Balancing Act: Evaluating the Evolution and Effectiveness of Corporate Social Responsibility (CSR) in India’s Changing Corporate Governance Landscape
Introduction
The concept of Corporate Social Responsibility (herein ‘CSR’) had gained increased prominence in India in recent years. It is, however, hardly a concept new to India. In its earliest manifestations, CSR in India encompassed the idea of corporate philanthropy, which was mostly ingrained in ideas of selfless philanthropy as a component of culture and religion. This changed dramatically when CSR started being perceived as something that needed to be mandated and that couldn’t be left to pure voluntarism. This change was consistent with the then-evolving corporate governance paradigms. India’s corporate governance took a shift from its old shareholder approach to the more holistic stakeholder model. According to the shareholder model of corporate governance, businesses had to be held accountable to all stakeholders, including financial, human resources, community, and the society at large. CSR became an effective tool to do this. The situation of CSR spending in a country heavily influences how businesses interact with their stakeholders for a more comprehensive and sustainable development.
Alongside this, the Indian government implemented a number of corporate governance reforms with the goal of developing a system of accountable, ethical, and transparent business functioning. In 2010, The Ministry of Corporate Affairs started making progress in adding CSR—and a more stringent version of CSR was conceptualized. CSR activities of Indian companies are in accordance with the provisions of Section 135 with Schedule VII to the Companies Act, 2013. Thus far, the MCA has moved towards a hard-law-like CSR requirement into the Companies Act and adopted CSR recommendations with a “comply-or-pay” approach.
This paper juxtapositions India’s CSR law with India’s corporate governance structure and attempts to evaluate its effectiveness to the tune of the development of the entire society. The first half of the paper is an attempt to analyze the nature and evolution of CSR law in India. Its growth from a philanthropy-based soft law to the present mandatory CSR funding is traced. Simultaneously, this trajectory is explained in the context of the changes in corporate governance in India.
The second half will investigate the effectiveness of the CSR law in India in incorporating social and environmental concerns into business choices, objectives, and operations as well as in relationships between businesses and their stakeholders
The objective of the paper is to evaluate how beneficial to society this revised CSR policy is. It is argued that law fails to take in account geographical biases while CSR activities are planned. The law also fails to note the importance of specialization while permitting and prohibiting CSR activities. It suggests that CSR law be expanded to include measures to allow companies to do CSR activities as per their strengths and specialties. Second, it will be asserted that there is a risk that promoter influence will affect CSR due to promoters’ extensive control over Indian companies and the Board of Directors’ extensive authority in terms of CSR implementation. This might encourage a limited understanding of CSR to persist, one that does not necessarily equate to greater social responsibility toward a company’s employees or the environment.
CSR in India: History and Evolution
In India, CSR is a well-known concept. India arguably has one of the most extensive CSR traditions in the world. The idea of retaining a portion of one’s surplus income for the benefit of society stems from a number of religious systems. [1] During the heyday of Indian capitalism, philanthropic activities like these developed, and largely constituted Gandhi’s theory of trusteeship. This theory was a combination of altruistic and spiritual motivation driven by the conviction that, in essence, society was giving capitalists a chance to control resources. This should be seen as a form of trusteeship on behalf of society in as a whole.[2] While this arrangement was successful and many businesses made substantial donations to charitable organizations, it became clear that big businesses were the primary sources of greenhouse gas emissions, environmental deterioration, discriminatory employee treatment, and climate change.[3] It was understood that businesses, in addition to increasing economic gains, also had social responsibilities. During this stage of Indian CSR, the business/society link started, marked by a vibrant corporate sector on the one side and a diversity of social development strategies on the other. [4]
As the government shifted its emphasis to the idea that legal structures and institutions may compel corporations to perform in the best interests of their stakeholders, an effective legal system became critical for establishing a high-quality level of corporate governance. This was reflected in the important improvements that the Companies Act 2013 enacted and solidified.[5]
The 2013 statute marked a clear departure from the shareholder model of governance and the adoption of the stakeholder model. The stakeholder model is based on the idea that the corporation is accountable to a larger group of stakeholders and that companies and directors must work to balance the interests of these stakeholders. This differs from the shareholder model, which emphasizes the corporation’s responsibility to make profits and increase shareholder value.[6] The stakeholder approach places a strong emphasis on managing relationships, the corporate environment, and the promotion of shared interest. The economic climate, national governance structure, strength of law, shareholders, national culture, behavioural norms, and industrial growth are the elements that play a role in how CSR is incorporated into corporate governance.[7]
Blending into this model, the companies act bought in CSR as something which the companies ‘need’ to undertake. The companies meeting a certain fiscal condition as given in section 135 of the Companies Act, were required to create a committee to enforce their CSR mandate. The CSR Committee was given basic responsibilities of creating CSR policies, allocating fund, issuing reports and overseeing the execution of the CSR activities. [8] A company is required to spend at least two per cent of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR policy.[9] Stricter penalties to ensure compliance with CSR laws have also been introduced with the 2013 Act as well as the recent amendments to it.[10] The CSR law in India is now heading to a hard law rather than relying on the old guidelines and philanthropy-based soft law. [11]
Thus the CSR shift in India was a part of the larger corporate governance shift. In summary, corporate governance was established to protect the interests of shareholders, but it has become more and more important to a variety of stakeholder groups, partly as a result of business failures brought on by unethical behaviour at the highest levels of management. Mandating standards and guidelines to enhance corporate governance structure has thus been the current trend.
CSR and the Society
Larger corporations have now increasingly accepted the fact that CSR is an integral part of the business framework for sustainable development. Businesses also view CSR as a strategy for socially and economically viable development, with a triple-bottom-line focus on economic, environmental, and social performance.[12] This is evident from the government’s recent initiatives to integrate CSR with the environment and society, such as the requirement for social impact assessments and the statutory recognition of implementing agencies.[13]
While the new CSR strategy is admirable, it is important to assess how much the mandatory CSR policy serves society.
First, the very idea of equating the “stakeholders” with the “society” is problematic. For instance, even though the shareholders’ and stakeholder perspectives of corporate governance are depicted as diametrically opposed, both of them seek to maximize the profitability of the firm and differ only in the path or terms prescribed to do so. A look at the conceptualizing figures of these models will help us understand the situation better. Milton Friedman, a leading proponent of the shareholder model and profit maximization, swiftly rejected any notions of social spending. According to him, providing non-mandatory benefits to workers, vendors, and customers amounted to stealing from the company’s owners.[14] While freeman shines a favourable light on the stakeholder model keeping in mind the benefits that can accrue to the firm form investing in its relationship with its various stakeholders. [15]
In any effect, the famous Friedman-Freeman debate comes to an amicable close, neither perspective is concerned with alleviating the broader ills of the society. Hence the entire idea that stakeholder theory is a means of helping the firms to think more concretely about their responsibilities to society is a bit shaky.
Second, even if we assume that the stakeholder approach is a microcosm of the entire society, the current CSR approach fails to take all the ‘stakeholders’ into account. India’s CSR is not as holistic as the stakeholder model, all the factors including a company’s employees, customers, surrounding communities (including the environment), and society as a whole are not taken into consideration. This includes geographic disparity with respect to CSR spending and the people benefitting from it.
For instance, it has been found that local community pressure is a statistically significant determinant in CSR. Corporates are also required under the Companies Act of 2013 to spend in local area. Nevertheless, depending on how deeply ingrained a business is in the neighbourhood, the pressure that local communities exert varies from industry to industry. As a result, businesses in various industries use various CSR strategies. The Act does not distinguish between different industries.[16] Hence any company impacting the society or the climate in any way possible can simply allocate its funds to CSR as long as it satisfies the 2% limit prescribed by the legislation or instance, a company operating in an industry that has a substantial negative impact on the environment and contributes to air pollution could utilize the requisite cash to establish a school in the area rather than ensuring that its negative environmental impact is reduced. Even though this may not be entirely bad, it undoubtedly falls short of an inclusive stakeholder perspective of CSR. The potential use of books for children breathing toxins remains an enigma.
If anything, the Companies Act has barred actions that are in the regular course of the Company’s business and activities that are for the benefit of the Company’s employees from being included as part of the CSR model in its hurried endeavour to assure sustainable development[17]
On the surface, it would seem that this is an excellent way to combat businesses who try to masquerade profit-making practices as CSR. Companies have, in fact, chosen to focus on CSR initiatives that enhance their brand value and help them grow rather than initiatives that really benefit society as a whole. Some corporations claim that the required 2 percent CSR on net profit is also a means of unfairly collecting higher profits through a back-door, forcing them to make up for areas where the government has not engaged sufficiently.[18]
However, it seldom takes into account how much more effectively businesses can use their specialization. CSR shouldn’t just be considered as a way to spend money or as a “tick-box”[19] approach to satisfying the 2% mandate; instead, it should work with businesses to ensure that CSR funds are used wisely. For instance, a multinational corporation that produces packaged foods should give similar resources to people living below the poverty line, and phone companies should install telecom infrastructure in rural places that don’t already have it.
In light of this, Section 135 of the Companies Act should be amended to include provisions allowing businesses to engage in CSR activities in accordance with their areas of expertise and capabilities.
Critics have increasingly noted that a mandated expenditure requirement, according to critics, would be virtually useless and wouldn’t necessarily make a company socially accountable. On the other hand, the government appears to leave the door ajar for fraud and corruption.[20] To reiterate, mandating CSR without a proper cost-benefit analysis for the company as well as the society will lead to a mere check-the-box compliance.
The premise that CSR is committed to society at large is challenged by another flaw in the CSR laws. It is only natural for geographic bias to appear when CSR funding are being allocated. First, the government requires that the company give preference to the local community and areas nearby where it operates when allocating funds for CSR operations.[21] Even in the absence of such a law, it is only reasonable for businesses to allocate their funding to initiatives close to their places of business. This guarantees lower transportation and administrative expenses, improved monitoring, and a feeling of familiarity.
This ultimately results in the industrialization of the developed or developing areas. The nation’s underdeveloped and poorer regions, which are in desperate need of these resources, see all of their resources redirected to the regions that are already developed. [22]
For instance, industrially powerful states like Maharashtra, Gujarat, and Karnataka lead the list of CSR spending, according to the CSR data. While it was discovered that there was a 0.93 correlation between the economic performance of these three states and the amount spent on CSR.[23]
This bias exists not only towards States that are comparatively well-developed, but also within a State. According to data analysis for FY 2016–17, even in Maharashtra, the state with the highest funding, districts like suburban Pune and Mumbai received more than INR 200 crores each in CSR funding, while districts further from industrialized areas, like Hingoli, Buldhana, and Parbhani, received less than INR 1 crore.[24]
CSR and the shareholder model
Second, despite the fact that it appears to be attempting to capitalize on the cultural values of Indian businesses, the government has responded to the CSR issue by mostly placing its faith in directors, as it did in the case of corporate governance reforms. The administration, governance and implementation of CSR fall under the purview of the Board of Directors.
The board of directors must therefore oversee a company’s CSR policies and make public reports on such policies, including the amount of profits spent on CSR activities, in accordance with the Companies Act.[25] The issue with making directors, be it independent directors, central players is that it can make the nation’s corporate governance model weaker without benefiting from ingrained cultural norms or a broader vision for CSR. The bitter truth is that directors in India still consider themselves as the strategic advisors to the promoter or the founder. [26] Therefore, there is a significant chance that CSR will not entail a fundamental transformation of how a company conducts business, but rather will continue to take the form of initiatives that result from the founders’ desire to develop alternatives to established models or from corporate practices that are influenced by their underlying beliefs about social reality and values. Moreover, at the outset, the Companies Act itself does not make any favours. Stakeholders do find themselves with a right [in that directors owe them a duty under Section 166(2)], but there is no comparable remedy for a breach of that duty under the Act.[27] In addition, given the core corporate governance issue in India (i.e., the domination of promoters and majority stockholders),[28] India’s robust CSR regulations could make some of the issues with majority-minority agency expenses worse since controlling stockholders might utilize the money for projects that would only benefit the promoter and not other shareholders or the business.
Conclusion
Indian regulators, as well as business representatives and firms from India, have made major attempts to modernize Indian corporate governance since the late 1990s. Regulators have also tried to address CSR by Indian businesses more recently. India’s CSR law is more inclusive than ever right now. The law’s enforcement is commendable since it places India among the few nations that have used coercive tactics to make it a legal obligation for businesses to engage in social and environmental issues. Additionally, the country’s CSP expenditure is flourishing. If the CSR law in India is indeed as comprehensive as it claims to be, it has to be re-evaluated. The sustainable development envisaged needs to be more inclusive in terms of geography and area of spending. Additionally, these initiatives give board members a lot of discretion and influence, just like the corporate governance system does. The issues raised in this article highlight the need for reforming India’s corporate social responsibility laws.
BIBLIOGRAPHY
[1] Bidyut Chakrabarty, ‘Gandhi’s doctrine of trusteeship: spiritualizing interpersonal relationship.’(2017) 67 NCDS < WP67NCDS.pdf> Accessed 1st December 2022.
[2] Ramakrishnan Ramachandran, ‘Indian CSR- an overview’ (Researchgate, 1 January 2020) < Indian CSR – An Overview (researchgate.net)> accessed 3 December 2022.
[3] Gerlinde Walliser, Inara Scott, ‘Redefining Corporate Social Responsibility in an Era of Globalization and Regulatory Hardening’ 55(1) ABLJ < https://doi.org/10.1111/ablj.12119 > accessed 4 December 2022.
[4] Ramachandran, n2.
[5] Uzma SH, “Embedding Corporate Governance and Corporate Social Responsibility in Emerging Countries” (International Journal of Law and Management, May 9, 2016) <https://www.emerald.com/insight/content/doi/10.1108/IJLMA-04-2015-0015/full/pdf> accessed December 11, 2022
[6] Conventus Law, ‘India – Corporate Governance & Shareholder Activism.’ (Conventus Law,31 May, 2016) <<https://conventuslaw.com/report/india-corporate-governance-shareholder-activism/>> accessed December 1, 2022
[7] R. Edward Freeman, John Mcvea, ‘A stakeholder Approach to strategic management’ (2001) 1(2) SSRN <A_Stakeholder_Approach_to_Strategic_Management.pdf> accused 2 December 2022.
[8] India CSR, ‘CSR Law in India & Its Implications’ (India CSR, August 14, 2022) < https://indiacsr.in/csr-law-india-implications/> accessed 3 December 2022.
[9] ibid
[10] Companies Amendment Act, 2019 ; Companies Amendment Act, 2020 ; Companies (CSR Policy) Amendment Rules, 2021
[11] Marta Cominetti1 · Peter S. ‘Hard Soft law or soft hard law? A content analysis of CSR guidelines typologized along hybrid legal status’ (SpringerLink, 2 December 2016)
[12] Rusen Kumar, ‘Corporate Social Responsibilty in India’ (IndiaCSR ,22 November 2022) <Corporate Social Responsibility (CSR) in India – India CSR> accessed 1 December 2022
[13]Krina Majithiya, ‘Corporate Social Responsibility in 2021: Comply or Pay penalty’ (The Indian Review of Corporate and Commercial Laws,17 April 2021) <Corporate Social Responsibility in 2021: Comply or Pay Penalty (irccl.in)> accessed 2 December 2022.
[14] Milton Friedman, ‘A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits’ (The New York Times, 13 September 1970 )< https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html >accessed 4 December 2022.
[15] Arevalo, J.A. and Aravind, D., “Corporate social responsibility practices in India: approach, drivers, and barriers”, 11(4) Corporate Governance. pp. 399-414. <https://doi.org/10.1108/14720701111159244> accessed 4 December 2022.
[16]Vijita Singh, ‘Institutional pressures for corporate social responsibility implementation: a study of Indian executives.’ (2019) 16(4) Social Responsibility Journal. pp. 555–577. <Sci-Hub | Institutional pressures for corporate social responsibility implementation: a study of Indian executives | 10.1108/srj-11-2018-0311 (hkvisa.net)> accessed 29 November 2022.
[17] ‘CSR Provisions under Companies Act 2013.’ (TaxGuru,23 May 2016) <Detailed Note on CSR Provisions under Companies Act, 2013 (taxguru.in)> accessed 2 December 2022.
[18] Avantika Rai, ‘Failure of CSR in India’ (TaxGuru, 11 October 2022)’ <Failure of CSR in India (taxguru.in)>accessed 1 December 2022.
[19] ‘CSR: CII to approach govt on penal provisions; Ficci says changes to encourage tick-box compliance.’ (The Financial Express,2 August 2019)
[20] Somasekhar Sundararesan, ‘Govt’s approach to CSR gives scope for corruption’ (Business Standard, 21 January 2013) <Govt’s approach to CSR gives scope for corruption | Business Standard News (business-standard.com)> accessed 4 December 2022.
[21] Ankita Singhla, ‘Corporate Social Responsibility as per Companies Act, 2013’ (TaxGuru, 24 September 2018) <Corporate Social Responsibility (CSR) as Per Companies Act, 2013 (taxguru.in)> accessed 1 December 2022.
[22] Avantika Rai, n18
[23] ibid.
[24] M.V Ashok, ‘Challenges in CSR Implementation in India’ (CSR Mandate, 11 October 2021) <Challenges in CSR Implementation in India – CSR Mandate> accessed 2 December 2022.
[25] Section 135, Companies Act, 2013
[26] Koninica P, ‘Possibility of Abuse of Corporate Governance in Promoter Driven Companies and its Treatment in Present Law’ (TaxGuru, 30 July 2020) <Abuse of Corporate Governance in Promoter Driven Companies (taxguru.in)> accessed 26th November 2022.
[27] Mukhopadhyay, Devarshi, ‘The end of shareholder primacy in Indian corporate governance? Says who?!’(2020) 46(4)Com LB < https://www.tandfonline.com/doi/citedby/10.1080/03050718.2020.1812413?scroll=top&needAccess=true&role=tab> accessed 2 December 2022.
[28] Naveen Srivastav, ‘Corporate Governance in India : Case for safeguarding Minority Shareholders Rights’ (2012) 2(2) IJMBS <CorporateGovernanceinIndiaCaseforSafeguardingMinorityShareholderRights.pdf> ACCESSED 2 December 2022.
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Author Name – Ashi Gautam | Student Id – 2633 | III Year, B.A LLB (Hons.), II Trimester, National Law School of India University
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