By Sibani Panda, KIIT Law School, Bhubaneswar.
“Without a sense of caring, there can be no sense of community”
In the recent years, increasing attention has been given to the concept of corporate social responsibility. The corporate social responsibility is an evolving concept and it does not have a universally accepted definition, so it generally refers to the transparent business practices that are based on ethical values, compliance with legal requirements, and respect for people, communities, and the environment. Thus, beyond making profits, companies are responsible for the totality of their impact on people and the planet.[1] Corporate Social Responsibility (CSR), can be described as, the continuous commitment by corporations towards the economic and social development of communities in which they operate. Good corporate governance is a part and parcel of a corporate responsibility towards the society.
The World Bank Group stated that “Corporate social responsibility is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large, to improve their lives in ways that are good for business and for development.”[2]
The concept of corporate social responsibility is not new. The history of corporate activity shows that business houses have always encompassed the notion of broader obligations to the communities in which they operate. Companies have recognized the value of enlightened self interest responding to their own specific circumstances.Corporate social responsibility is essentially a concept whereby companies integrate social and environmental concerns in their business operations and in the interaction with their stakeholders on a voluntary basis. Through voluntary commitment to CSR, companies send a positive signal of their behavior to their various stakeholders, viz. shareholders, employees, investors, creditors, suppliers, customers, regulators, government and the society at large. By doing so, they make an investment towards future and increase their profitability. Corporate social responsibility is the responsibility of an organization for the impacts of its decisions and activities on society and environment through transparent and ethical behavior that is consistent with sustainable development and the welfare of the society.
Importance of CSR:
“In the flat world, with lengthy global supply chains, the balance of power between global companies and the individual communities in which they operate is tilting more and more in favor of the companies. As such these companies are going to command more power, not only to create value but also to transmit values, than any other institution on the planet.”[3]
Thomas L. Friedman, the World is Flat, 2005.
Some social scientists have formulated mainly three theories to justify the importance of the CSR to the companies in promoting welfare measures for the society:
- Trusteeship Theory: This theory adopts a realistic perspective of the company as a social institution which has a corporate personality. In this theory, the managers and the executives are required to act as trustees and should not only promote the financial interests of the shareholders but also to promote the broader interests of the company as a whole. The managers are also required to balance the conflicting interests of the present and future stakeholders and develop the corporate capacities on a long term basis rather than focus on short term shareholder gains.
- Social Entity Theory: This theory regards the company not as a private association with individual property rights, but as a public association constituted by political and legal processes. It is a social entity, meant for pursuing collective goals with public objectives. This theory regards the company as a social institution in society based on the grounds of fundamental values and moral order of the community. The executives of the company are the custodians of the stakeholder’s interests.
- Pluralistic Theory: This theory advocates the idea of multiple interests of the stakeholders. According to this theory, a company should serve and accommodate the broader interests of all the stakeholders in order to make it efficient. This theory asserts that the company’s performance in terms of profitability and growth will be increased substantially provided the stakeholder’s management is practiced by the company.
Need for Corporate Social Responsibility:
The broad rationale for setting up of ethics for corporate decision making arises from the fact that a business enterprise derives several benefits from society, which must, therefore, require the enterprise to provide returns to society as well. A business cannot succeed in a society which fails. This, therefore, clearly establishes the stake of a business organization is in the good health and well being of a society of which it is a part. Most importantly, in the present era, customers of any product or service are likely to feel dissatisfied in buying from an organization that is seen to violate the expectations of what is deemed to be ethically and socially responsible behavior. It is becoming increasingly evident that organizations that pay genuine attention to the principles of socially responsible behavior are also getting favor from the public and are the preferred choice for their goods and services, therefore it is required to adopt CSR activities and follow the CSR policies and guidelines.
Factors Influencing Corporation’s Level of Social Responsibility[4]:
- Financial condition of the firm and health of the economy.
- Too much or too little competition.
- Institutional factors such as well-enforced state regulation.
- Well-organized and effective industrial self-regulation.
- Private, independent organizations, including NGOs, social movement organizations, institutional investors, and the press.
- Important business publications, business school curricula, and other educational venues in which corporate managers participate.
- Membership in trade or employer associations, which are organized in ways that promote socially responsible behavior.
- New concerns and expectations from various stakeholders in the context of large scale industrial change due to globalization.
- Increased influence of social criteria on the investment decisions of individuals and institutions, both as consumers and as investors.
- Increased concern about the damage to the environment caused by economic activity.
- Transparency of business activities brought about by the modern information and communication technologies.
Scope of Corporate social responsibility:
The scope of CSR is far and wide. It can be considered from different points of views, some of them are:
- Protecting and promoting the interests of the various stakeholders.
- Addressing the social concerns and promoting the public welfare programmes.
- Engaging in philanthropic activities.
- Ensuring good corporate governance in the companies.
- Sponsoring social and charitable causes and social welfare activities.
Corporate social responsibility voluntary guidelines, 2009:
In India, the voluntary guideline for CSR was prepared by the Ministry if Corporate affairs to focus on some of the core elements which the business or corporate houses needs to focus. These guidelines were prepared after taking into account the government challenges faced in our country as well as the expectation from the society and the reason behind formulating these guidelines is that each business entity should prepare a CSR policy to guide its strategic planning and to provide a pathway for its CSR initiatives, which should be an integral part of the overall business policy and which should be aligned with its business goals.
CSR mandatory with passage of New Companies Bill:
According to section 135 of the New companies act , 2013 , the compliance of CSR is mandatory, if the company meets any of the following criteria:
- Net worth of Rs 500 crore or more,
- Turnover of Rs 1000 crore or more,
- Net profit of Rs 5 crore or more during any financial year.
If any of the 3 criteria are complied by the company, then the company is required to constitute a CSR committee with 3 or more directors ( at least 1 of them should be an independent director) and the committee shall formulate a CSR policy and recommend to board and indicate CSR activities to be undertaken and the committee should monitor CSR activities of the company and review it from time to time.
There is considerable flexibility for corporates on the areas that they can address as part of their social responsibility activities, the geographical regions that could be chosen for the intervention and the manner of engagement. The new act provides the additional flexibility to the company’s Board to decide on some other activity as well, as long as it is spelt out in the company’s CSR Policy. All the core social needs – including education, healthcare, sanitation, environmental sustainability, employability – are covered under Schedule VII, so the act is clearly aiming to align corporate’ s CSR activities with the country’s social development imperatives. The new act demarcates CSR from charity and does not position it as a ‘moral responsibility’ for companies.
The new Act will necessitate capacity building with regards to CSR – in terms of understanding the regulation, developing policies, building a governance structure, evaluating and deciding on programs, choosing partners, monitoring and assessing impact of programs.
Conclusion:
The concept of corporate social responsibility is now firmly rooted on the global business agenda. But in order to move from theory to concrete action, many obstacles need to be overcome. A key challenge facing business is the need for more reliable indicators of progress in the field of CSR, along with the dissemination of CSR strategies. Transparency and dialogue can help to make a business appear more trustworthy, and push up the standards of other organizations at the same time.
References:
[1]Sir Geoffrey Chandler, “Defining Corporate Social Responsibility,”
Ethical Performance Best Practice, Fall 2001.
[2] The Challenges of Social Corporate Social Responsibility: Facts for You, May 2013, pp. 38-39
[3] The 2007 Edelman “Trust Barometer” found that a majority of respondents in North America and Asia thought that global business plays a role that no other institution can in addressing major social and environmental challenges. 57% in the European union and 63% in Latin America also believe this to be true.
[4] Campbell, J.L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review, 32, 946-967