Corporate Social Responsibility: The Lessons from the Corporate World

June 26th, 20119:55 pm @    


Introduction

The recent economic meltdown reminds us of the damage caused by the uncontrolled private economic independence blended along with irresponsible behaviour of the corporate world.  Through the years, the corporate entities have redefined their role in this multifarious society. From a raw idea of ‘profit maximization’, its objective was changed to ‘profit optimization’. This change can mainly be attributed to the identification of challenges posed by the various social and economic concerns. The viability and sustainability of such enterprises were questioned. This cynicism could be marked as the beginning of the theory of “Corporate Social Responsibility”.

The ongoing debate mainly draws the attention towards the success and effectiveness of the voluntary compliance towards the environmental laws, legal requirements, honest financial accounting shown by the companies and the boundaries defined by it. Major debates exist over a number of key issues related to achieving efficient and fair mechanisms at a global level. One relates to who is responsible for the current and immediate future levels of carbon dioxide (CO2) in the atmosphere and what drives them to engage in CSR? Other debates relate to whether or not various “remedies” proposed to reduce carbon sequestration contribute to helping solve other environmental concerns and the responsibility of its burden of paying for its welfare effects. The ethics of the corporate actions must be subjected to close scrutiny in the light of current impasse. The main focus would be on to search for new arenas which can utilise the strengths of capitalism. It is a more or less accepted fact that rapid reduction in the emission of green house gases is necessary after the decade long assessment carried out by IPCC towards a low carbon future in the interest of government policies and corporate organisations.

Though different theories are followed across the world to identify the relative quantity in the emissions, certain principles have over the period of time, assumed a general nature. Equal per capita emissions, historic responsibility, and ability to pay are some ideas which have strengthened along with the rise of the concept of Sustainable Development. A huge task is contemplated to Green parties and supporting international entities to strike balance between preservation future development opportunities and conflict of interest through a low-carbon technology revolution. It is an ascertained fact that greater per capita income is directly proportional to the emissions per capita. In the light this fact, it is necessary for the international community to assume responsibility and impose strong proposals and create accord on country based emission allocations. No doubt that it might seem hugely favouring developing countries but applying a straight-jacket formula will be detrimental to their economic growth. With the passage of time, it is likely that a dedicated budget allocation would be in the cards given the current rate of energy consumptions and technological breakthroughs. Ultimately it would be the institutional efficiency and diplomatic prowess of mediators which it going to reconcile the climate change goals of mankind. corporate social responsibilityCollective responsibility has taken the centre stage as the best available theory capable of a mass reduction of the climate change threats. Financial fostering of centres of excellence and institutions that provide high level intellectual endeavour to support the government and business enterprises in their efforts to move along the path of sustainable development would be choices that support the welfare of society, while at the same time safeguarding the interests of shareholders. Progressive damage and degradation of the country’s natural resources has already started to impose major costs on business and industry, losing over 10% output every year.

Companies in India have recently begun to focus on improving energy efficiency even though the motivating factor behind this effort is financial benefit on account of cost savings. The energy sector being the single largest source of greenhouse gas emissions, it is believed to have the greatest potential for development of mitigation options which would also serve as a viable business practice. The responsibility to the affects of climate change that fall on the companies should be seen as an opportunity to finance itself into a low-carbon economy, through approaches such as Corporate Social Responsibility (CSR), Socially Responsible Investment (CSI), and Principles for Responsible Investment (PRI). The Government of India is keen on harnessing the power of corporations and encouraging their cooperation is one of the key areas for building environmental security. It is important for government to reach out key national, regional and international institutions for partnerships and alliances to share knowledge, mutual learning and joint initiatives.

Present National Legal Framework

Corporate Social Responsibility has been making an increasingly prominent impact in the Indian social psyche by supplementing development projects towards betterment of the standard of life. But it is not a novel concept in India as its historical roots goes till the Vedic age. In the past it was seen as a tool to organise the society together with strong community ethos. Indian system of Corporate Social Responsibility can be divided into three.

(1) Gandhian model: It is based on a voluntary agreement by the donor and the society based on   its commitment  to  public welfare  based  on  ethical  awareness  of broad  social  needs;

(2)  Nehru model: It is State-driven policy as it takes over the industry and imposes strict regulations on them.

(3)  Milton Friedman model: The interaction is limited to investor’s objectives opposed to company’s overall image and direct and indirect stakeholder interests.

Tata group of companies has been a shining beacon among the socially committed enterprises in India. Tata Council of Community Initiatives manages all social initiatives across all Tata companies. Creating Sustainable livelihoods and self-reliant communities are their mission objectives which stems from the Tata Group’s abiding concern for environment and society. IT sector has been of the booming sectors of the Indian economy and there is no doubt that Infosys has played a major role in achieving it. Computers @ Classrooms was a project started by Infosys in 1998-99 to utilize its core competence in the area of technology to bring larger good to the community. Mahindra Foundation’s underprivileged girl child programme, Larsen and Toubro’s HIV programme, Reliance’s Energy conservation measures are some of the initiatives worth mentioning.

The Statistics and the CSR in practice

According to a new report produced by Ceres on the climate change performance of the top 100 companies, there is a orotund increase in the number of companies addressing greenhouse gas emissions. But often CSR is criticised for providing platform for illegal tax evasion by diverting the corporate profit in manifold ways by spending it on CSR. It also pressurise corporate entities from deviating from its path of conducting business to social service which would ultimately result in its downfall.

Corporate Social Responsibility is a term with very broad connotations such as the compliance, philanthropic and business approaches (all of which are linked to corporate benefit) and the social primacy and social obligation approaches (which are not necessarily linked to corporate benefit). It is a step taken prior to the coupling of moral liability with legal liability. There has been much research undertaken on whether the adoption of environmentally and socially responsible policies will improve a company’s financial performance. Managing corporate risk along with enhancing corporate value and opportunity can be seen in the area of climate change. The question whether the profit gained by the opportunities such as enhanced reputation and higher profit margins offered by CSR will outweigh the risks related to climate change which include reduced profit margins, higher operating costs due to increased costs of energy, loss of reputation. The American Law Institute (ALI) comments on this issue by saying that ‘where conflict exists between ethical considerations and corporate profitability, the most desirable and appropriate course would be to comply with the ethical considerations even though this would not enhance corporate profit or shareholder gain. The logic behind this proposal is that the voluntary sacrificing of profits will, in the long-term, have benefits and consequences far superior to those flowing from the narrow pursuit of pure profit maximisation.

The Stakeholders

Stakeholders are the group of people who have the maximum chance to be affected by the organisation’s activities, products or services and have an ability to influence the company ‘strategies and its objectives which would include shareholders, financiers and creditors, employees, consumers, adjacent communities, NGO’s. Majority of the stakeholders have financial interest in the company and they are concerned about how the directors manages the company’s environmental, social and governance (ESG) risks and their effect on corporate financial viability.

Recent Nike backlash for the exploitation of workers in the production of their products, and the change by Nike in response is an important incident which shows that corporate reputation may play a part in retaining the most talented employees. Another commendable job worth mentioning was done by Rainforest Action Network, which bought Citigroup down to the earth as it published its report branding Citigroup as the most destructive bank in the world in April 2000 because of its role in the destruction of the world’s remaining old growth forests and resultant acceleration of climate change. It ran a full fledged campaign for four years including full page newspaper and television advertisements, demonstrations and protests, and two years of negotiation and dialogue stripping off the reputation the bank had in the market. In 2004, Citigroup approved to the RAN’s demands and bought a substantive change into its environment policy and set a novel standard for the financial services industry. The company’s risk management policy should also take into account its legal obligations and the expectations of its stakeholders as failure to do so may threaten its reputation and success. It adds that effective risk management involves considering factors which bear upon the company’s continued good standing with its stakeholders and the community.

Duties of Directors

Directors are under constant pressure from stakeholders, to perform in the best interest of the company as a whole according to common law and statutory duties keeping the financial interests of the stake holders in mind. The question before the directors is whether corporate philanthropy is a part of business strategy with the primary motivation being to enhance the interests of the company. Under Tort law any act of negligence or mistake will cause company the loss of its reputation or through some pecuniary penalty unless if the director can show that they rationally believed that their judgment was in the best interests of the company. Director has to draw the line between the environment interest of the community and a state where there is no prospect of commercial advantage to the company. Directors cannot use the excuse that the financial interests of shareholders have priority over corporate compliance. In the case of ASIC v Adler, it was held that the shareholders could bring an action against the directors for breaching their statutory or common law duties to the company by not taking all steps to prevent the company from breaching, or causing the company to breach these environmental laws. It was also held that breaching an environmental law a breach of a director’s fiduciary duty towards the company. Many a times the absence of legislative document will motivate directors to bring environmental and social perspectives into their strategy; it is recommended that stakeholders should take a liberal view for the overall environment and preventing Climate change is one of the biggest challenges that companies face today as it has the potential to impact on the future of earnings, liabilities and general risk profile of companies across a range of industry sectors.

Corporate disclosure

Environmental performance in terms of company matters can be defined as an organisation’s impact on living and non-living natural systems, including eco-systems, land, air and water. It is taken along with social performance which includes labour practices, human rights and other issues affecting consumers, the community and other stakeholders in society to measure the level of Corporate Social Responsibility of the firm. The economic performance of the firm is crucial factor which is indirectly proportional to the other two elements. Thus it shall concluded that the society has a right to know from he investors how far is his firm going to exploit the environment but often reality is hidden and stats are bend. The company heads are concerned that the real disclosure of details might affect their opportunities for market growth, market share and profits.  In countries like Ireland, Norway and the Netherlands, it is made mandatory to the companies that annual reporting must be done on their impact on the external environment. A survey was conducted to find out the reality of these reports and the result was shocking. Even the companies having the reputation for being environment friendly was lagging behind the required standards and that the external environment was grossly neglected. This may indicate that it is a real challenge to develop a synergy between company law and environmental law.

Conclusion

India in the global level has emerged as a global leader with regards to knowledge and in creating an intellectually high and socially sound society even on a limited basis. This development can be mainly attributed to highly qualified research foundations and their deep commitment towards problems in the system.

Preparing corporate sector to tackle those problems would provide much needed support to the independent organisation functioning across the world. It would help to replicate success achieved through sustainable development and disseminate it to the other parts of the world.

A concern for social and environmental development should be made a part of every corporate entity through its inclusion in the annual agenda backed by strong and genuine programmes. It’s up to the lobbying groups and governmental agencies to convince the corporate power houses to come forward and take up the challenge by making them aware of the associated advantages that these companies stand to gain from Corporate Social Responsibility.

The argument that Corporate Social Responsibility is not the area of concern of business corporations, and that it is only for individuals and governments reasoning that it is the returns to the shareholders that matter does not stand in the modern world. This microscopic view needs to be altered as gone are those days where a sector was depend on a single enterprise limited to the borders of that country. The holistic objective must be to achieve the macro-economic goals such as achieving public welfare and sustainability of environment. The theory behind the origin of CSR is growth oriented. It says that the  income  is  earned  only  from  the  society  and  therefore  it should  be  given  back;  thus wealth  is meant  for  use  by  self  and  the  public;  the  basic motive behind all types of business is to quench the hunger of the mankind as a whole (not specific to a particular geographical  area);  the  fundamental objective of all business  is only  to help people.

Article by

He is pursuing UG Degree in Law from Rajiv Gandhi National University of Law, Punjab.

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