Ravindra Singh Parwal
In essence there is a paradigm shift from the traditional “Corporate Financial Responsibility” to a newer and wider “Corporate Social Responsibility”. Corporate Citizenship, Global Citizenship, Sustainable Responsible Business, Corporate Social Performance, Corporate Responsibility, and Triple Bottom Line, many a name we assigned to it but very less we understood it.
This article gives an insight into the concept of CSR.
1.What is CSR?
The concept of CSR was first mentioned in 1953 in the publication “Social Responsibilities of the Businessman” By William J. Bowen. However it came into common use in late 1960s and early 1970s after the formations of many multinational corporations. While there is no universal definition of CSR it generally refers to transparent business practices that are based on ethical values, compliance with legal requirements, and respect for people, communities, and the environment. Thus, beyond making profits, companies are responsible for the totality of their impact on people and the planet.
We have a responsibility to look after our planet. It is our only home.
“As we pursue our strategies world-wide, we accept a social and environmental responsibility as well. These responsibilities include the promotion of a sustainable economy and recognition of the accountability we have to the economies, environments, and communities where we do business around the world.”
– John F. Smith, Jr. – GM CEO and President
“People” constitute the company’s stakeholders: its employees, customers, business partners, investors, suppliers and vendors, the government, and the community at large. Increasingly, stakeholders expect that companies should be more environmentally and socially responsible in conducting their businesses. In the business community, CSR is alternatively referred to as “corporate citizenship,” which essentially means that a company should be a “good neighbor” within its host community. CSR implies that it is the duty of the corporate to ensure the safety of all the stakeholders.
Carroll’s Four Part Definition illuminates the concept of CSR.
- “CSR encompasses the economic, legal, ethical and discretionary (philanthropic) expectations that society has of organizations at a given point in time”
1.1 CSR and Sustainability
The idea of sustainable development emerged from the environmental protection debate and was established at the political level as a guiding principle for society as a whole at the UN Earth Summit in Rio de Janeiro in 1992.
Sustainable development is, “a form of development that meets the needs of the present without compromising the ability of future generations to meet their own needs”
– HAUFF 1987:46.
While very often these terms are used interchangeably, what normally goes in the name of CSR are few acts of philanthropy like donation, setting up educational facilities, health services, etc. and a part of the profit is used for that. But charity is not CSR; charity is not sustainability. Sustainability means business has to be undertaken in a sustainable and profitable manner, and not create undue pressure.
1.2 CSR and corporate citizenship
The CSR concept is far broader in its scope: it encompasses the fundamental responsibilities of the company and all of its contributions to sustainability irrespective of whether the activities concerned form part of or lie outside its ordinary business activities.
1.3 CSR and Corporate Governance:
In the world of CSR, there are some terms that often get confused. Corporate Social Responsibility and Corporate Governance (CG) are often used interchangeably when they are in fact distinct ideologies. The concept of governance has been in existence since the beginning of corporations but the phrase itself did not feature in financial literature until late 20th century. It is only in the last 10 years that it has gained popularity because it is often used in conjunction with or instead of CSR.
To put a little clearly: in the course of defining CSR, CG is an essential part of it, but not actually it. Good governance, corporate or otherwise is about values rather than rules. CSR is how those values manifest themselves in a corporate environment. Having a good concept of CG often negates the need for CSR. In more practical terms – CSR is easy to fake, governance isn’t.
For corporate performance to be viable, good governance is essential. This is where stewardship fits in, which is another phrase that further confuses CSR. Organizational management is concerned with stewardship which is essentially the proper management of resources – financial, social, environmental etc. The concept of sustainability further grapples with those resources that are located externally in relation to the business, specifically environmental resources. Sustainability is the branch of stewardship that maximizes resource potential as well as keeps an organization focused on the future by ensuring that present resource utilization does not constrain future business activities.
So where does CSR come in? CSR includes three basic activities: sustainability, accountability and transparency. CSR is also the physical manifestation of CG and thus needs to be given some allowances for developmental changes as organizations mature in their attitude towards stakeholders. The updated idea of CG is more aligned with CSR and it emphasizes corporate ethics, accountability, disclosure and reporting. This increase in areas of overlap between the two concepts is the root cause for confusion which is not merely semantics.
Risks taken with CSR can have a financial impact on a company, however a company that has strong principles of CG can bounce back quicker from these lapses due to the fact that it would have lesser PR holes. Some companies make a distinction by defining governance as part of investor relationships and CSR as part of stakeholder relationships. Others think of CSR as part of risk management. However it may not always be so clear-cut. There are significant global issues hampering the understanding of CG and CSR and better multi-national cooperation will ensure that there are codes of agreement that would create a distinction between the two.
CSR is in itself is a complex process of regulation especially with global supply chains and multi-stakeholder business models. There are actually very few CG and CSR practices that don’t overlap and often one drives the other. There is this idea that CG is a precursor to CSR which not only enables CSR performance but also encapsulates it.CSR and CG are often converging values at a level of governance that often requires reclassification of boundaries of business ethics. As these points are renegotiated, CSR itself will play a more important role in corporate boardrooms.
2. How CSR?
In Several Countries CSR is a mandatory exercise to be done by the companies so as to determine the Social Presence of the business houses. But in most part of the world CSR remains a voluntary practice. In India various guiding principles have been formulated by different authorities’ viz. Reserve Bank of India, Ministry of Heavy Industries & Public Enterprises (Department of Public Enterprises) and the Ministry of Corporate Affairs.
Last year in July 2011 Ministry of Corporate Affairs presented a guideline which is a refinement over it earlier issued “Corporate social responsibility Voluntary Guidelines” 2009. The new guidelines named as “National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business”.
The guidelines emphasise that businesses have to endeavor to become responsible actors in society, so that their every action leads to sustainable growth and economic development. Accordingly, the Guidelines use the terms ‘Responsible Business’ instead of Corporate Social Responsibility (CSR) as the term ‘Responsible Business’ encompasses the limited scope and understanding of the term CSR.
The Guidelines have been articulated in the form of nine Principles with the Core Elements to actualize each of the principles.
Principle # 1: Businesses should conduct and govern themselves with Ethics, Transparency and Accountability.
Principle # 2: Businesses should provide goods and services that are safe and contribute to sustainability throughout their life cycle.
Principle # 3: Businesses should promote the well being of all employees
Principle # 4: Businesses should respect the interests of, and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalised.
Principle # 5: Businesses should respect and promote human rights
Principle # 6: Business should respect, protect, and make efforts to restore the environment
Principle # 7: Businesses, when engaged in influencing public and regulatory policy, should do so in a responsible manner.
Principle # 8: Businesses should support inclusive growth and equitable development.
Principle # 9: Businesses should engage with and provide value to their customers and consumers in a responsible manner.
3. Mandatory vs. Voluntary
In most parts of the world, CSR remains a voluntary practice. So far, France is the only country to enact specific legislation requiring publicly listed companies to produce non-financial reports covering economic, social as well as environmental dimensions. Various other countries mandate detailed reporting for specific industry sectors. Additionally, some stock exchanges like the South African Stock Exchange now make NFR (i.e. Non Financial Reporting) a requirement for listed companies. A number of stakeholders have called for sustainability reporting to be a mandatory requirement aimed at increasing corporate accountability, the argument being that most companies will generally not report of their own accord or, when they do, such reporting will be incomplete and rarely material to stakeholder interests.
4. Criticisms and concerns
Critics of CSR as well as proponents debate a number of concerns related to it. Proponents argue that corporations make more long term profits by operating with a perspective, while critics argue that CSR distracts from the economic role of businesses. Others argue CSR is merely window-dressing, or an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations.
4.1 Arguments for CSR:
Proponents have following contentions to supplement the CSR philosophy:
- Addresses social issues that businesses caused and allows businesses to be part of the solution.
- Protects businesses self-interest.
- Limits future government intervention.
- Addresses issues by using business resources and expertise.
- Addresses issues by being proactive.
4.2 Arguments against CSR:
Critics have the following arguments to dampen the CSR philosophy:
- Restricts the free market goal of profit maximization.
- Business is not equipped to handle social activities.
- Increase business power due to less intervention of government.
- Dilutes the primary aim of business.
- Limits the ability to compete in a global marketplace.
The Progress of CSR in India is very slow, but a significant and sound pick – up has been made. The Institute of Chartered Accountants of India — Accounting Research Foundation (ICAI – ARF) Committee is working on a new set of rules on CSR and CII is also developing a green rating system for Indian companies. The pressure to adopt sustainability has further intensified with the launch of Sustainable Development Funds and Indices in India such as CRISIL, S&P ESG Index.
It is a concept whose time has come but it has to transform into a movement. RBI has been encouraging banks to adopt greater environmental and social disclosures apart from financial. Government is also providing assistance to corporate’s and PSUs by proving guidelines on CSR reporting. But not much has happened on this front, although, on the inclusive agenda front, there has been progress but it has not yet formed part of non-financial disclosures. In order to make an impact, India needs to integrate the concepts CSR with CFR (i.e. Corporate Financial Responsibility). As society starts rewarding and judging performance of businesses by their social, environmental performance and inclusive growth agenda, apart from economic agenda, businesses would be more motivated to voluntarily adopt CSR. I wish the deliberations all the success.