The only country in the world with legislated corporate social responsibility csr is

Forthcoming in American Journal of Comparative Law

54 Pages Posted: 16 Apr 2019 Last revised: 21 Aug 2020

Date Written: March 28, 2019

Abstract

Corporate social responsibility (CSR) is often understood as voluntary corporate behavior beyond legal compliance. The recent emergence of CSR legislation is challenging this typical understanding. A number of countries including China, Indonesia and India have expressly stated in corporate law that companies shall undertake CSR. The CSR law is controversial. Critics of CSR see the law as an unwise effort to challenge profit maximization as the only social responsibility of the corporation. Even CSR advocates welcome the CSR law with great caution. Given the vague statutory language of CSR, the practical application of the law places high demands on the judiciary. However, as the countries that have adopted the CSR law are mainly developing countries with rather weak legal institutions, it raises a common concern that the law is simply an innovation without implementation. This article conducts an empirical study on China, an early adopter of the CSR legislation. The empirical analysis of Chinese court cases reveals what the CSR law means in judicial practice, whether CSR is in fact mandatory and in what types of disputes CSR is relevant or outcome determinative. Among various findings, this article shows that the CSR law is by no means as useless as commonly expected. The meaningful application of the law is attributable to the law’s fit with China’s legal infrastructure and socio-political institutions. Chinese courts have innovatively applied CSR in various contexts far beyond the traditionally Western-led focus on directors’ fiduciary duties. The Chinese experience suggests that the significance of the CSR law is more of a judicial review standard than a corporate behavior standard, which further confirms the importance of judicial capacity in implementing the vague law. This article concludes with insights for the corporate purpose debate in comparative perspective and policy suggestions for adopting the CSR legislation.

Keywords: corporate social responsibility, corporate governance, shareholder primacy, fiduciary duty, legal transplant

Suggested Citation: Suggested Citation

Lin, Liwen, Mandatory Corporate Social Responsibility? Legislative Innovation and Judicial Application in China (March 28, 2019). Forthcoming in American Journal of Comparative Law, Available at SSRN: https://ssrn.com/abstract=3361448

In India, CSR is approached with a rigor not found anywhere else in the world. Here, we see how businesses around the world can learn from the Indian approach to CSR — to ensure that every dollar spent has the best societal impact, while improving your brand value.

Conventional business models utilize profits to increase shareholder equity, pay dividends or reinvest back into the business. So, wouldn’t it be terrifying for companies if the government suddenly stepped in and mandated a small share of their profits be diverted into social improvement projects?

Well, apparently not!

India, the world’s fastest-growing economy, is also home to one of the strangest corporate laws on the planet. It is the only country in the world that requires companies to have a corporate social responsibility policy.

Corporate social responsibility is a practice in which businesses voluntarily take part in internationally to self-regulate and contribute to social and environmental improvement projects. However, the phrase takes a completely different meaning in India.

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In India, Section 135 of the Companies Act 2013 makes it mandatory for businesses that have a net worth of more than Rupees 500 crore (~US$71 million), turnover of more than Rs. 1000 crore (~US$142 million) or net profit exceeding Rs. 5 crore (~US$714,000) in the last financial year to use a minimum of 2 percent of their average net profit for any activity that is provided for in a list compiled by the government.

Among other things, the list allows businesses to apply their CSR funds toward matters that provide for eradicating poverty and hunger, promoting education, women’s empowerment and environmental sustainability.

zWhat’s different about Indian CSR policies?

In India, CSR is dealt with in a different rigor that’s not found anywhere in the world. The law dictates that three Board directors must form a CSR committee, which is tasked with creating and enforcing each company’s Corporate Social Responsibility Policy. When 3 board directors have to create and enforce a policy, you know that the work is not going to be done lackadaisically!

The law dictates that the CSR policy be quite elaborate, and the money spent will be audited. Further, the committee will be liable for every dollar spent; and the policy as well as the CSR activities undertaken must be detailed by the company in its annual report and on its website.

The CSR committee is also given a much higher range of power than the Board in ensuring that 2 percent of the profits have actually been given by the company. The Board of Directors is also obligated to follow any CSR-related suggestions that may be put forward by the CSR committee.

How do Indian businesses feel about this?

It may be quite hard for foreign businesses to fathom, but Indian companies as well as foreign companies setting up shop in India are in fact quite agreeable to the government’s policy.

This is because, unlike paying taxes, CSR allows the company to be the master of every dollar that it spends on any of the permissible activities. Further, with 3 directors on board and being granted such extraordinary powers, companies usually ensure that they make the best impact with their money — a far cry from the government’s expenditure on social welfare policies, which generally involve a lot of wastage.

However, engaging in CSR activities does not involve only an outflow in cash. It is also a great branding opportunity for businesses and provide for a great way to engage in local marketing while simultaneously doing good for the community.

And, nowhere is this truer than India! With companies including Coca-Cola and Tata Sons trying to out-do each other every year, CSR is a battleground in terms of which business can do more good in the community within a fixed budget.

And, it has been seen repeatedly that these activities create quite a deep-set patriotic feeling within Indian consumers. Tata, one of the largest philanthropic business houses in India, is also one of the most revered and trusted businesses in the country. While US car companies such as Ford and General Motors have been unable to penetrate the Indian consumer market, Tata Motors was able to dominate it in one year after it moved from commercial to consumer vehicles.

How companies can use CSR internationally

As proven in India, engaging in a dedicated approach to CSR presents one of the best avenues for a business to sustainably grow. Using India’s CSR principles is, however, not that difficult a task. In fact, most US brands that invest in India already have the necessary expertise.

For example, Coca-Cola’s 2015 “Support My School” campaign was one of the biggest CSR campaign ever undertaken in India. The viral campaign earned Coca-Cola media exposure that even coordinated marketing campaigns shall find difficult to replicate.

To apply CSR effectively, here are three unique principles to which companies must adhere:

1. Get the highest management on board – Ensure that the entire company understands that this is a serious policy.

2. Create OKRs for enforcing your policy – Your CSR policy must have clear goals, accompanied by key actionable results that will help you reach your objectives. Although this was a management principle invented by Andrew Grove, the former CEO of Intel, you can find traces of the principle in the CSR legislation in India. Remember that while goals are important, goals followed by actionable policies work much better.

3. Fix accountability – There must be accountability if the CSR objectives are not met. It should be on par with other business metrics such as missing sales targets, etc. Try to ensure that the accountability rests on the highest management. Usually, you can’t fix accountability on the Board; but the CEO or some executive must be entrusted with the entire enforcement process.

Some companies are already engaging in voluntary socially beneficial work. For example, the tech-cum-intellectual property law firm PatentPC, which I had the opportunity to work with, provides a free-access, AI-powered learning platform that also helps inventors get their patents filed. And more and more international businesses are realizing that taking a stand and engaging in activism is important for businesses to boost their brand.

As you can see, using India’s CSR principles is a matter of tweaking your company’s current management approach and setting priorities. In order to ensure sustainability in your CSR activities, you can even track the ROI on your investment. This will help you tweak, experiment and even change your CSR activities — thus ensuring that every dollar you spend has the best impact in terms of improving societal goals while at the same time improving your brand value.

Published Feb 21, 2022 7am EST / 4am PST / 12pm GMT / 1pm CET

Adhip Ray

Adhip Ray is founder of WinSavvy.com.

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