Corporate social responsibility.  An Overview

 

The concept of Corporate Social Responsibility has gained recognition and significance with the evolution of the global economy into a borderless and increasingly integrated world. Commercial world gradually has begun to perceive CSR as a value-added strategy enhancing corporate reputation and, more importantly financial performance. The concept of CSR means that organization has moral, ethical and philanthropic responsibilities in addition to their responsibilities to earn a fair return for investors and comply with the law.

 

DEFINITION

While there may be no single universally accepted definition of CSR, each definition that currently exists underpins the impact that businesses have on society at large and the societal expectations of them. Although the roots of CSR lie in philanthropic activities (such as donations, charity, relief work, etc.) of corporations, globally, the concept of CSR has evolved and now encompasses all related concepts such as triple bottom line, corporate citizenship, philanthropy, strategic philanthropy, shared value, corporate sustainability and business responsibility. This is evident in some of the definitions presented below:

The EC[1] defines CSR as “the responsibility of enterprises for their impacts on society”. To completely meet their social responsibility, enterprises “should have in place a process to integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders”.

The WBCSD defines CSR as[2] “the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large.”

Corporate Social Responsibility is nothing but how the business takes responsibility for social, economic and environmental impacts it produces from its operation or products. It also includes the labor standard, employee relations and human rights.[3]

The Canadian Centre for Philanthropy: CSR is “a set of management practices that ensure the company minimizes the negative impacts of its operations on society while maximizing its positive impacts”.

Peter F. Drucker refers to CSR as “a way companies manage the business processes to produce an overall positive impact on society.”

According to the UNIDO[4] , “Corporate social responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (Triple-Bottom-Line Approach), while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that.”

From the above definitions, it is clear that:

  • The CSR approach is holistic and integrated with the core business strategy for addressing social and environmental impacts of businesses.
  • CSR needs to address the well-being of all stakeholders and not just the company’s shareholders.
  • Philanthropic activities are only a part of CSR, which otherwise constitutes a much larger set of activities entailing strategic business benefits.

Corporate social responsibility is predominantly considered as a western phenomenon due to strong institutions, standards, and appeal systems which are weak in developing countries of Asia (Chappie and Moon, 2005).

Despite the growing awareness and popularity of the term CSR, there is no general consensus as to what it actually means.[5] In fact, CSR is often used interchangeably with various other terms, such as corporate philanthropy, corporate citizenship, business sustainability, business ethics, and corporate governance.[6] Although these other terms do not all mean the same thing, there is one underlying thread that connects them all – the understanding that companies have a responsibility not just toward shareholders, but also toward other stakeholders, such as “customers, employees, executives, non-executive board members, investors, lenders, vendors, suppliers, governments, NGOs, local com- munities, environmentalists, charities, indigenous people, foundations, religious groups and cultural organizations.”[7] All of these stakeholders are equally important to a corporation, and it should therefore strive with sincerity to fulfill the varied expectations of each.

[A corporation] has a role to play in treating its employees well, preserving the environment, developing sound corporate governance, supporting philanthropy, fostering human rights, respecting cultural differences and helping to promote fair trade, among others. All are meant to have a positive impact on the communities, cultures, societies and environments in which companies operate.[8]

It is a known fact that a corporation is owned by shareholders who provide risk capital in expectation of a financial return. Hence, the primary goal of corporate management is to run the business profitably to maximize shareholder value in the form of dividend and appreciated stock prices.[9] But this is an extremely narrow interpretation of profitability, and one which focuses on one stakeholder while ignoring the contribution of others in the success of the enterprise. Shareholders are important stakeholders as they are the ones who have invested their money in the financial equity. But a modern company has several types of equity in addition to financial equity. Investments in these other equities are made by a variety of stakeholders.

For instance:

  • Intellectual equity: Employees invest their ideas in improving technological processes, product quality, cost management, marketing techniques, and customer service. These initiatives usually go far beyond the call of normal duty for which they are compensated.
  • Goodwill equity: The community around a firm invests its goodwill; it continues to support operations in spite of inconveniences it suffers in the form of, for example, environmental pollution, and traffic congestion.
  • Growth equity: The government’s investment is in the form of law and order, infra- structure development, and economic policies conducive to business growth.
  • Knowledge equity: Educational institutions invest their expertise through their re- search and their students.[10]

CSR is also considered as the commitment of business to con tribute to sustainable economic development by working with employees, their families, the local community and society at large to improve their lives in ways which are beneficial for both business and development (World Business Council, 2002).

Towards developing a rationale for Corporate Social Responsibility[11]
CSR goes by many names, which include: corporate citizenship, corporate philanthropy, corporate giving, corporate community involvement, community relations, community affairs, community development, corporate responsibility, global citizenship, and corporate societal marketing. It makes no difference what this social commitment of companies is called. It is a NEW way of doing business to cater to the needs of the market and its stakeholders. Social responsibility is the responsibility of an organization for the impacts of its decisions and activities on society and the environment, through transparent and ethical behavior that is consistent with sustainable development and the welfare of the society; takes into account the expectations of stakeholders ; is in compliance with applicable law and consistent with international norms of behavior and is integrated throughout the organization.This is a working definition by ISO 26000 working group on social responsibility (Sydney, February 2007)

CSR is the way in which an organization strikes a balance between economic, social and environmental imperatives on the one hand and the expectations and welfare of the shareholders on the other. This implies that social responsibility or rather its execution involves a well planned strategy. Assessment of the social environment, formulation of objectives, devising operational plans and programmes, monitoring social progress, assessment of social and economic impact and summary of outcomes and performances are of utmost importance.In other words CSR implies that the profits of corporate houses should be diverted to socially responsible activities for the benefit of the society. Companies can exert an emphatic influence over the quality and credibility of its products in the market through its CSR activities, which has a great impact on society and also provides better synergy returns to their business. In fact CSR is the impact of organizational activity on society. CSR is becoming an increasingly important activity to businesses nationally and internationally. As globalization accelerates and large corporations serve as global providers, these corporations have progressively recognized the benefits of providing CSR programs in their various locations. CSR activities are now being undertaken throughout the globe.

The rationale for CSR has been articulated in a number of ways. In essence it is about building sustainable businesses, which need healthy economies, markets and communities, which again necessitate all business houses whether private or public to carry out CSR activities. The government has declared it compulsory for industries to be socially responsible. They cannot ignore the society while carrying out production and amassing profit. A vibrant association or a high degree of correlation can be revealed between CSR and good public governance. Earlier this was neither specified nor executed, as the industrial policy resolutions failed to point out the real role of industries in society. Infact the real costs that the society incur, are primarily due to the presence and operation of the industrial houses. Public sector units may have to shell out 2-5% of profit in CSR. CSR for a PSU may no more be a photo opportunity for its chairman but would involve people-centric projects to be funded by 2-5% of the company’s net profit.

Today’s consumers hold companies to a higher standard. They’re looking for more than just material products or quality services when choosing a company to work with: Nine in 10 consumers expect companies to not only make a profit, but also operate responsibly to address social and environmental issues, according to a study by Cone Communications. Eighty-four percent of global consumers also said they seek out responsible products whenever possible.[12]

Recognizing how important social responsibility is to their customers, many companies now focus on and practice a few broad categories of corporate social responsibility (CSR).

  1. Environmental efforts:One primary focus of corporate social responsibility is the environment. Businesses regardless of size have a large carbon footprint. Any steps they can take to reduce those footprints are considered both good for the company and society as a whole.
  2. Philanthropy:Businesses also practice social responsibility by donating to national and local charities. Businesses have a lot of resources that can benefit charities and local community programs.
  3. Ethical labor practices:By treating employees fairly and ethically, companies can also demonstrate their corporate social responsibility. This is especially true of businesses that operate in international locations with labor laws that differ from those in the United States.
  4. Volunteering:Attending volunteer events says a lot about a company’s sincerity. By doing good deeds without expecting anything in return, companies are able to express their concern for specific issues and support for certain organizations.

Examples of corporate social responsibility

While many companies now practice some form of social responsibility, some are making it a core of their operations. Ben and Jerry’s, for instance, uses only fair trade ingredients and had developed a sustainability program for dairy farms in its home state of Vermont. Starbucks has created its C.A.F.E. Practice guidelines, which are designed to ensure the company sources sustainably grown and process coffee by evaluating the economic, social and environmental aspects of coffee production.

 

CORPORATE SOCIAL RESPONSIBILITY (CSR) IN INDIA

The beginning of Twenty first century in India has seen the term CSR coming to the forefront of development discourse. Interestingly, the Indian state is taking lead in defining the meaning, extent and scope of CSR and creating a context within which the on-going CSR discourse is emerging. In the process, it is also providing legitimacy to the role of CSR in development.

Corporate social responsibility (CSR), also known as sustainable responsible business (SRB), or corporate social performance, is a form of corporate self-regulation integrated into a business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure their adherence to law, ethical standards, and international norms.

Corporate Social Responsibility (CSR) Provisions As per Companies Act, 2013, CSR has become mandatory in India. The Ministry of Corporate Affairs (MCA) in exercise of its powers conferred by Section 1(3) of the Companies Act, 2013 (the Act) and vide notification dated 27th February 2014, notified 1 st April 2014 as the date on which the provisions of Section 135 and Schedule VII of the Act shall come into force.

 

Section 135 read with Companies (CSR Policy) Rules, 2014

Applicability

Section 135 is applicable to every Company (including its holding or subsidiary, and a foreign Company having branches/project office in India) which meets any of the following criteria during any 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.

Every Company which does not meet the above mentioned criteria for 3 consecutive financial years is not required to –

  • Constitute a CSR Committee; and
  • Comply with provisions of the Section 135 of the Act till such time it meets the criteria mentioned above.

Definition of Net Profit

For an Indian Company Net profit as per the Financial Statements prepared under the Act or Companies Act, 1956 and it shall not include the following-

  • Any profit arising from any overseas branch or branches of the Company, whether operated as a separated company or otherwise; and
  • Any dividend received from other Companies in India which are covered under and complying with the provisions of Section 135 of the Act.

For Foreign Company

Net profit as per the Profit and Loss Account prepared in terms of Section 381(1) (a) read with Section 198 of the Act.

Contribution

Every applicable Company should spend in every financial year at least 2% of the ‘average net profits’ of the Company, made during 3 immediately preceding financial years.

 ‘Average net profit’ shall be calculated in accordance with the provisions of Section 198 (sec 198 relates to calculation of net profits for the purpose of determining the limits for managerial remuneration)

If the Company fails to spend such amounts towards CSR activities, the Board is required to provide reasons for not spending the amount in its report laid before the Company in the Annual General Meeting.

CSR Committee of Board

CSR Committee of Board should consist of 3 or more Directors, out of which at least 1 director shall be Independent Director subject to the following criteria-

  • An unlisted Public Company or a Private Company shall have its CSR Committee without an Independent Director.
  • A Private Company which has only 2 directors on its Board shall constitute its CSR Committee with 2 such directors.
  • A Foreign Company will have at least 2 persons on its CSR Committee out of which one person shall be specified under Section 380(1)(d) of the Act and the other person will be nominated by the Foreign Company.

The Directors Responsibility Statement shall disclose the composition of the CSR Committee.

Role of CSR Committee CSR Committee shall-

  • Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the Company as specified in Schedule VII.
  • Recommend the amount of expenditure to be incurred on the activities mentioned above. s Monitor the CSR Policy of the Company from time to time. Role of Board of Directors (BoD) in respect to CSR
  • Approve the CSR Policy for the Company after taking into account the recommendations made by the CSR Committee and disclose the contents of the CSR Policy in the Directors Report and also place it on the Company’s website.
  • Ensure that the activities which are included in the CSR Policy of the Company are undertaken by the Company.
  • The Company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR activities.

 

Schedule VII of the Act

MCA in exercise of its power conferred by Section 467(1) of the Act and vide notification dated 27 February, 2013 has amended Schedule VII of the Act.

 

Salient Features of Companies (CSR Policy) Rules, 2014

MCA, in exercise of its power conferred under Section 135 and subsections (1) and (2) of Section 469 of the Act and vide notification dated 27 February, 2013 has notified Companies (CSR Policy) Rules, 2014.(the Rules). These Rules will be effective from 1 st April, 2014.

CSR

CSR means and includes but is not limited to –

  • Projects or programs relating to CSR activities indicated in Schedule VII of the Act ; or
  • Projects or programs relating to activities undertaken the Board in accordance with the recommendations of the CSR Committee as per the CSR policy of the Company. The CSR Companies Act, 2013 Tracker II For Private Circulation CNK & Associates 5 policy shall cover activities specified in Schedule VII of the Act but excludes activities undertaken in the normal course of business of the Company.

 CSR Activities

  • CSR activities undertaken by the Company should be as per its CSR Policy and can be in the form of projects or programs or activities but should not include activities undertaken in its normal course of business.
  • CSR activities may be undertaken through a registered trust or a registered society or a Company established by the Company or its Holding or Subsidiary or Associate Company under Section 8 of the Act subject to the following conditions-
  • If the trust, society or Company is not established by the Company then it shall have an established track record of 3 years in undertaking similar projects or programs; and
  • The Company has specified the project or programs to be undertaken through these entities, the modalities of utilisation of funds on such projects programs and the monitoring and reporting mechanism.
  • A Company may also collaborate with other Companies for undertaking CSR Activities in such a manner that CSR Committees of respective Companies are in a position to report separately on such activities.
  • CSR activities undertaken in India only shall amount to CSR Expenditure.
  • CSR activities which benefit only the employees of the Company and their families shall not be considered as CSR activities.
  • Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of 3 financial years but such expenditure shall not exceed 5% of total CSR expenditure of the Company in 1 financial year.
  • Contribution to any political party whether directly or indirectly is not considered as CSR activity.

 

CSR Policy

  • CSR activities included in CSR Policy should be related to the activities included in Schedule VII of the Act.
  • CSR Policy of the Company shall specify that the surplus arising out of the CSR activities shall not form part of the business profit of the Company.

CSR Reporting

  • In case of an Indian Company, BoD Report shall include an annual report on CSR activities as per the Annexure
  • In case of a Foreign Company, the Balance Sheet filed under Section 381(1)(b) of the Act shall contain an Annexure regarding report on CSR.

CONCLUSION

Corporations do not exist in isolation. Therefore, they should feel some level of responsibility for the community of which they are a part, and should work for the development and progress of that community and society at large. The idea of being a socially responsible company means recognizing obligations and going beyond simple compliance with the law. It is absolutely essential that corporations make sincere efforts to fulfill their obligations because development based solely on economic growth paradigms is unsustainable, and not conducive.

Thus Corporate Social Responsibility (CSR) is about how companies manage the business processes to produce an overall positive impact on society. Thus companies consider the interests of society by taking responsibility for the impact of their activities on customers, suppliers, employees shareholders, communities and other stakeholders, as well as the environment. This is seen to extend beyond the statutory obligation to comply with legislation as organizations are voluntarily taking further steps to improve the quality of life for employees and their families as well as for the local community and society at large. If a company chooses to follow the way of CSR, it will integrate ethical concerns in its activities and in its interaction with all the stakeholders. This implies that the corporate units function in such a way that their CSR activities in all likelihood actually reach out to the beneficiaries –the society in general. The ethical considerations are aimed at preparing the groundwork for expecting the correct reaction or response of their CSR generated activities

 

[1] http://ec.europa.eu/enterprise/policies/sustainablebusiness/corporate-social-responsibility/index_ en.htm

[2] http://www.wbcsd.org/work-program/businessrole/previous-work/corporate-social-responsibility. aspx

[3] www.ask.com

[4] http://www.unido.org/what-we-do/trade/csr/whatis-csr.html#pp1[g1]/0/

[5] 9. Juno Consulting, Making Sense of Corporate Responsibility 1 (2005), available at http:// wwwJunoconsultingxom.aii/articles/Making_Sense_of_Corporate_Social_Responsibility_Par

[6]Id.

[7] Id.

[8] Id.

[9] 3. See S.K. Chakraborty et al., Management Paradigms Beyond Profit Maximization, 29 Vikalpa: The J. for Decision Makers 97, 106 (2004).

[10]  Id. at 105.

[11]  Chakraborty, Saheli, Corporate Social Responsibility and the Society, businessthatcares.blogspot.com/2010/08/corporate-social-responsibility-and.html visited on 11th April, 2017 at 6:30 a.m.

[12] www.businessnewsdaily.com/4679-corporate-social-responsibility.html visited on April 11 ,2017 at 7:00 a.m.

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