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Corporate Social Responsibility in India: A Constitutional and Theoretical Commentary

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Over the past years, corporate social responsibility in India has acquired legal and social significance. Several sustainable outcomes have come from CSR activities in India and elsewhere. Despite that, many view it as an obligation and impediment. While the expectations from businesses and corporates have increased beyond profit margins, many have contested the mandatory effect of CSR on small businesses. Sneha Sengupta presents a nuanced debate on CSR from a constitutional and jurisprudential standpoint. Arguing from the utilitarian principle, Sneha offers why laws on corporate social responsibility could bear dissatisfaction among corporates but remain essential.   

corporate social responsibility in India

By Sneha Sengupta, a fifth-year BBA LLB student from CMR Law College, Bangalore, Karnataka. 

Introduction

In the early ages, following the Industrial Revolution, corporations donated a portion of their profits to society out of respect for the latter’s business support. This support extended as resources and labour from the society. Thus, corporates owed a payback almost as a moral obligation for causing inevitable harm to the environment.

However, as mentioned in Schedule VII, the government has made it mandatory for enterprises with a market capitalisation of more than 500 crores to establish a CSR committee to engage in CSR activities.[1]

Historically, businesses saw such activities as fundamental to their morals and ethics, and they engaged in such activities to influence their moral and ethical behaviour.[2] Although it is well established that ethical and moral behaviour can only be maintained in the long term through legal obligations, regardless of whether or not a legal requirement dictates them.

Thus, according to Salmond, a corporation’s moral obligations have been elevated to legal obligations, which may also be referred to as legal burdens. In contrast, he also stated that for every right, there is always a correlative obligation. Thus, corporate social responsibility is simply a correlative duty they must fulfil in exchange for the resources, labour and other services. These services they avail makes the corporate entity a person through legal fiction.

According to German Jurist Savigny, corporations are recognised as persons and hence have the rights and obligations bestowed by law.[3] Thus, the state offers corporations rights while also imposing obligations, which they must adhere to. Here, it is pointless to argue whether the legislation is moral or immoral because the law was enacted for two primary purposes: to guide businesses’ ethical behaviour and advance society’s social good.

Gradually, activities that promote social welfare gaged popularity, making CSR an overused acronym among corporate circles. This meant that even corporations were tacitly aware of their accountability towards the community and shareholders.[4]

When a firm adopts a CSR policy, it indicates both an ethical commitment and a dedication to people, communities and the environment. In addition, the corporation commits to monitoring and reporting on its compliance with its stated CSR policy quarterly, similar to how it reports financial outcomes.

Legal Validity of Corporate Social Responsibility in India

Corporate social responsibility is a legal idea as the state has imposed it. Therefore, corporate entities with legal personality, whether they embrace it, must ideally adhere to it because it has legal legitimacy supported by a penalty.

The primary premise for CSR is that it is for the greater benefit. This type of law is enacted for the benefit of the majority. The greatest good, as defined by Jeremy Bentham, takes precedence here.[5] But, individual validity, as emphasised by Ronald Dworkin, becomes secondary.[6]

Another argument is that because the company utilises society’s resources and labour, they should be held accountable for it, as it is in exchange for what they obtain from society. While this is a reasonable argument, Wood’s stakeholder theory presents its contradiction, as the latter opposes the ethics of enforcing corporate social responsibility.

Although the concept of giving back to society began as a voluntary return to society’s sustainability, it evolved into a legal requirement that corporations return to society for whatever they consume from it.[7] Labourers are compensated for their work, and society benefits from the products produced by corporations.[8] Thus, the resulting law is either a legal compulsion or legal responsibility but without any associated rights. Or maybe the law is an absolute duty conferred by the state, as Austin, Allen, and Hibbert maintain.[9]

However, Salmond abandons the concept of absolute liability, believing that first a right should be granted and then a correlative duty should be imposed. So, according to him, the law is unfair from this perspective.[10]

“The absolute liability rule is modified strict liability. This rule applies without exception and makes a person fully accountable for any mistake. Absolute liability and great retraction constitute this liability as an absolute liability.”[11]

The Supreme Court of India established absolute liability in M.C. Mehta v UOI[12] and Bhopal Gas Leak[13] cases. In these cases, the SC extended the Rylands V. Fletcher rule passed by the House of Lords of the United Kingdom on strict liability.[14]

The SC rule is substantially broader than the UK House of Lords rule. The following argument is made from a human rights perspective. Here, Henkin attempts to demonstrate a link between obligation and human rights by introducing social expectations and the laws that enshrine such social expectations.[15]

Furthermore, according to John Locke’s Social Contract Theory, anything for the good of society is for the social good of the people who live together. But, in contradiction, Dworkin poses that when a pragmatic approach is utilised wrongly,[16] the law loses validity because it is based on achieving the greatest good for society at the expense of individual interests.

Individual liberty and property rights are based on market allocations regardless of the disparity they cause, according to Nozick’s libertarian perspective.[17] According to Karl Olivecrona, the law only exists in a factual sense, i.e., it is simply what people think the law is.[18] As a result, while the law is meant to serve the greater good of the people, some individual liberty may be jeopardised. However, at the same time, it’s also true that a regulation that violates an individual’s right could cause social discrepancy or dissatisfaction.

Weighing Corporate Social Responsibilities

Advantages

  • Profit and Value

A CSR policy improves a company’s profitability and value. Energy efficiency and rubbish recycling save money while also helping the environment. CSR also enhances a company’s accountability and transparency in the eyes of investors, the media, shareholders and the local community.[19] This enhances the company’s reputation among investors, such as mutual funds that consider CSR when selecting stocks. As a result, the company’s stock value rises, and it has easier access to capital.

  • Better Customer Relationships

An estimated by Landor Associates survey and further cited by the University of Pennsylvania’s Wharton School, 75 per cent of consumers feel corporations should be socially responsible.[20] A company’s reputation as a decent corporate citizen draws customers. According to research conducted at Tilburg University in the Netherlands, consumers are willing to pay a 10 per cent premium for socially responsible items.[21]

  • Enhancement of public image.

This is crucial since consumers consider public image when deciding whether to do business. Simple things like personnel volunteering an hour a week at a charity demonstrate the brand’s dedication to philanthropy.[22] As a result, you’ll appear far more favourable to consumers.

  • Increased brand familiarity and awareness.

If brands are committed to ethical procedures, this news will spread.[23] As a result, brands gain increased recognition, resulting in increased awareness.

  • A competitive advantage.

By embracing CSR, businesses differentiate themselves from their competitors in other industries.[24] As a firm devoted to going above and above in terms of social and environmental stewardship.

  • Customer engagement increased.

If a brand propones sustainable systems, the same should be visible.[25] Additionally, it should demonstrate its efforts to local news organisations hoping that they will cover their story. Customers will become aware of and engaged with the brand activities.

Disadvantages 

  • CSR is an Expensive Endeavour to Implement.

The fundamental disadvantage of corporate social responsibility is that it disproportionately burdens small businesses with its costs.[26] While large organisations can afford to devote resources to CSR reporting, smaller companies with ten to two hundred employees may not always be able to. A small business can use social media to communicate its CSR strategy to consumers and local community members. However, monitoring transactions requires time and additional staff that the business may be unable to pay.

  • Contrary to the Profit Motive

Costs associated with CSR can impede even larger businesses. According to some detractors, corporate social responsibility might be a fruitless endeavour.[27] Management of a business owes a fiduciary duty to its shareholders, which CSR vehemently rejects, as executives’ primary obligation is maximising profits. A manager who foregoes revenues favouring societal advantages can anticipate losing his job and being replaced by someone who prioritises profits.

  • Consumers are savvy when it comes to greenwashing.

Greenwashing is a term that refers to corporate efforts that appear to be ecologically ethical but do not actually change how a business works.[28] For example, a product may be labelled “All Natural” even if it is manufactured conventionally. Certain dry cleaning establishments self-identify as ‘organic’, but the same has no legal standing. While some customers give in to such marketing, others view corporate greenwashing with suspicion.

Is Corporate Social Responsibility Against Article 14?

Article 14 of the Indian Constitution ensures that every person in India has equality before the law and equal protection of the law. Additionally, Article 14 allows for a rational categorisation of legislation. The Supreme Court has repeatedly held in Re: Special Courts Bill[29] that classification is permissible only if:

  1. It is predicated on an understandable differential and
  2. The differentia bears a reasonable relationship to the statute stated objective.

CSR spending is essential for just business-type organisations. CSR does not apply to partnership firms, limited liability partnerships, or any other type of organisation, even if their net worth, profit or turnover exceed the statutory maximum.[30]

According to Section 135(1) of the Companies Act[31], if a business reaches one of the net worth, turnover, or net profit levels, it falls under the ambit of section 135. Thus, even if a corporation does not exceed the requirements in future, it is still required to spend on CSR initiatives.

Section 135 of the Companies Act, 2013 explanation specifies that ‘average net profits’ shall be computed under Section 198 of the Companies Act regulations. Section 198 (4) (l) of the Companies Act[32] allows for the set-off of accumulated losses incurred after the implementation date of the said Section (but not for periods before such effective date) against net profits to calculate the ‘average net profits’ required by Section 135. Thus, a corporation that has produced profits over the last three fiscal years but has not yet recovered its carried forward losses from the time before to the effective date of Section 198 will be forced to spend on CSR.

A loss-making business has the same requirement to contribute to CSR as a profit-making business, as long as the ‘average net earnings’ test is met.

Finally, Section 135 applies to corporations registered under Section 8 of the Act.[33] The Section mandates corporations to use their profits exclusively to promote their objectives. But, under the Section, the computation of net profit for a foreign company with a subsidiary in India is unclear and ambiguous. Because the classification requirement is not met, and Section 135 regards unequal as equals, Article 14 is violated in certain instances.

Why is CSR Important?

Corporations need to enhance their focus on social responsibility now more than ever. Simply put, ‘social responsibility’ refers to a business’s commitment to pursuing attainable and beneficial long-term goals for its employees and the broader community.[34]

Today, we have seen several successful firms use social responsibility to give back to society and express gratitude to their customers. This might manifest itself in the shape of projects, movements, or personal empowerment. Whatever form these corporate alliances take, there is no doubt that they benefit both the firm and the community. Additionally, it has been noticed that select corporations are taking the lead and pursuing humanitarian efforts ranging from road development to poverty alleviation.[35]

Due to the voluntary nature of corporate social responsibility, many corporations may feel obligated to engage. Nonetheless, corporations need to prioritise social responsibility for a variety of reasons.

CSR Could Improve Customer Engagement.

CSR has the potential to assist organisations in increasing their consumer involvement. Numerous CSR  activities require businesses to engage directly with members of society who may or may not be clients or prospective clients.[36] They can immediately obtain feedback on their product and services.

Besides, consumers who benefit from a company’s social responsibility often spread the word about the brand. Thus, the same serves as an effective advertising tool.

CSR Could Boost a Brand’s Impression Among Customers.

Today’s business market is competitive, and it can be challenging for businesses to separate themselves from their clients’ views. But, on the other hand, companies that take social responsibility seriously can develop a marketing platform and win potential customers.

CSR can platform critical issues while also developing a dialogue around its own presence. It could also establish trust in the long run.

CSR is Critical For Branding.

Businesses must establish trust with their target audience to build a successful brand and retain customers. I believe that implementing a CSR strategy can assist in making a positive reputation while earning clients’ trust and loyalty. Consumer loyalty is important for a business.

Consumers want brands and businesses to be more than self-interested and contribute to society in exchange for their loyalty.

According to a 2015 Nielsen survey, more than half of consumers are willing to pay a premium for a product or service if the business places a premium on sustainability.[37] This indicates that consumers will choose and support businesses that are not solely profit-driven.

CSR Demonstrates a Commitment to Investors.

Socially responsible enterprises may appear more appealing to investors. This is because investors in a business have a single goal: to receive a larger rate of return on their investment than they invested.

Businesses that manage their finances effectively while also giving to their communities are accountable and open in their dealings. According to a 2016 Aflac report, investors do not frequently view CSR spending as a waste of money but rather a ‘sign of a firm culture less prone to costly missteps like financial fraud’.

According to the survey, 61 per cent of investors perceive CSR as a sign of ‘ethical company behaviour that reduces investment risk’.[38]

CSR Results in Cost Savings.

As previously said, many customers are willing to pay a premium for products manufactured by a socially responsible company, and CSR can aid in recruiting and retaining employees. This is noteworthy given the thousands of dollars that turnover may cost firms.

To summarise, firms cannot continue to operate only for profit, putting the environment, society, economy, consumers, and employees at risk. Businesses must consider ways to give back to the community to recruit and keep the best employees. Customer satisfaction and employee retention are, after all, key to every successful business.

Why Mandating Corporate Social Responsibility Doesn’t Violate Fundamental Rights?

Corporate social responsibility has been enshrined in law—the Companies Act[39]subjects corporations to specific restrictions, imposing constraints.

Schedule VII, which contains a list of CSR activities to be handled by corporations, implies that all activities fall under Article 21 of the Indian Constitution.[40]

As defined in Article 21 of the Constitution, the right to life includes the right to cohabit with other persons.[41] Dignity and all that entails, specifically: the bare necessities of life, such as food, clothing, and shelter, health protection, the right to medical assistance, prompt medical care in government-run hospitals, the state’s responsibility to ensure that no one dies of hunger, and the state’s obligation to provide safe drinking water to its inhabitants.

The court has interpreted and clarified the scope of Art. 21 in a plethora of cases such as Bandhan Mukti Morcha Vs. Union of India[42], Kirloskar Bros Ltd. Vs. ESI Corporation[43], Paschim Banga Khet Mazdoor Samity Vs. State of West Bengal[44] and PUCL Vs. Union of India.[45]

The court has repeated enough times that CSR efforts should serve as a stimulus for the auxiliary arm of the government to enforce fundamental rights, most notably Article 21 of the Constitution.

The ‘right to education’ is incorporated into the ‘right to life.’ Art 21A expressly recognises the right to education as a fundamental right.[46] This includes the right to free education up to fourteen years age, despite social and economic constraints.

Further, the right to life has been enlarged to encompass tradition, culture and inheritance.[47] It includes the right to shelter,[48] the right to a decent place to live[49] and dwellers of steep locations where access to the path itself is regarded as a gateway to life.

All these rights are judicially recognised. Declared rights pertain to the things stated in the Seventh Schedule. Listed as corporate social responsibility (CSR) activities, which reads as follows: –

“Protection of national treasures, art, and culture, rehabilitation of historic structures and places, and creation of works of art, establishment of public libraries, promotion and Progress in the development of traditional arts and crafts”

The right to an unpolluted environment and the responsibility to maintain and protect nature’s bounty has been interpreted to include the right to life. The right also protects wild animals, forests, lakes, historic sites, vegetation, ecological balance, and sustainable development. And several times, the legal right to environmental protection may take precedence over the economic concerns of society.[50]

Employees of a State Corporation who were harmed by X-ray radiation have a right to adequate relief consented by the court.[51] The declaration of these rights can be dated back to the following constitutes the basis for CSR activities:

“Ensuring the long-term viability of the ecosystem and ecological balance, Flora and fauna protection; animal welfare; agroforestry conservation of natural resources and maintenance of a high standard of living of soil, air, and water” [52]

The right to livelihood is included in the right to life.[53]  For instance, the right to farming is a component of the fundamental right to life and livelihood. This is predicated on the premise that no one can live indefinitely without means of subsistence. In this regard, corporate social responsibility should make efforts to advance livelihood programs. Through that, one may be assured of the right to live a steady life with respect for human dignity.

Item VII of CSR activities relates to beneficiary programs for veterans of the armed services, including war veterans, widows and their heirs.

Item VIII makes provision for contribution to the Prime Minister’s National Relief Fund or any similar fund further operations of the Fund for socioeconomic development. [54]

To summarise, fundamental rights are ideally enshrined in all laws, and states are constitutionally required to give it effect. CSR efforts, on the other hand, cannot be optional and must be mandated.

The government may ensure that noncontributing companies are subjected to ‘civil or criminal penalties’. Depending on the corporate objective, there may be punitive penalties. Additionally, any corporations that earn a profit should contribute based on a percentage of their net income.

A good plan is crucial for efficiently monitoring, utilising and carrying out CSR operations. Furthermore, it is critical to avoid corporations being used as a vehicle for ‘scamming’ under the pretext of CSR initiatives. Finally, strong business involvement in CSR initiatives will work as a firm complement to the government’s arm for upholding fundamental rights.

Conclusion

The government has proclaimed corporate social responsibility a legislative duty for enterprises. This law gives the corporation a premium for its commitment to sustainability, human values and social responsibility. It is a right and hence has legal authority, even though it defies Salmond’s idea of rights and obligations.

It is a form of legislation that respects social justice and takes a liberal viewpoint at the same time. This is, therefore, a sound law that takes into account various prospects. The argument is that they do so for sustainability’s sake, but they would not be interested in continuing them even at this level without regulation. Alternatively, because the company pays taxes and wages, etc., such laws do not have to be implemented.

The law is based on the utilitarian concept of anything that serves the majority as legislation; likewise, it is a just law that is good for many because it benefits the majority. As a result, it becomes easier to access the statute’s legitimacy by evaluating the legal personhood of the company and its rights and obligations.

However, the Constitution provides that a bill passed by parliament may reduce some rights. Therefore, the law on social responsibility acts as a control over the power of the private sector. There is a risk that the desire for capitalism will destroy the social good to benefit its citizens. Thus, even outside legal theory and jurisprudence, control becomes essential to operate.

Endnotes

[1] The Companies (Amendment) Act, 2013, The Act of Parliament 1956 (India).

[2] DeTienne, K.B., Ellertson, C.F., Ingerson, MC. et al. Moral Development in Business Ethics: An Examination and Critique. J Bus Ethics 170, 429–448 (2021).

[3] Iwai, Katsuhito. “Persons, Things and Corporations: The Corporate Personality Controversy and Comparative Corporate Governance.” The American Journal of Comparative Law, vol. 47, no. 4, American Society of Comparative Law, 1999, pp. 583–632, https://doi.org/10.2307/841070.

[4] Tripathi, Kanchan. (2016). Corporate Accountability: A Review. International Journal of Economics and Management Studies. 3. 101-104. 10.14445/23939125/IJEMS-V3I6P119.

[5] Crimmins, James E., “Jeremy Bentham”, The Stanford Encyclopedia of Philosophy (Summer 2021 Edition), Edward N. Zalta (ed.)

[6] Ronald DWORKIN, Taking Rights Seriously, Ch 4 (1978); Ronald DWORKIN. Response to Overseas Commentators 1. Intl. J. of Con. Law (I.CON) 651,660-662 (2003).

[7] Castelo Branco, M. & Lima Rodriques, L.(2007). Positioning Stakeholder Theory within the Debate on Corporate Social Responsibility EJBO – Electronic Journal of Business Ethics and Organization Studies, Vol. 12 (1).

[8] Suzanne Benn & Dianne Bolton, Key Concepts In Corporate Social Responsibility 203 (Sage 2011)

[9] D. Mahajan, Jurisprudence & Legal Theory 251-252 (5ed. Ebc 1987) (2016). 

[10] Ibid.

[11] http://docs.manupatra.in/newsline/articles/Upload/2D83321D-590A-4646-83F6-9D8E84F5AA3C.pdf

[12] 1987 SCR (1) 819

[13] AIR (1989)(1)SCC 674: AIR 1992 SC 248

[14] The Rule in Rylands v. Fletcher. Part I by Bohlen, Francis H. (1911).

[15] MARKOS KARAVIS, CORPORATE OBLIGATIONS UNDER INTERNATIONAL LAW 88-89 (1ed. Oxford 2013).

[16] RAYMOND WACKS, UNDERSTANDING JURISPRUDENCE 131-132 (3ed. Oxford).

[17] Mack, Eric, “Robert Nozick’s Political Philosophy”, The Stanford Encyclopedia of Philosophy (Summer 2018 Edition), Edward N. Zalta (ed.)

[18] Suzanne Benn & Dianne Bolton, Key Concepts In Corporate Social Responsibility 129 (Sage 2011).

[19] M.P. Lee, “A Review Of The Theories Of Corporate Social Responsibility: Its Evolutionary Path And The Road Ahead”. International Journal Of Management Reviews, 10, 2008, 53–73.

[20] Dr. Sunil Karve “National Conference On Corporate Social Responsibility Issues And Challenges”

[21] Paiement, P. (2015). Voluntary Sustainability Standards: Regulating And Coordinating In Transnational Law.

Tilburg University

[22] Https://Thecsrjournal.In/Top-Indian-Companies-For-Csr-In-2020/ Visited On Aug. 14.

[23]T. Smith, “Institutional and social investors find common ground. Journal of Investing, 14, 2005

[24] Elizabeth Kurucz; Colbert, Barry; and Wheeler, David “The Business Case for Corporate Social Responsibility.” Chapter 4 in Crane, A.; McWilliams, A.; Matten, D.; Moon, J. and Siegel, D. The Oxford Handbook of Corporate Social Responsibility. Oxford: Oxford University Press, 2008, 83-112

[25] “Corporate Social Responsibility.” Institute of Medicine. 2007. Global Environmental Health in the 21st Century: From Governmental Regulation to Corporate Social Responsibility: Workshop Summary. Washington, DC: The National Academies Press. doi: 10.17226/11833.

[26] Ibid., p.2

[27] K. O’Sullivan, “Virtue rewarded: companies are suddenly discovering the profit potential of social responsibility.” CFO, October 2006, pp. 47–52.

[28] Majláth M (2017) The effect of greenwashing information on ad evaluation. Eur J Sustain Dev.

[29] Re: Special Courts Bill AIR 1979 SC 478, (1979) 1 SCC 380, 1979 2 SCR 476

[30] Rule 2(d) of Companies (CSR Policy) rules, 2014

[31] Section 135(1) of the Companies Act, 2013.

[32]  Section 198 (4) (1) of the Companies Act, 2013.

[33] Section 8 of the Companies Act,2013

[34] Ben & Jerry’s. “Socially Responsible Causes Ben & Jerry’s Has Advocated for.” Visited Sept. 4

[35] Brugmann, J., & Prahalad, C. K. (2007). Co-creating business new social compact. Harvard Business Review, 85(2), 80–90.

[36]https://www.forbes.com/sites/forbesbusinesscouncil/2020/11/18/the-growing-importance-of-social-responsibility-in-business/?sh=1894bdea2283

[37] Nielsen Media Research (2015) https://www.nielsen.com/us/en/insights/reports/2015/the-sustainability-imperative.html. Accessed Jun. 26 2018

[38] https://www.aflac.com/docs/about-aflac/csr-survey-assets/2016-csr-survey-deck.pdf visited on Jun. 1,

2020.

[39] The Companies Act, 2013

[40] See also Schedule VII of The Companies Act, 2013

[41]https://www.lawctopus.com/academike/article-21-of-the-constitution-of-india-right-to-life-and-personal-liberty/  visited on Aug. 12, 2021.

[42] Bandhan Mukti Morcha Vs. Union of India, AIR 1984 SC P.811

[43] Kirloskar Bros Ltd., Vs. ESI Corporation (1996)2 SCC P.682

[44] Paschim Banga Khet Mazdoor Samity Vs. State of West Bengal (1996)4 SCC P.37.

[45]PUCL Vs. Union of India (2003)9 Scale P.835

[46]Unni Krishnan Vs. State of AP (1993)1 SCC P.732.

[47] Ramsharan Antyanuprasi Vs. Union of India, AIR 1989 SC P.549.

[48] Gauri Shanker Vs. Union of India (1997)1 SCC P.444.

[49] Shantistar Builders Vs. Narayan Khimalal Totame, AIR 1990 SC P.630.

[50] M.C.Mehta’s case, AIR 2004 SC P.40 16

[51] Bharath Electronics Ltd., (M.K.Sharma) Vs. Bharath Electronics Ltd., AIR 1987 SC P.1086.

[52] See item No. IV of Seventh Schedule list of Indian Companies Act, 2013.

[53] Delhi Development Horticulture Employees Union Vs. Delhi Administration, AIR 1992 SC P.789.

[54] Schedule VII of The Companies Act, 2013

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