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Paper on Corporate Social Responsibility: Myth or Reality?

Submitted By :

Name: Sarthak Vij

Regn. No.: NRO0431816

Ipcc Student (pursuing articleship)

Address : House no. 3279 , street no. 3 mahavir jain colony ,sunder nagar, Ludhiana.

Contact No. : 8968128214 , 0161-4607941

Emaid ID: Sarthakvij26@gmail.com


Introduction
Indian corporations, like those in other countries, have had a long tradition of being engaged in social
activities that have gone beyond meeting a corporation’s immediate financial objectives. However, since
the late nineties, CSR activities have increasingly come under the lens both of policy makers as well as of
corporations’ stakeholders as governance issues acquired increasing prominence. At the policy level, the
formal focus on CSR started in India with the issuance of the Corporate Social Responsibility Voluntary
Guidelines in 2009 by the Ministry of Corporate Affairs (MCA, 2009) that culminated in the enactment of
Section 135 of the Companies Act 2013 (MCA, 2013) making CSR spending as well as CSR disclosure
mandatory for specific types of companies. Significantly while CSR issues have been gaining in
prominence across countries, India became the first country, and at the time this article is written, the only
country to have made CSR activity mandatory for large and profitable companies incorporated into law. In
all other countries CSR efforts by corporations have been kept largely voluntary, with only a select
number of countries mandating corporations to disclose such activities.

CSR in India –
The Legal Framework The first formal attempt by the Government of India to put the CSR issue on the
table was in the issuance of Corporate Social Responsibility Voluntary Guidelines in 2009 by the Ministry
of Corporate Affairs (MCA, 2009). It is in the Voluntary Guidelines of 2009 that the core elements of a
CSR policy was spelt out that included care for all stakeholders, ethical functioning, respect for workers’
rights and welfare, respect for human rights, respect for the environment and activities to promote social
and inclusive development. The Guidelines specifically drew a distinction between philanthropy and CSR
activities, and highlighted the voluntary nature of CSR activities that go beyond any statutory or legal 3
obligation. The Guidelines of 2009 were followed in 2011 by the National Voluntary Guidelines of Social,
Environmental & Economic Responsibilities of Business, also issued by the MCA (MCA, 2011).

The transition from a voluntary CSR regime to a regulated regime came when the Securities
Exchange Board of India (SEBI) required the top listed 100 companies, as part of Clause 55 of the Listing
Agreement, to mandatorily disclose their CSR activities in the Business Responsibility Reports (BR
Reports) accompanying the Annual Reports. This, SEBI opined was in the larger interest of public
disclosure and represented a move towards integrating social responsibility with corporate governance.
The most ambitious attempt at mandated CSR activities for companies came with the enactment of
Section 135 of the Companies Act 2013 (MCA, 2013). As stated in the introduction, Section 135 made
CSR spending as well as reporting mandatory for the very first time in India and brought the CSR
activities of Indian corporates under the purview of corporate law. Specifically, the provisions under
Section 135 requires companies with net worth of rupees five hundred crore or more, or turnover of rupees
one thousand crore or more or a net profit of rupees five crore or more
(i) to appoint a CSR Committee of at least 3 directors (one independent director), and
(ii) under the guidance of the CSR Committee, spend in every financial year, at least two per cent of
the average net profits of the company made during the three immediately preceding financial
years, in pursuance of its Corporate Social Responsibility Policy.

Why Corporate Social Responsibility?


In any CSR discussion it is important to understand why corporates should be socially responsible in the
first place? Why, instead, would corporates not go about their business of shareholder value maximization,
and leave the task of pursuing social development to government agencies? What is the underlying
rationale of CSR, and more specifically, in the context of Section 135, the economics of mandatory CSR?
The question of “why CSR” can be essentially decomposed into three sub-queries namely, what is CSR,
what is the rationale for CSR, and what is the rationale for mandated CSR.

Defining CSR
The definition of CSR has evolved over the years. CSR is defined by UNIDO, World Bank and the World
Business Council for Sustainable Development (WBCSD). The notion of CSR in-built in most of the
definitions is that CSR is essentially a voluntary activity that serves as a bridge between the corporation
and the society, with the goal of the corporation re-defined from maximizing only shareholder interests
(the shareholder primacy view) to the interests of all its stakeholders.

The Rationale of CSR


To understand better the drivers of CSR in developing countries and the considerations that have possibly
dictated the imposition of mandatory CSR in India, it is important to highlight the pros and cons of
socially responsible activities from the viewpoint of both the society and the corporation along with the
need for regulatory oversight of such activities.

While much of the argument for CSR from the perspective of the society is ensconced in moral and ethical
considerations, there are economic arguments too that have been made for and against CSR.

CSR and the Firm


Turning to the rationale of CSR from the perspective of a firm, two distinct motivations are identified,
one which is ‘performance driven’ and the other which is ‘stakeholder-oriented’
Regulatory Approaches to CSR The regulatory approaches entail the extent to which the government
influences CSR behavior of firms in two respects, first with respect to reporting of CSR activity, and
second with respect to the amount of spending for CSR activity. Based on this, one gets three types of
regulatory regimes, namely

(i) voluntary reporting and voluntary spending


(ii) mandatory reporting but voluntary spending, and
(iii) mandatory reporting and mandatory spending. Much of the policy debates around the world is
with respect to whether CSR reporting should be voluntary or mandatory i.e., whether firms
should be required by laws and regulations to report their CSR activities.

Regulatory Approaches to CSR


The regulatory approaches entail the extent to which the government influences CSR behavior of firms in
two respects, first with respect to reporting of CSR activity, and second with respect to the amount of
spending for CSR activity. Based on this, one gets three types of regulatory regimes, namely

(i) voluntary reporting and voluntary spending


(ii) mandatory reporting but voluntary spending, and
(iii) mandatory reporting and mandatory spending. Much of the policy debates around the world is with
respect to whether CSR reporting should be voluntary or mandatory i.e., whether firms should be
required by laws and regulations to report their CSR activities.

Mandating CSR disclosure The issue of mandating CSR essentially pertains to the question of whether
corporations are required by laws and regulations to report/disclose its CSR activities or whether the
decision to report is to be left to the business judgment of the corporation. The issue of mandatory CSR
reporting has gained prominence in recent years following the global financial and economic 10 crisis in
the 2000s, a string of corporate misconduct and failures, and growing threats from business operations to
environmental sustainability from business operations, all of which have created a ‘trust deficit’ between
corporates and their stakeholders (KPMG-UNEP, 2010). Consequently, CSR governance has over time
shifted from a “hands-off” approach to more stringent regulation in terms of imposing greater mandatory
disclosure requirements regarding how CSR by corporations are impacting its different stakeholders and
the community at large.
CSR Myths
Myth 1 - Economic growth is not compatible with CSR

What the Index for Sustainable Economic Welfare and Human Development Index show is that GDP
growth and quality of life move in parallel until social and environmental costs begin to outweigh
economic benefits. Most developing countries have yet to reach this divergence threshold. For them,
economic growth and the expansion of business activities is still one of the most effective ways to achieve
improved social development, while environmental impacts are increasingly being tackled through
leapfrog clean technologies.

Myth 2 - Multinationals is the biggest CSR sinners

On the ground in most countries, multinationals are generally powerful forces for good, through their
investment in local economies, creation of jobs, upgrading of infrastructure, provision of basic services
and involvement in community development and environmental conservation. The cumulative social and
environmental impacts of smaller companies, which operate below the radar of the media and out of reach
of the arm of the law, are typically far larger than that of the high profile multinationals.

Myth 3 - Multinationals is the biggest CSR saviors

Not only do large companies have limited influence over government policy, but most multinationals,
despite large capital investments, provide only a minuscule proportion of the total employment in
developing countries. The real potential saviors are small, medium and CSR Business Ethics Government
Multinationals Shareholders micro enterprises (SMMEs), including social enterprises, which are labour
intensive and better placed to effect local economic development. If the social and environmental impacts
of these SMMEs can be improved, the knock on benefits will be proportionally much greater than
anything that multinationals could achieve on their own.

Myth 4: Developing countries are anti-multinational

Developing countries are often caught in a no-man’s land of under-development in a competitive,


monetized, global economy, and the sooner they can modernize and integrate, the better for them. Most
often, developing country communities welcome multinationals and their CSR initiatives. This is not the
same as saying that the developing world should repeat the past mistakes of the developed countries, such
as highly polluting industrialization, nor that multinationals should not be required to be responsible and
held accountable.
Myth 5: CSR is the same the world over

One of the biggest fallacies is that, in a globalised world, CSR can somehow conform to a unitary model.
Of course, we need universal principles, like the Global Compact, and perhaps even process frameworks,
like ISO 14001. But standardized performance metrics, like those of the Global Reporting Initiative and
the numerous sustainability funds and indexes, start to tread on shaky ground. The tendency is for
developed country priorities to receive emphasis and for northern NGO agendas to dominate.

Myth 6: Developed countries lead on CSR

There are countless examples of how developing countries are proving themselves highly adept at
delivering the so-called triple bottom line of sustainability, namely balanced and integrated social,
economic and environmental benefits. It is actually not surprising, since in developing countries, these
three spheres are seldom separable – economic development almost inevitably results in social upliftment
and environmental improvement, and vice versa.

Myth 7: Codes can ensure CSR

The past few years have seen a mushrooming of corporate responsibility codes, standards and guidelines.
This standardisation trend is both inevitable and necessary in a globalizing world which is desperately
searching for an alternative to command-and-control style business regulation in order to satisfy the
governance and accountability void which still exists. But it would be a big mistake, for either companies,
or civil society, or regulators to assume that this codification bears much relation to relevant and
appropriate CSR practices at grassroots level. (Dr Wayne Visser)

Reality behind CSR initiatives


Lack of awareness

It is clear that many organizations have limited awareness of what CSR is or of the external drivers that
are pushing CSR along supply chains. There are some organizations where a greater level of
understanding of CSR issues and practices exist. However, in these cases there is often a lack of
understanding about where to begin the process of implementing some kind of CSR programme.

Multiple requirements and competing codes of conduct

Many managers see CSR as just one more thing to do. They complain that they already have to deal with
quality issues (and in some cases compliance to quality standards), health and safety requirements and a
whole host of other legally mandated requirements. They point out the need to spend large amounts of
time preparing for audits and inspections.
Procurement practices

Tensions and a lack of dialogue between CSR managers and procurement departments is something that
many CSR managers will openly admit to. Price is of course an issue and it is true that companies
concerned about CSR want good CSR practices, good quality, delivery on time, and a low price. Of
course, it should be the combination of all those things that matter but there is still a need to be working
more closely with procurement departments to make sure they really are committed to that idea. There
may be a role for some sort of CSR certification for procurement managers.

Corporate social responsibility does not means only social responsibility restricted to donations etc. but
it’s much more than that. It’s clear from Carroll’s and Lantos’ classification as follows:

i. Economic responsibilities: be profitable for shareholders, provide good jobs for employees, and
produce quality products for customers.
ii. Legal responsibilities: comply with laws and play by rules of the game.
iii. Ethical responsibilities: conduct business morally, doing what is right, just and fair, and avoiding
harm.
iv. Philanthropic responsibilities: make voluntary contributions to society, giving time and money to
good works. According to Lantos‟ the classification is as follows:

Ethical CSR: morally mandatory fulfillment of a company’s economic responsibilities, legal


responsibilities, and ethical responsibilities. ii. Altruistic CSR: Fulfillment of an organization’s
philanthropic responsibilities, going beyond preventing possible harm (ethical CSR) to helping alleviate
public welfare deficiencies regardless of whether or not this will benefit the business itself. iii. Strategic
CSR: fulfilling those philanthropic responsibilities which will benefit the company through positive
publicity and goodwill. The CSR concept evolved despite inevitable skepticism . Throughout the sixties
and seventies, most of the studies attempt to define distinctive features and rules of CSR (Manne and
Wallich, 1972). Despite much divergence, all of them agree that socially responsible companies have to
act voluntarily to conform to CSR paradigms, beyond legal prescriptions .