By: Dipannita Ganguly
“The business of business is business”
The modern business era has undergone a huge change, aiming at market oriented yet having a responsible behavior towards customer instead of sustainable business success and shareholders’ value solely through maximizing short-term profits. Nowadays business wants to contribute towards sustainable development by operating and managing their resources in such a way that it enhances the economic growth and competitiveness, keeping pace with environmental protection and promoting and enhancing the social responsibility, thus the consumer interests.
Corporate Social Responsibility
Definition & Concept
Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.1
The concept of Corporate Social Responsibility is an emerging and evolving concept, not having a universally accepted definition. Sometimes this concept is also referred to as ‘Corporate Citizenship’.
CSR may be meant to understood the way by which the business enterprises tries to integrate social, economic and environmental concerns into their working, with emphasis into their values, culture, decision making, strategy and operations in a clear and transparent manner, by which they can establish better practices and thereby increase the wealth of society and march towards its improvement.
Thus, Corporate Social Responsibility can be explained as under-
Corporate –means an organized business.
Social– the concept of dealing with society or people in general
Responsibility– a sense of accountability for the working of the business enterprises towards their customers.
In general, the philosophy is basically to return to the society what the business enterprises has taken from it in the course of its quest for creation of wealth.
A Contract with Society
“The broadest way of defining social responsibility is to say that the continued existence of companies is based on an implied agreement between business and society. In effect, companies are licenses by society to provide the goods and services which the society needs. The freedom of operation of companies is therefore, dependent on their delivering whatever balance of economic and social benefits society currently expects of them. The problem for companies is that the balance of needs and benefits is continually changing and there is no generally accepted way of measuring those changes.
To start with, companies are expected to meet society’s demand for goods and services, to provide employment, to contribute to the exchequer, and to operate efficiently at a profit. There is no conflict between social responsibility and the obligations on companies to use scarce resources efficiently and to be profitable – an unprofitable business is a drain on society. “The essence of the contract between society and business is that the companies shall not pursue their immediate profit objectives at the expenses of the long-term interest of the community.”– Sir Adrian Cadbury
Evolution of Corporate Social Responsibility1
India has the world’s richest tradition of Corporate Social Responsibility (CSR). The term CSR may be relatively new to India, but the concept dates back to Mauryan history, where philosophers like Kautilya emphasized on ethical practices and principles while conducting business. CSR has been informally practiced in ancient times in form of charity to the poor and disadvantaged. Indian scriptures have at several places mentioned the importance of sharing one’s earning with the deprived section of society. We have a deep rooted culture of sharing and caring.
Religion also played a major role in promoting the concept of CSR. Islam had a law called ‘Zakaat’, which rules that a portion of one’s earning must be shared with the poor in form of donations. Merchants belonging to Hindu religion gave alms, got temples and night shelters made for the poorer class. Hindus followed ‘Dharmada’ where the manufacturer or seller charged a specific amount from the purchaser, which was used for charity. The amount was known as charity amount or ‘Dharmada’. In the same fashion, Sikhs followed ‘Daashaant’.
Here, we can understand that the history of CSR in India runs parallel to the historical development of India. CSR has evolved in phases like community engagement, socially responsible production, and socially responsible employee relations. Therefore, the history of Corporate Social responsibility in India can be broadly divided into four phases:
The first phase of CSR was driven by noble deeds of philanthropists and charity. It was influenced by family values, traditions, culture and religion along with industrialization. Till 1850, the wealthy businessmen shared their riches with the society by either setting up temples or religious institutions. In times of famines, they opened their granaries for the poor and hungry. The approach towards CSR changed with the arrival of colonial rule in 1850. In the Pre-independence era, the pioneers or propagators of industrialization also supported the concept of CSR.
In 1900s, the industrialist families like Tatas, Birlas, Modis, Godrej, Bajajs and Singhanias promoted this concept by setting up charitable foundations, educational and healthcare institutions, and trusts for community development. It may also be interesting to note that their efforts for social benefit were also driven by political motives.
The second phase was the period of independence struggle when the industrialists were pressurized to show their dedication towards the benefit of the society. Mahatma Gandhi urged to the powerful industrialists to share their wealth for the benefit of underprivileged section of the society. He gave the concept of trusteeship. This concept of trusteeship helped in the socio-economic growth of India. Gandhi regarded the Indian companies and industries as “Temples of Modern India”. He influenced the industrialists and business houses to build trusts for colleges, research and training institutes. These trusts also worked to enhance social reforms like rural development, women empowerment and education.
In the third phase from 1960-1980, CSR was influenced by the emergence of Public sector undertakings to ensure proper distribution of wealth. The policy of industrial licensing, high taxes and restrictions on the private sector resulted in corporate malpractices. This led to enactment of legislation regarding corporate governance, labor and environmental issues. Still the PSUs were not very successful. Therefore there was a natural shift of expectation from the public to the private sector and their active involvement in the socio-economic growth. In 1965, the academicians, politicians and businessmen set up a national workshop on CSR, where great stress was laid on social accountability and transparency.
In the fourth phase from 1980 onwards, Indian companies integrated CSR into a sustainable business strategy. With globalization and economic liberalization in 1990s, and partial withdrawal of controls and licensing systems there was a boom in the economic growth of the country. This led to the increased momentum in industrial growth, making it possible for the companies to contribute more towards social responsibility. What started as charity is now understood and accepted as responsibility.
It is mandatory for Central Public Sector Enterprises to allocate 2-3% of the PAT for the inclusive development of a backward district. (CSR and Sustainability guidelines by Department of Public Enterprises 2013). In which one key project has to be in CSR and the other in Sustainability for the development of the disadvantaged and marginalized communities.
Thus the country is at the verge of beginning an interesting stakeholder relationship through Corporate Social Responsibility programs which would give rise to inclusive and equitable growth and benefit for the needy and the underprivileged across the country.
Factors influencing Corporate Social Responsibility
Attention towards the concept of Corporate Social Responsibility is increasing. It may be referred to a concept whereby the companies integrate social and environmental concerns in their business operations and in their interactions with their stake holders on a voluntary basis. Following are the factors that influence the promotion of CSR:
- Globalization, coupled with focus on cross border mergers, trade, multinational enterprises and global supply chains, the need for CSR is increasing. Human resource management, environmental protection and health and safety are the other factors that influence promotion of CSR.
- Institutions such as United Nations, The organization for Economic Co-operation and Development and ILO has adopted compacts, declarations, guidelines, principle and other instruments which provides the outlines for the promotion of CSR.
- Concerns of consumers and investors are increasing in support of responsible business practices and demands are made by stakeholders for information on how companies are addressing risk and opportunities related to social and environmental issues are met.
- Serious and high profile breaches of corporate ethics have contributed to elevated public mistrust of corporations and highlighted the need for improved corporate governance, transparency, accountability and ethical standards.( eg: Satayam scam)
- There has been demand all over world that corporations should meet the standards of social and environmental care, no matter where they operate.
- Business are recognizing that adopting and effective approach to CSR which can reduce risk of business disruptions, open up new opportunities, and enhance brand and company reputation.
Advantages of Corporate Social Responsibility
Existence of business in isolation is not possible; business cannot be oblivious to societal development. The Social Responsibility of business needs to be integrated into the business purpose so as to build a positive synergy effect between two.
The advantages of CSR can be pointed out in the following points:
- CSR helps in creating a favorable public image which acts as a magnet for grabbing customers’ attention to the business concerns. Reputation and brand equity of the products of a company which understands and demonstrates its social responsibility is very high.
- Society gains through better neighborhoods and employment opportunities, while the organization benefits from a better community, which is the main source of its workforce and the consumer of its products.
- A good reputation makes it easier to recruit employees.
- Employees may stay longer, reducing the costs and disruption of recruitment and retraining.
- Employees are better motivated and more productive.
- CSR helps to comply with regulatory requirements.
- Activities such as involvement with the local community are ideal opportunities to generate positive press coverage.
- Good relationships with local authorities make business easier.
- Understanding the wider impact of business can helps in developing new products and services.
- CSR can make the business more competitive and reduces the risk of sudden damage to reputation and sales. Investors recognize this and are more willing to finance the business.
Approaches of CSR- Concept of Triple Bottom Line
The concept of Triple Bottom Line (TBL) is gaining importance and becoming popular among the corporate. The term was coined by one noted management consultant, John Ellington in the year 1997. The concept of TBL is based on the premises that business entities have more to do than just profits for the owners of capital. ‘People’, ‘Planet’ and ‘Profit’ are used to succinctly describe the triple bottom lines.
People– refers to human capital, pertains to fair and beneficial business practices towards labor and community and region in which a corporation conducts business.
Planet– refers to natural capital, pertains to sustainable environmental practices. It is the lasting economic impact the organization has to its economic environment.
A concern following TBL endeavors to benefits the natural order as much as possible or at least do not harm and curtail environmental impact.
Profit is the bottom line shared by all commerce.
Profitability is purely an economic bottom line; a social and environmental bottom line is semi or non-economic in nature so far as revenue generation is concerned but it has certainly a positive impact on log run value that an enterprise commands.
Statutory backing in support of Corporate Social Responsibility
- Section 135 of Companies Act, 2013
This section provides that every company having specified net worth or turnover or net profit during any financial year shall constitute the Corporate Social Responsibility Committee of the Board. The composition of the committee shall be included in the Board’s Report. Polices shall be formulated by this committee including the activities specified in schedule VII. The section furthers ensures that at least 2% of average net profits of the company made during three immediately preceding financial years shall be spent on such policy every year. If default is made by the company in spending such amount, the Board shall give in its report the reason for such default.
- Application of provision
Companies having net worth of Rs. 500 crores or more or turnover of Rs. 1000 crores or more or net profit of Rs. 5 crores or more during any financial year shall constitute a CSR Committee of Board comprising of 3 or more directors, one of whom shall be an independent director.
- Functions of the CSR Committee
The committee shall formulate and recommend of the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII of the Act.
The committee shall also initiate a CSR policy, which shall stipulate how, where and when they went to invest their funds with respect to this requirement.
The committee shall recommend the amount of expenditure to be incurred on the activities referred to above. Further, The CSR Committee is under an obligation to monitor the implementation of the CSR policy from time to time.
- CSR Activities
The Companies Act, 2013 does not prescribe the methodology by which CSR activities are to be undertaken by the company. Companies have been given flexibility to decide the activity within the framework, choose programs, implement in the manner it desires, monitor it and ensures compliance of its own CSR policy. However, the CSR activities may be undertaken by way of the following methods:
Charity– Company can donate money to various charitable trusts, societies, NGOs etc. who work for social economic welfare of the society.
Contract– Company can hire an NGO or any other like agencies that carries out the projects on behalf of the company.
Company itself– Company can take up a project of its own or create its own trusts and use its own staffs for its proper working and monitoring or through trust and societies.
- Expenditure on CSR
In order to qualify any contribution as contribution for CSR the nature of contribution should be kept in mind. Any contribution may not result in any direct or indirect commercial benefit to the company. However it must be ensured that CSR expenditure should comply with company’s CSR Board approved CSR policy and the legal provisions. CSR expenditure includes all expenditure including contribution towards corpus for projects or a program relating to CSR activities approved by the Board on the recommendation of the CSR Committee, but does not include the expenditure on an item not in conformity or in line with activities which fall within the purview of Schedule VII of the Companies Act, 2013.
- Penalty in case of default by the Company ( under Companies Act, 2013)
The Companies Act, 2013 requires that,
- The Board’s report shall disclose the composition of the Corporate Social Responsibility Committee as per subsection (3) of section 134.
- If the company fails to spend such amount, i.e. at least 2% of the average net profit the Board shall disclose and specify the reasons for not spending the amount in its report as per Clause (o) of sub-section (3) of Section 134.
As per section 134 of the Companies Act, 2013 if the Company fails to disclose such information, it shall be punishable with fine, which shall not be less than Rs.50,000 but which may extend to Rs. 25,00,000 and every officer in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000 but may extend to Rs.5, 00,000 or with both.
Corporate Social Responsibility Reporting Frameworks
An important aspect of Corporate Social Responsibility (CSR) is the reorganization that sound practices are often based on good standards of Corporate Governance.
The following are some of the main standards for social, ethical and environmental reporting currently in use internationally.
The AA 1000– This frame work was developed by the Institute of Social and Ethical Accountability. It provides a standard for social and ethical accounting, auditing and reporting, including mandatory external verification and stake holder engagement. It aims to assist an organization in the definition of goals and targets, the measurement of progress made against these targets, the auditing and reporting of performance and in the establishment of feedback mechanism. This is mainly achieved through:
- Developing stakeholder engagement strategy
- Facilitation of Stakeholders Dialogues
- Capacity building for stakeholder engagement
SA 8000– This is an international standard for social accountability by Council on Economic Priority Accreditation Agency. SA 8000 covers the following areas of accountability:
- Child labor
- Forced labor
- Workplace safety and health of workers
- No discrimination based on race, caste, origin, religion, disability, gender, etc.
- Working hours
- Management system for Human Resources.
The Good Corporation– It is the global standard of CSR developed by the Institute of Business Ethics. This covers the fairness to employees, suppliers, customers and providers of finance; contribution to the community; and protection of the environment. Company performance is assessed annually by an independent verifier.
The OECD Guidelines for Multinational Enterprises– These guidelines set out the recommendations for a responsible business enterprise conduct in employment and industrial relations; human rights; the environment; competition; taxation; science and technology; combating bribery and protection of consumer interest.
They are not legally binding and there is no requirement for reporting or external measurement.
Highlights on Steps taken by certain Corporate towards CSR Policies
- Microsoft– Microsoft releases Corporate Citizenship Report annually and it includes the details of CSR programs and initiatives engaged by the company. Citizenship mission of the company is “to serve globally the needs of communities and fulfil our responsibilities to the public”. Microsoft’s spending on CSR initiatives in 2014 exceeded $1 billion, which includes cash donations of $119 million and in-kind donations worth $948.6 million. Moreover, charitable activities of Bill & Melinda Gates Foundation founded by Microsoft founder Bill Gates is also associated with Microsoft in the perception of the general public to a certain extent.
- Infosys– The first company that comes to mind as a beacon of good corporate governance is the Indian IT industry bellwether, Infosys. Indeed, Infosys is one of the companies that has set benchmarks for other companies not only in India but all over the world in the way corporate governance and social responsibility are handled and projected to the outside world.
- TATA Group– Another Company that has done an exceptional job of portraying itself as a good corporate citizen is the TATA group in India and The Body Shop (formerly owned by Anita Roddick) company in the United States.
The term Corporate Social Responsibility refers to the concept of business being accountable for how it manages the impact of its processes on stakeholders and takes responsibility for producing a positive effect on the society. CSR has been defined as the continuing commitment by business to behave fairly and responsibly and contribute to economic development while improving the quality of life of workforce and their families as well as the local community and society at large.
A thin line of differences exists between CSR and Philanthropy. Philanthropy refers to the act of donating money, goods, times or effort to support a charitable cause in regards to a defined objective. It may be done by an individual or by a corporate.
CSR on the other hand is how a company aligns their values to social causes by including and collaborating with their investors, suppliers, employees, regulators and the society as a whole.
Thus in the conclusion it can be stated that in order to have sustainable development the corporate should put their hands together and march towards Corporate Social Responsibility.
- Governance, Business Ethics and Sustainability- Study material by The Institute of Company Secretaries of India.
- Company Law, Decoding the Code- Dr. Prem Kumar Agarwal and CA R.K. Singh.
- Company Law- Dr. Avtar Singh.
About the Author:
The author, Miss Dipannita Ganguly is a qualified company secretary and a budding lawyer from Kolkata, India.