Reimagining CSR

Corporate law requires directors to take only those decisions that they honestly believe (in good faith) will serve the “best interest of the company as a whole”.

For long it was considered that a company is collective of shareholders and, therefore, the best interest of shareholders is the best interest of the company. However, in some jurisdictions, courts are taking the view that a company is a legal entity separate from shareholders and, therefore, the “best interest of the company as a whole” does not imply the best interest of shareholders. Directors must consider the interest of other important stakeholders, too. Governments are incorporating that view in corporate law. For example, Section 166 of the Indian Companies Act 2013 (Indian CA) stipulates: “A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.” 

Corporate law imposes a responsibility on directors that while taking decisions in the commercial interest of their company, they should evaluate the impact of their strategies and operations on employees, neighbourhood communities, and the environment. Directors must ensure safe and good working conditions to employees and safety to neighbouring communities, choose business models that produce minimum negative externalities and minimum negative impact on the environment. They must also ensure the company is taking actions to mitigate the pain inflicted on neighbouring communities and to conserve and protect the environment. This responsibility is called corporate social responsibility (CSR). Business defines CSR little broadly. According to it, CSR is not limited to mitigating pain in neighbouring communities. CSR is to support neighbouring communities and communities in which firms work in their development initiatives.

 The above perspective on CSR is reflected in the requirements of Section 135 of the Indian CA, which mandates large and profitable companies to spend 2 per cent of their average net profit in the past three years in the CSR activities listed in Schedule VII of the Act, which lists a wide range of developmental activities. It stipulates that in spending the money, the company should give preference to the local area and areas around it where it operates. American business also holds a similar view. Business Round Table (BRT), which is an association of CEOs of America’s leading companies, in its 2019 statement on the purpose of a corporation, signed by 181 CEOs, states that, among other things, businesses are committed to supporting the communities in which they work and protecting the environment. 

Incorporation of CSR in corporate law is huge progress in making businesses responsible. A recent development is more significant. It is the emergence of the concept of corporate irresponsibility. Companies that fail to fulfil CSR and adopts unethical practices in dealing with customers, vendors, and other stakeholders are labelled as irresponsible companies. Corporate irresponsibility is now a taboo. Irresponsible companies fail to attract and retain talent. Recent research shows “meaningfulness” quotient of jobs increases when employees see top management’s sincerity in fulfilling CSR and adopting ethical practices. This has made CEOs and directors cautious the reputation of the company and their own is not tarnished by media exposure to their company’s irresponsible behaviour. This has strengthened the commitment of companies to CSR and adoption of ethical practices.

Public pressure on Facebook to stop political advertisements before the presidential election in the US or to remove the president’s statement on the movement against racial discrimination in the US shows that big firms have enormous power to impact the social culture and the outcome of important social events. CEOs and the boards should take the responsibility to assess the impact of every strategy and policy on social culture and fabric. Their social responsibility is not to adopt strategies and policies, which may hurt society, even if those benefit the company commercially.

We see CEOs and chairpersons often express concerns about social evils, like discriminations and inequality, in social media and public fora. They must realise their statements are seen with suspicion by employees and other stakeholders. They consider those as rhetoric unless the company demonstrates sincerity in eradicating those evils. In times to come, companies which will fail to demonstrate that sincerity will be considered irresponsible.  

Reimagining CSR is necessary to present a better society for future generations. The current trend creates the hope that the change is coming. New generation CEOs and directors, who as students were part of social activism, will take society forward.

The writer is founder of Nonlinear Insights, former professor of IIM Calcutta, and ex-director, IMT Ghaziabad

Mail id: asish.bhattacharyya@gmail.com