This article is written by Paridhi Dave, a student at the Institute of Law, Nirma University. This is an exhaustive article which deals with the meaning of corporate social responsibility, the key issues, types of CSR along with its advantages and disadvantages.
Table of Contents
Introduction
The concept of corporate social responsibility has undergone many changes over a period of time. The ability to make a significant impact on society and subsequently improve the overall functioning of the company and the economy is much appreciated. All businesses have an obligation which is beyond making a profit.
The concept of corporate social responsibility functions on the principle of ‘quid pro quo’ – something in return of something. CSR allows companies to contribute their bit to society through various activities.
This article discusses the meaning, types, key issues of CSR along with its advantages and disadvantages.
What is Corporate Social Responsibility?
The United Nations Industrial Development Organization (UNIDO) defines Corporate Social Responsibility (CSR) as a management concept wherein the companies aim at integrating the social and environmental concerns in their business operations and interactions with their stakeholders. It is a way through which companies can maintain a balance between the economic, environmental and social imperatives on one hand and address the expectations of shareholders and stakeholders on the other. In this sense, it becomes essential to draw a line of distinction between CSR and charity or philanthropy.
The concept has an impact on companies, nonprofits and employees alike. The purpose of CSR is to give back to the community. It helps in building a positive brand image.
Key issues in CSR
The concept of CSR goes far beyond charity. Through this action, an attempt is made to align private enterprises to the objective of sustainable global development. This is done by providing a comprehensive set of objectives rather than the sole purpose of profit-making. The key idea is that an organization, in order to be sustainable has to be financially secure, has to minimize the negative environmental impacts and should act in conformity to societal expectations.
Following are some of the key issues in CSR:
- Environmental management
- Engagement of the stakeholders
- Proper working conditions and labour standards
- Responsible sourcing
- Maintaining eco-efficiency
- Maintaining gender balance
- Good governance
- Social equity
- Community and employee relations
- Human rights
Types of CSR
CSR focused on Environment
This type of CSR primarily focuses on the reduction of detrimental effects of the company’s operations on the environment. It involves taking measures such as using eco-efficient machinery and other steps to ensure a sustainable manufacturing process. It also involves promoting the usage of non-renewable energy sources to prevent the harm caused by the burning of fossil fuels.
CSR focused on Community Welfare
The companies for the promulgation of community welfare join hands with non-profit organizations usually. The aim is to fund these bodies which will perform certain tasks and activities for improving the living standards of the members of the community. The companies should take up economic responsibility as well. They should duly pay their taxes and invest back into the community. This ensures the well-being of both the company and the economy.
CSR focused on Human Resource
Every employee is an asset to the company. It is essential that corporations focus on the well-being and self-development of the employees. The companies can do this by offering more salary to their employees, more compensation packages, providing a generous duration of parental leave, etc. Companies which follow ethical labour practices generate a sense of loyalty and pride in their employees.
CSR focused on Philanthropy
The companies under this aspect, make donations to either organizations or individuals to help in uplifting their living standards and improving their financial conditions. This is the most common practice followed by companies. Mostly, the companies directly provide financial support, but in some cases, it can engage a non-profit organization.
Importance of Corporate Social Responsibility
The relevance and significance of corporate social responsibility is consistently increasing in contemporary capitalist societies. This is to ensure that life and business processes remain sustainable in the future. The importance of CSR is highlighted below:
Brand Value of Companies
It is an established fact that a corporation engaged in responsible operations, business processes accompanied with a CSR program can build its brand equity and create awareness among people. A goodwill and trust is developed in the community for the products and services of the company as well as its CSR activities.
Increase in Sales and Customer Base
Companies that engage in purposeful activities along with their regular conduct of business, are perceived in a positive manner by the existing customers and the potential customers. This leads to an increase in sales as well.
Increase in employee engagement and retention
CSR initiatives of a company help in building a positive public change. Due to this, the employees enjoy working for such companies. The empathy and loyalty among the employees also increases. Higher employee satisfaction leads to their retention.
Alleviation of Poverty
The corporate sector has the requisite talent and know-how to ensure that maximum impact can be created at minimum cost. There are several governmental schemes for the upliftment of the poor, but there is still a wide gap between the rich and the poor. The companies through their CSR activities can provide assistance at the grassroot level and help in poverty alleviation.
Advantage over companies which do not follow CSR
Companies which engage in CSR have an upper hand over rival companies that do not engage into such practices. The customers choose to buy products which are eco-friendly.
Corporate Social Responsibility in India
India has a statutory compliance requirement on CSR spending as compared to other countries which only offer voluntary guidelines. The concept of CSR is imbibed in the Companies Act, 2013 under Section 135. Firms which have a net worth of Rs. 500 Crore or revenue of Rs. 1000 Crore or earn a net profit of Rs. 5 Crore are bound to pay a minimum of 2% of the profit on CSR as per the provision.
Further, Schedule VII of the Act, 2013 provides a wide range of activities which can be undertaken by corporations in the country. The Companies (Corporate Social Responsibility Policy) Rules under Rule 2(c) define the term Corporate Social Responsibility, which is an inclusive definition. The definition is beneficial to companies as it offers flexibility to them, by permitting them to choose their own ideal CSR engagements, that are in accordance with the rules laid down. The activities which are prescribed are on the lines of eradicating hunger and poverty, promoting education and gender equality, ensuring a sustainable environment, etc. Further, it is compulsory for companies to publish an annual CSR Report on their official websites under Rule 8 of the CSR Policy Rules, 2014.
CSR under the Companies Amendment Act, 2019
The Amendment Act received the presidential assent in July, 2019. The amendment has brought certain revisions in the existing framework of CSR which is specified under Section 135 of the Principal Act. The changes in this particular section are mentioned in Section 21 of the Amendment Act. The changes are discussed below.
Unspent Funds
Under the Amendment, if there are any unspent funds related to CSR in one financial year (with respect to an ongoing CSR Project) then such funds, in accordance with CSR Policy of the company, have to be transferred to a special account within a period of thirty days from the end of that financial year. This account is to be opened in a scheduled bank and is to be named as Unspent CSR Account. These funds will have to be used by the company within a period of three financial years from the date of such transfer. If the company fails to do so, then the unspent amount has to be transferred to a fund which is specified under Schedule VII of the Companies Act. This is to be done within six months from the end of the relevant financial year.
Penal Liability in case of non-compliance
Under the prescribed Amendment, if a company fails to follow the above mentioned obligations, then a penalty ranging from INR 50,000-25 Lakhs can be imposed on it. Additionally, it also provides for imprisonment of all officers of the company who have defaulted, for upto 3 years along with a fine ranging from INR 50,000-5,00,000. Apart from this, a separate penalty has been prescribed for continuing offences.
New Companies
The Amendment clarifies that if a company has not completed three years from its incorporation, then the amount to be spent on CSR will be equivalent to 2% of the net profits made by the company in the previous financial year.
Rule-Making Power
The Amendment specifies that the central government has been bestowed with the power to make rules, regulations and issue directions with regard to compliance.
Examples of Corporate Social Responsibility in India
India is active in its contribution to CSR activities in the areas of education, gender equality, poverty, etc. The following companies are involved in CSR extensively.
Tata Group
This conglomerate has carried out a variety of CSR projects in India, thereby substantially contributing to poverty alleviation and network improvement. It also provides for scholarships and endowments. Other areas include the healthcare sector, wherein it has laid down several healthcare projects, economic empowerment projects, development of infrastructure, etc. The company contributed INR 25.68 crores in 2018-19. Recently, it also contributed INR 1500 crores to the PM Cares Fund for COVID-19.
Mahindra & Mahindra
This organization primarily focuses on education projects, for the upliftment of economically and socially disadvantaged communities. They invest in scholarships, disaster relief and healthcare. It has a special program called ‘Nanhi-Kali’ wherein educational support is provided to underprivileged school girls. The company spent INR 93.50 crores in 2018-19.
Infosys Ltd.
This conglomerate primarily works with non-governmental organizations in several areas which include senior citizen care, heritage conservation, promoting culture, etc. It contributed INR 342 crores in 2018-19.
HDFC Bank Ltd.
The bank engages in CSR activities through various implementing partners and contributes to rural development, sustainable environment, education, etc. It contributed INR 443.78 crores in 2018-19.
ITC Group
The thematic areas that this organization is involved in ranges across sanitation, rural development, livelihood enhancement, education, etc. It contributed INR 306.95 crores in 2018-19.
Reliance Industries Ltd.
This conglomerate primarily invests in CSR activities in the sector of rural development, women empowerment, eradicating hunger and poverty, promotion of sports. It contributed INR 849.32 Crores in 2018-19 towards CSR.
Indian Oil
The thematic areas of its contribution include investing in eradication of malnutrition, promoting rural sports, women empowerment, etc. It contributed INR 490.60 crores in 2018-19.
Maruti Suzuki India Ltd.
The organization has contributed to the central government fund, education, healthcare and other areas. It contributed INR 154.07 crores in 2018-19.
Oil and Natural Gas Corporation Limited (ONGC)
The company was established under the aegis of Jawaharlal Nehru and invests in CSR activities such as welfare of armed forces veterans, housing for poor, contribution to poverty eradication, women empowerment, etc. It contributed INR 614.63 crores in 2018-19.
Vedanta Ltd.
Vedanta Ltd. spent approximately INR 309 crores on a consolidated basis in 2018-19. It has invested in diverse projects across various locations. The flagship initiative is the ‘Nandghar Project’, which aims at rebuilding Anganwadis.
In light of the recent COVID-19 outbreak, the government has launched the PM-CARES Fund. The Ministry of Corporate Affairs issued a statement that the money which the companies would contribute to this fund would be counted towards their CSR obligations.
Advantages of Corporate Social Responsibility
CSR leads to an increase in employee satisfaction
It is important for a company to treat its employees in a fair manner. How a company treats its employees depicts a lot about how the company would treat the community. Employees, if treated well, act as an active element in the society and pose as brand ambassadors of the company. It is important that people who work should feel respected and supported in their jobs. This boosts the morale of the employees. A sense of belongingness arises in the minds of these employees and they have a certain pride that they are working for the corporation. Employees gain motivation through the positive gestures of the corporation. Therefore, this leads to increased retention of employees, which cuts the cost of recruiting and training again and again.
CSR leads to an improved public image
In the contemporary era, it is essential to show what you have done, otherwise, it did not happen at all. The digital era demands that the companies demonstrate their CSR activities. This gains exposure for the company and subsequently appreciation for their efforts and conscious involvement. The customers of a certain brand would feel good about buying products or services which are helpful to the community at large.
CSR leads to more capital inflow
Companies which are regularly involved in CSR activities gain traction from various sources. The company will be highlighted because of its active involvement and this functions as a massive image booster as it leads to more business opportunities. Therefore, the company will have more capital investment as compared to companies which do not engage in CSR. Foreign investments also help the economy of a nation.
CSR leads to the granting of a moral license
Factors such as ethical labour practices, sustainable machinery, foreign investors, etc. play an important role in the functioning of a company. But in contemporary times, the community as a whole is also a major stakeholder. The license to carry out a business is applicable in two aspects, legally and morally. Companies which engage in CSR activities gain the trust and support of the surrounding community as well. This provides them with a ‘social license’ to operate. This is also known as ‘social goodwill’ of the brand.
CSR leads to improved client relations
Companies which engage in CSR activities have better customer relations and even earn their loyalty. Customers like to be associated with companies which are socially responsible. Consumers are attracted to corporations which are actively involved in these activities and have a reputation of being a good corporate citizen. In such cases, if the consumers believe that the company is genuinely making efforts, they are ready to pay a higher price for their products and services as well.
Other benefits include an increase in sales and profits, better decision making and risk management processes and the creation of efficient human resources.
Disadvantages of Corporate Social Responsibility
CSR leads to additional bureaucracy along with rising costs for observance
The primary disadvantage of CSR is that the costs that are incurred for its observance can prove to be burdensome on small businesses. Giant corporations can afford the allocation of budget for CSR, but it is a cumbersome process for smaller businesses. There arises a need to incur special costs for implementing a different mode of operation than the usual, which is burdensome for the organization. The second type of cost that is involved, is the cost of training employees, formulating dedicated programs for the upliftment of the society and also ensuring the safety of the environment. All these measures increase the overall expenditures of the corporation.
CSR leads to a clash in business objectives
It is an established fact that the primary objective of all business organisations is to make profits. This is the reason that they create a variety of products and services for the customers. The concept of CSR can pose as an obstruction during some decisions. It requires the corporate to maintain a balance between the considerations of the organization and the interests of the public. This can sometimes lead to a clash, which ultimately ends in a loss for these organizations.
Example- A corporate ‘X’ wants to purchase land to set up its business plant. Simultaneously, it is situated around a residential area. Now, the purchase is important for the increase in production and thereby gaining profits but at the same time it is the social responsibility of the organisation to take care of the interests of the people. This leads to a clash in the objectives.
Negative Impact of CSR on the reputation of the corporate
The customers in contemporary times are more vigilant than before. They are aware of the tactics that several corporates use, this is also called ‘greenwashing.’ The term is used to describe practices followed by the corporates that appear environmentally responsible but there is no change in how the corporation conducts its business. It is an established fact that CSR activities conducted quietly reap negligible benefits. But at the same time, if the corporation conducts it in the public space, it can be subject to greater scrutiny. Therefore, if there is a mistake or a hint of irresponsible behaviour on the corporation’s behalf, then it is bound to face the wrath of the public. Thus, in all probability, the company may be subject to more harm than good.
Further, when an organization is functioning in an ethical and socially responsible manner, it is bound to express the shortcomings in their products, to the public at large. Since they share such information, the corporation becomes susceptible to negative impacts on its brand image/reputation in the market.
CSR leads to a competitive disadvantage
The practice of CSR can prove harmful to the companies in the long run. As has been discussed above, accommodating the practices of CSR in the operations of the company can lead to an increase in the cost of production and other ancillary costs. This has a cascading effect, the customers and the stakeholders of the company have to bear the brunt. Due to an increase in the prices of products, the customers will not be inclined to purchase the product from such a company. They will buy the product that allows them to spend less for the same quality. This can lead to a disadvantageous position for a corporation which follows CSR as opposed to the companies which do not.
Conclusion
Corporate Social Responsibility lays down the responsibilities of companies operating in the country towards the citizens and the country itself. But it is also essential that the concept of Individual Social Responsibility is also introduced. The society is responsible as a whole for all the actions and omissions.
The article has pointed out the advantages and disadvantages of CSR. There is no straight formula to determine CSR as either a boon or a bane. The response depends on the implementation of these activities. There are several challenges in the process of implementation such as lack of awareness of the general public regarding these activities, issues of transparency, narrow perceptions of the government and NGOs towards these initiatives, lack of consensus on implementing these activities, etc. Therefore, it is essential that all factors are taken into consideration before determining whether CSR is a boon or a bane.
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