ENHANCING CORPORATE SOCIAL RESPONSIBILITY: A COMPARATIVE ANALYSIS OF

STAKEHOLDER PROTECTION PROVISIONS IN THE UK AND INDIA

SUBMITTED TO:
DR A. SRIDHAR
FACULTY, COMPANY LAW

SUBMITTED BY:
Praseem Patel
III Year, Semester VI, B.A. LL.B (Hons.)
(2021-5LLB-140)

NALSAR LAW UNIVERSITY, HYDERABAD

 Abstract
In the article the author looks into the jurisprudence surrounding Corporate Social
Responsibility (CSR) in light of mechanisms for better protection of stakeholder interests in
the context of both hard and soft law. The article goes on to comparative analyse the Indian
position with that of UK stakeholder protection provisions. The article highlights on the
handicap that the stakeholders have unlike the shareholders due to asymmetry of information
available. The primary question that can be devised here is how CSR can be used as a tool to
protect stakeholder interests thereby ensuring ethical conduct from the companies.
 Table of Contents
Introduction............................................................................................................................3

Corporate Social Responsibility Framework.........................................................................4

i. Substantive Duty.........................................................................................................4

ii. A debate between Soft Law v. Hard Law................................................................5

Analysis of ‘Substance’ versus ‘Procedure’..........................................................................6

Need to shape the corporate policy........................................................................................8

Conclusion..............................................................................................................................9

INTRODUCTION

Stakeholders can be simply described as person, group or organisation that has vested interest
in a company. Stakeholders can vary from employees, customers, suppliers to potential
investors. CSR can be best understood as a means through which a company takes
responsibility to impact a variety of stakeholders thereby extending the corporate purpose
beyond the limited focus on shareholder primacy framework. The success in stakeholder
relationship directly impacts the objectives of the company and their effective and efficient
attainment. It becomes more pertinent to ensure the protection of stakeholders as they are
devoid of the safeguards which implicitly comes along with the status of shareholder.

The significant growth of Environmental, Social, and Governance (ESG) investing has
highlighted the importance of the same on company financial performance. While there is
some overlap with CSR, ESG is mainly a financial strategy used by investors for portfolio
selection and engagement. This approach often prioritizes shareholder interests over social or
environmental concerns, which can limit boards from acting in the best interests of
stakeholders1.

Through this article the point of enquiry would be to observe the ways CSR could be
regulated from a Company Law perspective in order to ensure sustainable corporate conduct.
There are primarily two ways through which CSR could be viewed i.e. ‘process’ and

1
Michelle Mosser, 2012 REPORT ON SUSTAINABLE AND RESPONSIBLE INVESTING TRENDS IN THE UNITED
STATES WITH REFLECTIONS ON SUSTAINABLE AND RESPONSIBLE INVESTMENT, 2012 GREENMONEY JOURNAL
(2017), https://greenmoney.com/2012-report/ (last visited Apr 9, 2024).
‘substance’2. The UK and India have taken different stances on the importance of process
and substance. We will assess the advantages of each approach in how they could incorporate
CSR into corporate governance.

CORPORATE SOCIAL RESPONSIBILITY FRAMEWORK

i. Substantive Duty

The relation between director of a company and shareholders is that of uberrima fides 3. In
UK the provision is enshrined in their Company Law of 2006, Section 172(1). The section
provides for directors to act in the best interest of the company and take measures that benefit
the members of the company as a whole i.e. including the employees, customers, suppliers
and environment. While the provision provides for the protection of the stakeholders, the
interests of the shareholders still take primacy over stakeholders and the director duties are
oriented more towards addressing the concerns of the ‘members’ of the company4.

Section 166(2) of Company Act of 2013 5, in India, serves as a guiding principle to directors
instructing them to act in good faith and act to further the interests of a company, its
shareholders, the personnel and community in general. The approach taken here is more
pluralistic and shareholders and stakeholders seems to be present on the same footing.
However similar to its UK counterpart the provision fails to provide a substantive remedy to
the stakeholders against the abuse of the directors. The decision-making process is made
more complex by the lack of government guidance in India on how directors should manage
conflicting interests. The Companies Act of 2013 mandates 'mandatory CSR' as per Section
135 for some companies6, requiring them to allocate 2% of their net profit to CSR activities.
These companies must also establish a CSR Committee to oversee and report on their CSR
initiatives. In order to bolster the statutory provision, the CSR Rules were enacted in 2014. 7
However one of the primary problem that can be observed is the trend towards philanthropic

2
Katarzyna Chałaczkiewicz Ładna, Tomasz Sójka & Jędrzej Jerzmanowski, TO WHOM POLISH DIRECTORS OWE
THEIR DUTIES – BETWEEN SHAREHOLDER PRIMACY AND POLITICAL AGENDA (2022),
https://eprints.gla.ac.uk/276114/1/276114.pdf (last visited Apr 9, 2024).
3
Percival v Wright [1902] 2 Ch 401, also refer Rajat Maloo, SHAREHOLDER RATIFICATION FOR DIRECTORS’
BREACH OF DUTY INDIACORPLAW (2020), https://indiacorplaw.in/2020/02/shareholder-ratification-for-directors-
breach-of-duty.html (last visited Apr 9, 2024).
4
BTI 2014 LLC (APPELLANT) V SEQUANA SA AND OTHERS (RESPONDENTS) (2022),
https://www.supremecourt.uk/cases/docs/uksc-2019-0046-judgment.pdf (last visited Apr 9, 2024).
5
Cite the Act
6
Id
7
The Companies (Corporate Social Responsibility Policy) Rules 2014
endeavours that the companies generally engage in 8, while there is qualms with such
expenditure of companies, however the same does come at cost of ensuring a positive duty on
the companies towards the stakeholders, needless to add the misuse of the CSR funds9.

ii. A debate between Soft Law v. Hard Law

There has been a longstanding debate over which form of governance of CSR is better suited.
The debate is that of soft law versus hard law 10. United Kingdom Corporate Governance
Code (UKCGC),11 is one such example that attempted to apply a softer approach providing
implementation flexibility. The ‘comply or explain’ approach as pioneered by the Cadbury
Report12, had evolved over time through various amendments and stands today in form of the
provisions of UKCGC recent 2019 amendment. The UKCGC expands the Board's
responsibility to include a wider group of stakeholders and establishes a method for
incorporating their interests into corporate decisions, providing stakeholders with a chance to
participate in the Board's decision-making process. One such example can be provision 5 of
the code13, which provides for safeguards in forms of workforce advisory panel, director
appointment from the employees of the company. The same provision however suffers with
limited scope targeting only the employees of the company.

The National Guidelines on Responsible Business Conduct, released in the same year as
UKCGC, has similar rules, instructing directors to adopt an inclusive strategy via nine
principles that the guidelines lays down 14. However, empirical evidence shows that hard laws

8
R. Edward Freeman, Andrew C. Wicks & Bidhan Parmar, STAKEHOLDER THEORY AND “THE CORPORATE
OBJECTIVE REVISITED” HTTP://PUBSONLINE.INFORMS.ORG (2004),
https://pubsonline.informs.org/doi/pdf/10.1287/orsc.1040.0066 (last visited Apr 9, 2024).
9
EY India, WEAK GOVERNANCE AND LACK OF DUE DILIGENCE POSE A GRAVE RISK TO CSR PROGRAMS: EY
SURVEY EY US - HOME (2020), https://www.ey.com/en_in/news/2020/05/weak-governance-and-lack-of-due-
diligence-pose-a-grave-risk-to-csr-programs (last visited Apr 9, 2024).
10
Jennifer A. Zerk, Multinationals under international law, in CAMBRIDGE UNIVERSITY PRESS 69–72,
http://www.untag-smd.ac.id/files/Perpustakaan_Digital_1/CORPORATE%20SOCIAL%20RESPONSIBILITY
%20Multinationals%20and%20Corporate%20Social%20Responsibility.pdf (last visited Apr 9, 2024).
11
The citation for the code.
12
hampel.pdf , also DEVELOPING CORPORATE GOVERNANCE CODES OF BEST PRACTICE (2005),
https://documents1.worldbank.org/curated/ar/194571468330288811/pdf/
346690v20Corporate0governance0Rationale.pdf (last visited Apr 9, 2024).
13
Supra.
14
NATIONAL GUIDELINES ON RESPONSIBLE BUSINESS CONDUCT (2018),
https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdf (last visited Apr 9, 2024).
are more effective in Indian context than the soft laws. The predominance of promoters over
the companies require a mandatory and to an extend a coercive approach15.

Disclosure Obligation and Qualms regarding its efficacy

The Company Law of 2006 (UK) lays down the requirement of a Strategic Report through
which the directors of a company are obligated to explain how they have complied through
the 172(1). The report can be seen as a safeguard ensuring transparency regarding the tasks
undertaken by a company to further the interests of the stakeholders. Environment related
disclosures are given due emphasis in these reports, similarly several EU directives 16, have
increased the scope of disclosure in large companies17. The Indian equivalent of the Strategic
Report is ‘Board’s Report’ as mandated by Section 134(3)(o). Any company that qualifies the
requirement given in Section 135 is required to disclose the CSR responsibilities that a
company as undertaken in the Board’s report. The Business Responsibility Report is expected
from the top 100 listed companies to be given vide a circular issued by SEBI in August
201218, BRSR is the evolved form of BRR and has replaced the same. Such disclosure
requirements does seem to give a positive impression regarding the transparency of the
company. In reality the picture is grimmer than it appears to be, as most of the times
companies only furnish brief statements just to illustrate the application of NGRBC principles
without engaging in depth with the report. The report has been reduced to a mere formality
that needs to be adhered19.

ANALYSIS OF ‘SUBSTANCE’ VERSUS ‘PROCEDURE’

Salmond gave the typology of ‘procedural rights’ and ‘substantive rights’, the former governs
the “process of litigation” while the later governs the “administration of justice” one deals
15
Bernard S. Black & Vikramaditya S. Khanna, Can Corporate Governance Reforms Increase Firms' Market Values? Evidence from India,
4 J. EMPIRICAL STUD. (2007), available at http://ssrn.com/abstract=914440; Dharmapala & Khanna, supra note 70; also refer - Umakanth
Varottil, ‘India’s Corporate Governance Voluntary Guidelines 2009: Rhetoric or Reality?’ (2010)
16
Non-Financial Reporting Directive, Corporate Sustainability Reporting Directive.
17
Javier Delgado Ceballos et al., CONNECTING THE SUSTAINABLE DEVELOPMENT GOALS TO FIRM-LEVEL
SUSTAINABILITY AND ESG FACTORS: THE NEED FOR DOUBLE MATERIALITY HTTPS://JOURNALS.SAGEPUB.COM/
(2023), https://journals.sagepub.com/doi/pdf/10.1177/23409444221140919 (last visited Apr 9, 2024).
18
Business responsibility reports, SEBI (2012), https://www.sebi.gov.in/legal/circulars/aug-2012/business-
responsibility-reports_23245.html?QUERY (last visited Apr 9, 2024).

19
Aditya Jalan & Ankitesh Ojha, DRIVING SUSTAINABLE BUSINESS PRACTICES: THE SEBI’S BRSR CORE
FRAMEWORK AND INTERNATIONALLY EVOLVING ESG DISCLOSURES AZB (2024),
https://www.azbpartners.com/bank/driving-sustainable-business-practices-the-sebis-brsr-core-framework-and-
internationally-evolving-esg-disclosures/ (last visited Apr 9, 2024).
with matters inside the courts of justice while the other is available to the world outside 20.
Embedding the principles given now a century ago in the contemporary corporate governance
we need to ensure that the rights of the stakeholders are not only procedurally safeguarded
but also that they are not denied the substantive remedy. Hence, the substantive interpretation
of the CSR regulations would require us to ask the question ‘what needs to be done’ while the
procedural interpretation would require us to ask ‘how to do it’ 21. Both the provisions i.e.
Section 172(1) and Section 166(2), delves into the substantive question. They provide the
guideline as to what needs to be done however, they seem to fail in answering the procedural
question. Even though the pluralist approach taken by Companies Act of 2013 the same does
not suffice the engagement overdue with the procedural question.

By and large the provisions are general guidelines that directors have to bear in mind while
dispersing their duties, the conduct of the same remains open to their discretion. As we have
seen in the last part that disclosure requirements improves the transparency, consequently
solving the problem of information asymmetry. In the current framework, while the
communication in form of a public report provides a level playing field for the stakeholders,
the problem of engagement persists. The act of informing stakeholders about the Board of
Directors' decision appears to be futile when there is no meaningful involvement of
stakeholders in the decision-making process. Here, a distinction that must carefully be drawn
is that of ‘procedure’ and ‘process’. While disclosure is a procedural mechanism, it does not
lead to substantive realisation of rights. The came can only happen if stakeholders are
‘procedurally’ engaged in the ‘process’ of decision making.

While directors have the flexibility to make decisions for the company's success, stakeholders
often do not know how these decisions are reached. This lack of clarity can lead to
stakeholder interests being overlooked. This flexibility can also create biases towards
shareholders or directors' personal interests, rather than considering stakeholders. To improve
transparency and accountability, there is a call to open up the 'black-box' of decision-making,
allowing for better control over factors influencing decisions. The importance of recognizing
different stakeholder interests in decision-making, as the current focus on managerial talent

20
Salmond, Jurisprudence (9th ed. 1937) § 172. Plag na aaye toh ye bhi cite kar do – Albert Kocourek,
SUBSTANCE AND PROCEDURE FLASH: THE FORDHAM LAW ARCHIVE OF SCHOLARSHIP AND HISTORY
(1941), https://ir.lawnet.fordham.edu/flr/vol10/iss2/1/ (last visited Apr 9, 2024).
21
RICHARD GARNETT, SUBSTANCE AND PROCEDURE IN PRIVATE INTERNATIONAL LAW (2013),
https://law.unimelb.edu.au/__data/assets/pdf_file/0011/1687448/11Peari1.pdf (last visited Apr 9, 2024).
and shareholder investment has negatively impacted stakeholders and company performance.
There is a need for greater transparency in how directors make decisions, emphasizing the
importance of understanding the decision-making process and ensuring meaningful
stakeholder participation in board decisions for effective corporate governance22.

There is a need for an ex-ante form of accountability which has a precautionary as well as a
preventive effect on the decision making. It is extremely difficult to precisely predict the
outcome of a decision taken by the BOD. Stakeholder engagement in the decision making
would not ensure to come to a better discussed outcome it also disburse the accountability
which rests solely on the shoulders of the directors. Recognising the rights of the stakeholders
to participate in the decision making process would create a strong feedback mechanism
while creating more value23. The participation must be across various dimensions of decision
making which will also help in the trust building process.24

The complex nature of CSR requires transparent decision-making involving stakeholders.

Non-financial disclosure is crucial for informing stakeholders and engaging them. Mandatory
disclosure, sufficient information, and reliable auditing are key for effective stakeholder
engagement. Mandatory non-financial disclosure is seen as positive in both countries, but
improvement is needed in India to inform stakeholders better. Stakeholder engagement
should be a core policy, legislated, and part of directors' duties, similar to the UK's Section
172 statement. The BRSR framework should focus on comprehensive, detailed information
from a stakeholder perspective. External verification is necessary for companies to avoid a
superficial approach to ESG issues.

A more advance outlook towards Section 135 requires direct engagement with the
stakeholders in forms of site visits, collecting their opinion, through surveys discovering the
problems that they encounter. Such can be a valuable addition to the CSR programmes. The
CSR Committee ambit can be widened and powers can be conferred to stakeholders in certain

22
Iris H-Y Chiu & Roger Barker, SUBMISSION TO THE BUSINESS SKILLS AND INNOVATION COMMONS SELECT
COMMITTEE: CORPORATE GOVERNANCE INQUIRY SSRN (2016), https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=2858903 (last visited Apr 9, 2024).
23
Johan Hedren et al., SHAPING SUSTAINABILITY: IS THERE AN UNRELEASED POTENTIAL IN UTOPIAN THOUGHT?
FUTURES (2008), https://www.sciencedirect.com/science/article/abs/pii/S0016328708001778 (last visited Apr
9, 2024).
24
John F. Devlin & Denise Isabel Tubino, CONTENTION, PARTICIPATION, AND MOBILIZATION IN
ENVIRONMENTAL ASSESSMENT FOLLOW-UP: THE ITABIRA EXPERIENCE RESEARCHGATE (2012),
https://www.researchgate.net/publication/285748892_Contention_participation_and_mobilization_in_environm
ental_assessment_follow-up_The_itabira_experience (last visited Apr 9, 2024).
tailor made arrangement apt for ensuring the demands of the stakeholders are not left
unheard. Similar to election of director requirement under UKCGC 25. Furthermore, a policy
proposal that has gained traction over years is having a dedicated CSR Committee that looks
over the stakeholder interests and influence the decision making process of the directors. In
UK the disclosure and engagement requirements are more rigorous still due to grey areas that
are present as per provision 5 of UKCGC 26, allows for companies to dispense with the
disclosure requrements without a material engagement with the challenged that a company
faced to realise the CSR obligations. In this regard the ‘apply and explain’ approach of
disclosure becomes more effective as a regulatory tool than the ‘comply or explain’
methodology that is currently applied27.

NEED TO SHAPE THE CORPORATE POLICY

The corporate culture in both the countries allows for assimilation of the interests of the
stakeholders. Nevertheless, CSR is still not well integrated with the corporate policy of these
countries. To make CSR part of a company's policy, the board needs to think about how the
company's actions affect the stakeholders. The board should decide the core values of a
company and exhibit that they are serious about making sure that a company behaves well
and survives perpetually in a sustainable way, which can only happen if the company is
backed by the goodwill generated through active engagement in CSR28.

Under the Companies Act of 2013, India has adopted a broader corporate purpose under
section 166(2), however the same does not constitutes a part central to the identity of the
company. One possible solution of the same can be inclusion of the CSR obligation towards
the stakeholders into the ‘objects clause’ of the company making it a matter of mandate that
directors have to adhere. Such a change will shield the stakeholders’ interests from an
inconsistent shareholder proposal.29

To ensure progress towards long-term goals, annual incentive objectives should be aligned
with the company's purpose. These intermediate milestones should reflect the company's

25
Supra
26
Supra the rule
27
Mohamed Adnan, Shayuti and Hay, David and van Staden, Chris, The Influence of Culture and Corporate
Governance on Corporate Social Responsibility Disclosure: A Cross Country Analysis (2018). The University
of Auckland Business School Research Paper Series, 2018, Journal of Cleaner Production, 198, 820-832.
doi:10.1016/j.jclepro.2018.07.057, 2018, Available at SSRN: https://ssrn.com/abstract=4016840
28
Jeroen Veldman and others, ‘Corporate Governance for a Changing World Report of a Global Roundtable
Series’ (2016) Frank Bold and Cass Business School
29
BEIS, Executive Rewards: Paying for Success: Eighteen Report of Session 2017–19 (2019) 3
values and objectives, helping to hold managers accountable to stakeholders 30. This alignment
signals the company's priorities and helps embed a culture of CSR throughout the
organization31.

CONCLUSION

In conclusion, the analysis sheds light on the intricate interplay between corporate
governance, stakeholder protection, and the implementation of CSR initiatives in the UK and
India. Both countries grapple with the challenge of balancing shareholder interests with the
broader concerns of stakeholders, such as employees, customers, suppliers, and the
community at large. While the UK's approach, exemplified by the UK Corporate Governance
Code, emphasizes voluntary compliance and stakeholder engagement, India's regulatory
framework, anchored by the Companies Act of 2013, takes a more prescriptive stance with
mandatory CSR requirements. However, shortcomings persist in both jurisdictions, including
the lack of substantive remedies for stakeholders and issues surrounding the efficacy of
disclosure obligations. Moving forward, there is a pressing need for regulatory reforms to
strengthen stakeholder protection and embed CSR principles into corporate policies. This
entails fostering greater transparency and accountability in decision-making processes,
ensuring meaningful stakeholder participation, and aligning managerial incentives with long-
term sustainability goals. Moreover, there is a call for a shift towards a more proactive
approach to CSR regulation, one that goes beyond mere compliance and focuses on fostering
a culture of ethical conduct and stakeholder engagement. This could involve revisiting
existing legal frameworks to incorporate stakeholder interests into the core objectives of
companies, mandating stakeholder participation in decision-making processes, and enhancing
disclosure requirements to provide stakeholders with comprehensive and meaningful
information. Ultimately, by bolstering stakeholder protection provisions and promoting
responsible business practices, both the UK and India can create a conducive environment for
sustainable economic growth, social development, and environmental stewardship. Through
collaborative efforts between policymakers, businesses, and civil society, a more inclusive

30
Rajat Dhawan et al., HOW INDUSTRIAL COMPANIES CAN RESPOND TO DISRUPTIVE FORCES MCKINSEY &
COMPANY (2018), https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/how-industrial-
companies-can-respond-to-disruptive-forces (last visited Apr 9, 2024).
31
PRINCIPLES FOR PURPOSEFUL BUSINESS | FUTURE OF THE CORPORATION (2020),
https://www.thebritishacademy.ac.uk/documents/224/future-of-the-corporation-principles-purposeful-
business.pdf (last visited Apr 9, 2024).
and responsible corporate landscape can be cultivated, benefiting not only shareholders but
also the broader society.