Study Notes: Corporate Social Responsibility

By Sahil Kumar 20 Minutes Read

Introduction

The number of people living in absolute poverty and suffering from undernourishment remains significant. To support the government’s efforts to address these development gaps, business communities engage in Corporate Social Responsibility (CSR) initiatives aimed at sustainable development. Through these initiatives, businesses can effectively contribute to the development process alongside the government.

The Indian economy is continuously evolving. The environment of Indian business has made significant strides on the global stage, characterized by a supportive and proactive approach. Strengthening grassroots welfare is fundamental to any development process. Corporate contributions to community welfare in their areas of operation under the banner of CSR have increasingly become a core aspect of corporate business. These efforts have garnered significant recognition from policymakers, the government, and other stakeholders.

The foundational concepts of Corporate Social Responsibility (CSR) emerged in the 19th century with figures like Robert Owen and William Hesketh Lever in the United Kingdom, the Cadbury brothers in England, and Jamshedji Tata in India. In 1916, J. M. Clark supported Adam Smith’s idea that the economics of responsibility in business ethics could address various issues by shifting personal responsibility to public responsibility. Further contributions came from Bowen, H. R. (1953), Davis, K. (1960), and McGuire, J. W. (1963), who expanded definitions and models, emphasizing the importance of human values in business for societal welfare.

Subsequent works by Friedman, M. (1970) and Freeman, R. E. (1984) explored the role of CSR in the business-society relationship, resulting in ongoing debate between the shareholders’ perspective and stakeholders’ perspective of CSR. Carroll, A. B. (1999) later supported Freeman’s stakeholder arguments and highlighted his popular CSR pyramid, especially relevant for developing countries, by revisiting his four dimensions of CSR outlined in 1979.

In the 21st century, the focus has shifted from theoretical discussions to empirical investigations, emphasizing the stakeholder approach, triple bottom line, and business ethics. CSR now aims to ensure public goods and improve social welfare through its trickle-down effects on society, which can be understood using the stakeholder theory framework, particularly in the context of mandatory CSR in India.

Meaning

The concept of Corporate Social Responsibility (CSR) has been evolving since the early 1970s, yet a universally accepted definition remains elusive. Numerous codes, conventions, principles, and standards have emerged, reflecting the diverse CSR practices across different economies. These variations are primarily due to differences in

a) social and economic systems

b) legal and regulatory frameworks

c) cultural practices

d) local public needs and expectations.

While different organizations have developed their own definitions of CSR, there is considerable similarity among them. According to the Anarde Foundation, CSR involves companies managing their business processes to create an overall positive impact on society.

The World Business Council for Sustainable Development outlines several key aspects of CSR^[1]:

• CSR is the ongoing commitment by businesses to behave ethically and contribute to economic development while improving the quality of life for the workforce, their families, and the local community and society at large.
• CSR involves capacity building for sustainable livelihoods.
• CSR respects cultural differences and seeks business opportunities in building the skills of employees, the community, and the government (e.g., in Ghana).
• In the Philippines, CSR is seen as businesses giving back to society.

Peter Drucker posits that corporations can fulfill their social responsibility by turning it into business opportunities. For example, a company in the solar energy sector might conduct research to develop affordable solar energy devices and promote them among rural populations. This approach benefits both the company and society.

According to Nelson, the greatest contribution businesses can make to development is by producing safe and cost-effective products and services profitably while adhering to the law. This also involves enhancing the positive economic, social, and environmental impacts and managing and minimizing the negative ones.

CSR in India

In 1991, Indian society was not yet significantly liberalized or globalized. However, the economic reforms introduced subsequently led to substantial benefits, including enhanced access to diverse information and a plethora of perspectives. This transformation has profoundly influenced societal perceptions of Corporate Social Responsibility (CSR) initiatives, which in turn impacts corporate reputations. Currently, Indian society’s awareness and understanding of CSR programs is transitioning from a predominantly skeptical viewpoint to a more balanced and objective perspective.

Initially, CSR was a voluntary practice in India. Studies on CSR during its voluntary phase highlighted the necessity for a legal framework to ensure effective implementation in India. In today’s globalized world, only sustainable businesses can drive sustainable development. Companies are now expected to contribute to societal development beyond mere profit generation in this era of globalization. To this end, the Government of India issued CSR guidelines for Central Public Sector Enterprises in April 2010.^[2] Reporting on CSR activities is crucial as it significantly impacts a company’s reputation and image. An evaluation of the CSR activities of the top 1000 Indian firms revealed that only a negligible percentage were actively engaged in CSR initiatives.^[3]

The introduction of mandatory CSR provisions in India has led to significant changes in the economy. Proponents argue that corporations should broaden their responsibilities to include societal welfare, extending beyond their traditional focus on profit maximization. Conversely, opponents contend that CSR should remain a market-driven approach aimed at maximizing shareholder value. They argue that mandatory CSR can impose inconsistent costs on smaller and emerging firms, for which profits are a crucial source of investment. These enforced expenditures could result in opportunity costs. Therefore, the true responsibility of a firm lies in balancing the dual objectives of maximizing shareholder value and stakeholder value without substantially diminishing net social welfare gains. India is notable for being the first country to enact a mandatory minimum CSR law, which affects approximately 8,000 companies.^[4] 

Section 135 of the Companies Act, 2013 deals with Corporate Social Responsibility (CSR) mandates for certain companies in India.

Applicability

This section applies to companies meeting at least one of the following thresholds in the preceding financial year:

• Net worth of Rs. 500 crore or more
• Turnover of Rs. 1,000 crore or more
• Net profit of Rs. 5 crore or more

Calculation of Profits

Section 198 of the Companies Act, 2013 deals with “Calculation of Profits.”

Calculation of profits is necessary for the evaluation of the new worth of the company. Profits include any income from various sources such as business operations, investments, or other activities, after deducting expenses and applicable taxes.

CSR Committee

Companies covered under Section 135(1) must establish a Corporate Social Responsibility Committee with:

• Minimum of three directors
• At least one independent director

CSR Policy and Spending

• The Board of Directors has to formulate a CSR Policy [based on the recommendations of the CSR Committee].
• The policy should address activities mentioned in Schedule VII of the Act (covering areas like poverty, education, healthcare, etc.).
• Companies are mandated to spend at least 2% of their average net profit in the past three years on CSR activities (Section 135(5)).
• Unspent CSR funds need to be transferred to a specific fund within six months [or used for ongoing projects, with proper disclosure].

Reporting and Penalties

• Companies with an average CSR obligation of Rs. Ten crore or more in the preceding three years need to conduct independent impact assessments for CSR projects exceeding Rs. One crore^[5]
• Non-compliance with spending or reporting requirements attracts penalties (Section 135(7))

The National Voluntary Guidelines (NVGs) on Social, Environmental, and Economic Responsibilities of Business, released by the Ministry of Corporate Affairs (MCA) in July 2011, comprise nine principles designed to guide Indian businesses in adopting responsible business practices. Recognizing the national and international advancements in sustainable business since 2011, these guidelines were revised and reissued as the ‘National Guidelines on Responsible Business Conduct’ (NGRBC) in March 2019. The NGRBC aligns with the United Nations Guiding Principles on Business & Human Rights (UNGPs), the UN Sustainable Development Goals (SDGs), the Paris Agreement on Climate Change, among other frameworks. It provides a structure for companies to grow sustainably and inclusively while addressing stakeholder concerns.

The NGRBC encourages businesses to embody these principles earnestly, which include:

1. Conducting and governing themselves with integrity, ethics, transparency, and accountability.

2. Providing goods and services in a sustainable and safe manner.

3. Respecting and promoting the well-being of all employees, including those in their value chains.

4. Being responsive to and respecting the interests of all stakeholders.

5. Respecting and promoting human rights.

6. Making efforts to protect and restore the environment.

7. Engaging in public and regulatory policy influence responsibly and transparently.

8. Promoting inclusive growth and equitable development.

9. Engaging with and providing value to consumers responsibly.

The Supreme Court of India established the principle of “absolute liability” for industries involved in hazardous activities, which means that such industries are strictly liable for any harm caused to people or the environment, without any exceptions or defenses.^[6]

In another case, which is commonly known as the Bhopal Gas Tragedy case, the Supreme Court underscored the moral and legal responsibilities of corporations towards victims of industrial disasters and established important precedents for corporate accountability.^[7]

The 21st Report of the Parliamentary Standing Committee on Finance significantly contributed to incorporating CSR provisions into the statute. The Standing Committee noted that the annual statutory disclosures on CSR mandated by the Companies Act would effectively ensure compliance. Every company has to disclose its CSR activities in the Annual Report of the Board.^[8] The format for such disclosures has also been outlined.^[9]

Companies’ engagement in CSR

Engaging in Corporate Social Responsibility (CSR) offers several benefits for companies:

1. Enhanced Reputation: CSR initiatives improve public perception, fostering customer loyalty and trust.

2. Attracting Talent: Companies known for ethical practices and social contributions attract and retain motivated employees.

3. Risk Management: CSR helps mitigate risks by addressing social and environmental issues proactively.

4. Operational Efficiency: Sustainable practices often lead to cost savings and operational efficiencies.

5. Investor Appeal: Many investors prefer companies with strong CSR commitments, potentially increasing investment opportunities.

Overall, CSR contributes to a company’s long-term sustainability and success.

Example of Companies in India

1.      TATA Group

Tata Consultancy Services (TCS), a prominent IT services, consulting, and business solutions firm within the Tata Group, has been pivotal in guiding numerous leading global companies through transformative journeys for over five decades. In the fiscal year 2021-22, TCS exceeded its CSR expenditure requirement by allocating Rs. 727 crores, surpassing the mandated Rs. 716 crores.

The company stands firm in its belief that while everyone is born with equal potential, not all have equal opportunities. TCS is dedicated to empowering individuals and communities, fostering self-reliance through purpose and technology, while upholding values of fairness, equity, and human rights. It is committed to bridging the digital divide and creating inclusive pathways, particularly for women, youth, and marginalized groups.

Through diverse CSR initiatives and programs worldwide, TCS continues to invest in addressing critical community needs, with a primary focus on education, skill development, employment, and entrepreneurship. In the fiscal year 2022, TCS estimates that its global community initiatives benefited over 1.7 million individuals, made possible by the dedicated efforts of over 58,900 employees who volunteered more than 700,000 hours towards supporting local community projects.

2.      Reliance Industries Limited

Reliance, India’s largest company by market capitalization, holds a significant global presence in the integrated energy value chain and has established itself as a leader in the Retail and Digital Services sectors within India.

Reliance Industries Limited consistently ranks as the top spender on Corporate Social Responsibility (CSR) initiatives in the country. In the fiscal year 2021-22, the company allocated Rs. 1186 crores towards its CSR endeavors, surpassing its mandated spending obligation under the Companies Act (Rs. 1112 crores).

Most Reliance’s community outreach programs are conducted through Reliance Foundation, the CSR arm of the Reliance Group. Since the inception of its philanthropic activities, the company has positively impacted the lives of over 5.75 crore individuals. Reliance Industries’ CSR efforts primarily focus on Rural Transformation, Education, Disaster Response, Health, Sports for Development, and Arts, Culture, and Heritage. Additionally, the company extended support to the nation in combating the COVID-19 pandemic.

Reliance Foundation was honored for its Corporate Leadership in Environmental, Social, and Governance (ESG) practices at The CSR Journal Excellence Awards 2021.

CSR in the USA

1. Philanthropic Model:

• Emphasis on Charity: CSR in the USA is often centered around philanthropy, where businesses engage in charitable activities and donate a portion of their profits to various causes.
• Corporate Giving: Companies are known for their significant contributions to education, health, and social services. Major corporations set up foundations or partner with nonprofits to support community initiatives.
• Volunteerism: Encouraging employee volunteerism is a common practice. Companies organize and support volunteer efforts, fostering community engagement.

2.  Profit and Taxation:

• Business-First Approach: The primary focus is on making profits, with the understanding that profitable businesses can then support social causes.
• Tax Compliance: Companies fulfill their social responsibility by paying taxes, which in turn support public services and infrastructure.

3. Charitable Contributions:

• Donations to Charities: A certain percentage of profits is earmarked for donations to charitable organizations. This is seen as a way to give back to the community and enhance the company’s public image.

The Court of Appeals for the Tenth Circuit held the scope of discretionary power vested in a board of directors, particularly their authority to act in the public interest even if it may result in financial costs to the stockholders.^[10] In this case, the court went against the idea that “a business corporation is organized and carried on primarily for the profit of stockholders.”^[11]

Conclusion

Corporate Social Responsibility (CSR) has become a cornerstone of modern business practice. By integrating ethical and sustainable practices throughout their operations, companies can create a positive ripple effect. This extends from fostering a healthy work environment and responsible sourcing to minimizing environmental impact and giving back to communities. The benefits are multifaceted: a stronger brand reputation, increased customer loyalty, and a more engaged workforce. However, for CSR to be truly impactful, it must go beyond performative gestures. Transparency and authenticity are paramount. Consumers and investors are increasingly discerning, demanding genuine efforts that align with a company’s core values.

Looking ahead, CSR is likely to become even more ingrained in business strategy. Stakeholder capitalism, which prioritizes the needs of all stakeholders – employees, customers, communities, and the environment – alongside shareholders, is gaining traction. Companies that embrace this philosophy and demonstrate a commitment to social responsibility will be well-positioned to attract and retain top talent, particularly among younger generations who value a company’s social impact alongside its financial performance. As societal and environmental challenges intensify, CSR will play a crucial role in shaping a more sustainable and equitable future. Continuous improvement and measurable outcomes will be essential for ensuring CSR initiatives deliver on their promises.

^[1] Making Good Business Sense, Lord Holme, and Richard Watts.

^[2] DPE OM No. 2(29) 2005-GM-GL-69, 26th August, 2005.

^[3] Karmayog CSR Ratings 2008.

^[4] Companies act, 2013, ss. 134, 135.

^[5] Companies Act, 2013, s. 135(3).

^[6] Indian Petrochemicals Corporation Ltd. v. MC Mehta, 1987 SCR (1) 819; 1987 SCC (3) 170; AIR 1988 SC 1037

^[7] Union Carbide Corporation v. Union of India, 1991 SCR (1) 139; 1991 SCC (4) 584; AIR 1992 SC 248.

^[8]  Section 135(4), Companies Act 2013

^[9] Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

^[10] Herald Co. v. Seawell, 472 F.2d 1081 (10th Cir. 1972).

^[11] Dodge v. Ford Motor Co. 04 Mich. 459, 507, 170 N.W. 668, 684 (1919).

Sahil Kumar