historically volunteer-centric approach, there is a growing wave of CSR-backers that regard mandatory CSR as more of a carrot of inducement, but critics still view the requirement as a stick. (27) Its carrot-like elements include the requisite cover for companies that would like to dedicate resources to CSR, but are presently unwilling because such expenditures would put them in a competitive disadvantage relative to businesses that are not dedicating resources to CSR. (28) To makes some involvement in CSR mandatory would aid in removing its competitive disadvantage from a cost perspective. (29)

  2. Impact of Corporate Social Responsibility

    As with most philanthropic or socially conscious undertakings, it is incredibly difficult to measure the impact and effectiveness of CSR. (30) Unlike rating agencies that strive to provide consumers with an independent perspective on a particular investment in the financial services arena, there are no corresponding ratings agencies for the quality of socially conscious programs. (31) In many cases, it is easier for those engaged in socially responsible endeavors to demonstrate that their particular area of concern has not deteriorated, but defining and measuring success is often unattainable. (32) This immeasurability quandary leaves such programs open to criticism and will continue to do so for the foreseeable future. (33)

  3. Global Perspective

    Despite the hurdles with respect to CSR, governments and activists across the world continue to push for its implementation. (34) Indicative of this trend is the Global Compact launched by the United Nations in 2000. (35) The Global Compact is touted as the largest voluntary corporate citizen initiative and strives to engender ten principles in business activities in order to precipitate support for UN Goals. (36) At present, 8000 companies and 4000 non-business entities from the developed and developing world are participating in the Compact. (37)

    Descending from the macro level of the UN Global Compact, there have been more pointed movements in support of CSR initiatives in the European Union and more overtly in India. (38) In October 2011, the European Union published a new CSR policy for its member-states. (39) The policy calls for business enterprises that operate in the European Unions to

    "... have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders." (40) The European Commission buttressed this policy announcement in April 2013, when it launched an expanded CSR initiative in the European Union that centered on disclosure. (41) The announcement mandates that "large corporations include non-financial information in their public reports," such as environmental and diversity guidelines that the entity has in place. (42) This 2013 update by the European Union is similar to the types of disclosures that companies in Denmark have been required to make since 2010. (43)

    The initiatives by the U.N., EU, and Denmark make it clear that CSR programs are of interest to governing bodies as they push business entities to disclose whether they engage in CSR, however under these regimes the decision to undertake CSR is still voluntary. (44) In contrast, India's parliament, in a historical move in August 2013, passed the world's first mandatory CSR provision. (45) To a student of Indian philanthropy this may seem to be an unlikely place for such a bold law to take root. (46) Upon further inspection, India was perhaps ripe for an audacious CSR initiative and its parliament merely seized the moment. (47)

    III. HISTORY

  4. Origins of Corporate Social Responsibility in India

    The tradition of businesses engaging with the communities in which they operate has been rooted in Indian culture and in the teachings of its major religions for hundreds of years. (48) CSR, however, begun to take shape in the forefront of public discourse with respect to companies in the second half of the twentieth century as India shed the ties of colonialism and became an international economic force. (49) In the final years of colonialism, the collective struggle for independence and the teachings of Mahatma Ghandi affected Indian society as a whole, but had a particular impact on businesses and their role in CSR. (50)

    This collective consciousness continued in the wake of India's independence from Great Britain in 1947. (51) The new Indian government mandated that state-owned corporations be more socially conscious and undertake programs for the development of society as a whole and encouraged private sector entities to voluntarily contribute to the building of a new nation-state. (52) During this first decade of independence, India's government followed a mixed governance model that weaved elements of Keynesian economics, inherited British corporate law, and state control of business enterprises into its regulatory scheme. (53) However, as early as 1951, the Supreme Court of India noted in Chiranjit Lal Chowdhuri v. The Union Of India, et al., (54) that a company engaged in the production of an essential commodity has a social character and is not just a concern of investors. (55)

  5. Companies Act of 1956

    Within a decade of independence, India...

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