VII. Comparative Perspective: mentions US and UK approaches
CSR in India has traditionally been seen as a charity activity. And in keeping with the Indian tradition, it was an activity that was performed but not considered. In 2014, India became the first country in the world to have a compulsory CSR contribution legislation. In India, the concept of CSR is ruled by clause 135 of the Companies Act, 2013, which was passed by both Houses of the Parliament and had received the concurrence of the President of India on 29 August 2013. The CSR provisions within the Act is applicable to companies with an annual turnover of 1,000 crore INR and more, or a net worth of 500 crore INR and more, or a net profit of five crore INR and more. The new rules, which will be applicable from the fiscal year 2014-15 onwards, also require companies to set-up a CSR committee consisting of their board members, including at least one independent director. The Act inspires companies to spend at least 2% of their average net profit in the previous three years on CSR activities.
Similarly, the world has become more and more aware. All the major players have been backing to the society in one way or another. This concept of Corporate Social Responsibility has been introduced all across the globe. However, Different countries have different ways of application.
Recent studies have shown a substantial engrossment of CSR on the sustainability of any organization, in this date. The American companies devoted time in implementing the CSR and improving their abilities to attract and keep more and more customers and stakeholders with them. At the same time, they have taken benefits of it in terms of reduced risks, increased green production and addressing the concerns of stakeholders on a serious note.
The Corporate Social Responsibility (CSR) team in the Bureau of Economic and Business Affairs leads the Department’s engagement with U.S. businesses in the promotion of responsible and ethical business practices. The mission of the CSR office is to:
• Promote a holistic approach to CSR to complement the EB Bureau’s mission of building economic security and fostering sustainable development at home and abroad.
• Provide guidance and support for American companies engaging in socially responsible, forward-thinking corporate activities that complement U.S. foreign policy and the principles of the Secretary’s Award for Corporate Excellence program.
• Build on this synergy, working with multinational companies, civil society, labor groups, environmental advocates, and others to encourage the adoption of corporate policies that help companies “do well by doing good.”
In fact, the US law currently provides various legislative protection devices for CSR, in terms of regulations governing certain “results,” and “processes or actions” of corporate activities.
As for the protection of constituencies against certain “processes or actions” of corporations, numerous laws and regulations establish restrictions aimed at improving CSR efficacy. These laws govern corporate activities focusing on business decisions, disclosures, and accountability in a traditional corporate legal context. For instance, the Sarbanes–Oxley Act,84, Securities Laws,85 and Securities and Exchange Commission Acts, 86 govern certain processes or actions that imply CSR obligations in corporations. This chapter examines these instances by illustrating cases where US laws require or encourage corporations to pursue certain “processes or actions” beneficial to constituency wealth.
The corporate social responsibility also has an impact on the internal environment of any corporate system. It has a direct impact on the choices of the company and shows their concerns about the society and sustainability. At the same time, their attitudes towards CSR in the United States of America affect the talent attraction, directly. The more a company is concerned about its role in the society and system, the more it will be able to find worthy and original talent to its platform. According to recent studies, it has been found that the young talent is more inclined to work for the organization that is environment-friendly and work more for social causes, sustainability, and philanthropy.
Overall the sustainability and CSR programs are on the increase among American companies. The revolutions are already there are the researchers suggest that the corporate entities must implement the CSR and sustainability programs to gain a long-term success.
It is a part of Corporate Governance. The Companies Act 2006 has now added to those pressures by requiring directors to have regard to civic and ecological issues when considering their duty to promote the success of their company and by the disclosures to be included in the Business Review. CSR is, now, an integral part of good governance, for bigger companies in particular.
In November 2016, the government followed the unveiling of a Business, Energy and Industrial Strategy Committee inquiry into corporate governance with a public consultation on a Green Paper on corporate governance reform. The consultation closed in February 2017 and the government response was published in August 2017.
Proposals of reform were set out which the government plans to take forward across three areas:
• Executive pay.
• Strengthening the employee, customer and supplier voice.
• Corporate governance in large, privately-held businesses.
Corporate governance’s reform proposals set out to seek to raise the bar further. Changes and initiatives, driven at national and EU levels, therefore continue apace. The advisory EU referendum result in the UK in June 2016 (Brexit) was in favor of leaving the EU by 52 to 48% of those who voted. The government triggered Article 50 in March 2017, which signaled the point at which exit negotiations with the other members states commenced. The government has stated its intent for the UK to leave the EU on 29 March 2019. For the time being, however, the UK remains a member of the EU, and its protocols continue to apply.
VIII. Role Legal education and awareness
As per as CSR is concerned, the Companies Act, 2013 is a landmark legislation that made India the first country to mandate and quantify CSR expenditure. The inclusion of CSR is an attempt by the government to engage the businesses with the national development agenda. The details of on corporate social responsibility is mentioned in the Section 135 of the Companies Act, 2013. The Act came into force from April 1, 2014, every company, private limited or public limited, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on Corporate social responsibility activities. The CSR activities in India should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the act.
The corporations are required to set up a CSR committee which designs a CSR policy which is approved by the board and encompasses the CSR activities the corporations is willing to undertake. The act also has penal provisions for corporations and individuals for failure to abide by the norms. The details of the same are highlighted in the act.
Ref: SECTION 135
(1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility(CSR) Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility(CSR) Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two percent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:
Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
In exercise of the powers conferred by sub-section (l) of section 467 of the Companies Act, 20l3 (18 of 2013), the Central Government hereby makes the following amendments to Schedule Vll of the said Act, namely:-
(l) In Schedule VIl, for items (i) to (x) and the entries relating thereto, the following items and entries shall be substituted, namely:-
“(i) eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water;
(ii) promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
(iii) promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for the promotion of sanitation;
(v) protection of national heritage, alt and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
(vi) measures for the benefit of armed forces veterans, war widows and their dependents;
(vii) training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports;
(viii) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;
(ix) contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
(x) rural development projects;
(xi) slum area development.
In order to assess the effectiveness of this unique experiment in mandating CSR spending and disclosure, we studied the reporting practices of the four largest banks by market capitalization in India compared with banks from Australia, China, and Japan where there is no such law. In order to do so, we assessed annual and CSR reports of our sample of companies from 2012, one year before the law was passed.
Indian banks did not have CSR reports before 2012. The CSR committees formed by the banks function in the spirit of the law within defined targets, monitoring CSR spend, and reporting reasons for shortfalls in spending.
Of the Indian banks evaluated, only the State Bank of India (SBI) disclosed its CSR spend prior to the promulgation of the new Companies Act; all banks disclosed this spend from 2013.
Despite the new law mandating a CSR spend of 2% of pre-tax profit for corporations of this size, only ICICI Bank met the target in 2014. But it fell to 1.9% in 2016.Kotak Mahindra Bank reported a CSR spend of less than 0.69% of pre-tax profits in 2016.
In spite of not meeting the targeted CSR spend, none of the banks reported any fines or proceedings for breaching the law.
During this period (2012-2016), Australian banks had the highest disclosures, followed by Japan, China and India.
There’s a marginal difference in Indian bank disclosures after the new law was passed in 2013. But these differences may well be due to the different cultures and other non-market factors at play.
Our analysis shows that the law in its current form is failing to promote CSR activity. Its poor design and lack of clear obligations, set in a milieu of poor law enforcement, is also not generating an ethical obligation to obey the law in spirit.
India’s legal provisions contain vague language and permit a high degree of self-interpretation that undermines legislative intent. For example, it allows banks to list “staff training in fire safety” as part of CSR even though this should be a strictly mandatory workplace safety activity.
Indian banks’ annual and CSR reports do not show a major shift in the nature of disclosures after 2013. The law is perhaps purely expressive as the provision stipulates minimal penalties for non-compliance and relies on a comply-or-explain philosophy. This exacerbates the lack of ethical obligation to obey laws in India where there’s a level of high corruption, low levels of public confidence, weak institutions, low levels of development, and education, among other such issues.
The provisions also appear to be formulated based on a traditional understanding that top management is solely responsible for ethical behaviour and CSR activity, without making the connection between the company and its stakeholders. There is no explanation for how the CSR provision fits within the wider ambit of a corporation’s role and purpose, the duties expected of its directors, or the information it is expected to disclose.
The Indian companies in the last two years have invested majorly in education & skill development, healthcare & sanitation, rural development projects and environment after being mandated to allocate a portion of their profits towards community development.