[Mayank Barman is a third-year student at Department of Law, University of Calcutta]
Corporate Social Responsibility (“CSR”) cannot be defined in a singular manner. Given its vast scope, it basically refers to responsibilities on businesses/corporate houses to produce a positive impact in the society. It promotes philanthropic behaviour whereby companies integrate their social, environmental, cultural concerns in the day-to-day operations of their business. Though CSR is seen as a philanthropic measure, it is often mandated by law for the betterment of the society, whereas, in some jurisdictions it is purely a voluntary activity. This piece attempts to draw an analysis between the CSR framework in India and the UK and how the legislative framework is designed to suit such needs in both the jurisdictions.
Analysing the Indian approach: Is the ‘mandatory requirement’ a step too far?
In India, certain companies “mandatorily” owe a responsibility towards the society. In other words, this mandatory responsibility, also known as the CSR is an obligation on companies registered in India and having a net worth of five hundred crore or more, or a turnover of one thousand crore or more, or a net profit of five crore or more to spend at least two per cent of its average net profits made during the three immediately preceding financial years. A positive note about CSR’s spending is that it covers a large array of social activities including but not limited to river cleanliness, rural development, sports and resource conservation. However, over 60% of CSR-funded projects find their place in the health and education sector, leaving out very less scope for other developmental projects. Geography is yet another hurdle which India has to address. Maharashtra (the state with the highest GDP among all Indian states) receives about 16% of the Total CSR funds and the top ten Indian states receive nearly 60% of the total funding. The bottom five states account for only 3.5% of the total CSR funds creating a massive discrepancy amongst the rich and poor states. The CSR regulations cover companies having an annual net profit of INR 5 crores or more, and therefore, the SMEs are well within the ambit of the CSR. The SMEs usually identify themselves within the region or town they are based out of or with the issues that impact their business. It is at this level that SMEs are seen to participate in CSR activities, the most. In many situations, the SMEs are reluctant to seek publicity and therefore, are quite skeptical when it comes to sharing their CSR expenditure in large causes of public interest. Moreover, these SMEs are unwilling to expose themselves to the complex sets of rules and regulations for CSR as opposed to well-established companies. While large companies adapt quickly to the CSR mandate, SMEs often fail to meet the ‘two-percent’ target in many situations due to their ‘inability to find the right project.’
Analysing the UK approach: Let the Corporates decide for themselves?
The UK is no stranger to the concept of CSR. In fact, CSR in the UK could be traced back to the 1800s - a period when the term ‘CSR’ was not even formally coined. The European Union (“EU”) made its first pledge on CSR in the Lisbon Summit in March 2000, which was followed by a Green Paper on CSR published by the European Commission in 2001. The Paper (after extensive consultation) set out three aspects of CSR. Firstly, it advocated ‘voluntary CSR’ as opposed to ‘mandatory CSR.’ Secondly, the focus was set on sustainable development - integrating economic, social and environmental issues in business operations. And thirdly, to not view, CSR as an optional activity, because it has a fundamental impact on how businesses are run. Under the government of Tony Blair, the UK was the first country to have an official “Minister for CSR” to promote CSR activities. The voluntary nature of CSR expenditure in the UK has been appreciated by the Confederation of Business Industry, arguing that mandatory expenditure on CSR would not be feasible for small and medium businesses. This has largely made CSR expenditure purely in the hands of the companies which has largely become an advertising venture, and voluntarism has been viewed as an indication of lack of legislative intent. Due to the voluntary nature of CSR expenditure in the UK, there is no mention as to which companies would have to comply with CSR regulations. However, the companies adopting a “Triple Bottom Line” approach to CSR could be guided by legislations concerned with social and environmental aspects of their business operations. The list of legislations are not an exhaustive and rather provide a general guide on CSR expenditure hence not making the same mandatory for the companies to adhere with. A thing to note that a majority of SMEs in the UK do not shy away from performing non-profit/charity work. Prominent names such as the Piccolo Foods and Fruitful Office have been seen taking active participation in CSR activities. Hence, even though CSR is not mandated by the law in the UK, the intent of the corporates in participating in the same is worth appreciating.
Regulation v. Voluntarism
Milton Friedman puts it brilliantly when he says that “If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is?” The question that emerges further from this is - if regulations are imposed, how much of it should be allowed? Given the heightened difference of opinion on the subject matter, it is difficult to come up with one straight jacket answer.
Voluntariness is viewed to promote competitiveness, improve stakeholder relationships, increase brand value/reputation among other benefits. It has also been argued that owing to the plurality of environmental, political, cultural, and geographical factors faced by businesses, voluntariness would be the go-to option since a firm dealing with locals would have different objectives as opposed to a firm dealing in cross-border activities. Similarly, the overall size of the firm could also impact its CSR practice. Regulations can often prove to be counter- productive, and hence a meaning regulated CSR could eliminate the free will of the companies to participate in CSR.
On the other hand, even though voluntary CSR has been a great success in the UK, a legislative framework is essential to clearly carve out enforceable rules which would ensure a ‘level playing field’ for all stakeholders involved in the process. Further, voluntary approach could also lead to a difference in what companies may preach and what they ultimately do. Various scholars in their research have indicated that company reports on social and environmental issues necessarily do not showcase accountability. Similarly, many FTSE 350 companies in the UK still do not produce social and environmental reports on a regular basis. However, in the Indian context, the benefits of mandatory CSR implementation are clearly seen. As on September 30, 2019, ninety-eight per cent of the N100 companies had their CSR policy accessible in the public domain. India reported a massive increase in Total CSR Expenditure Amount and Total CSR Prescribed Amount. While the total CSR Expenditure amount and the total CSR Prescribed Expenditure amount in FY 2014-15 was INR 10,065.93 cr and 17, 140.42 cr respectively, the same increased to 17,548.63 cr and 25,806.82 cr respectively in FY 2018-19. Even the CSR expenditure in rural India in FY 2017-18 increased to 55.80% compared to 26.37% in FY 2014-15.
However, mandatory CSR reporting does not come without demerits. If statutes and rules create a host of key performance indicators, then companies might just end up checking in all the boxes rather than thinking through the issues which their stakeholders would ideally care the most about. Moreover, it becomes increasingly difficult to define a range of issues which are material to companies across all sectors.
As CSR continues to grow as an emerging legal reality, the focus must be to view it from a practical lens and beyond a theoretical debate. Most importantly, is CSR a venture that should be ‘promoted’ or ‘imposed?’ This is largely the dilemma stakeholders around the world continue to face. However, from a practical standpoint, what yields the best results to the society and contributes to overall growth of the people, should be the way to go forward, acknowledging the political and economic factors which each country might face in their pursuit.