03 Jan

The Intertwining of Corporate Social Responsibility and Corporate Governance

Understanding Corporate Social Responsibility (CSR)

The concept of Corporate Social Responsibility has been enshrined in India’s legal framework through Section 135 of the Companies Act 2013 according to which every company having a net profit of Rs 5 crore or more is to constitute a Corporate Social Responsibility Committee. The Committee is to formulate a CSR policy. As Mallenbaker puts,” CSR is about how companies manage the business processes to produce an overall positive impact on society.” In today’s dynamic world, Corporate Social Responsibility becomes all the more important and has emerged as an area of interest for entrepreneurs, practitioners, and academics. It is therefore implied that CSR has become an integral aspect of the internal framework of a company. Although the concept of CSR was based on the concept of philanthropy,  post-liberalization has witnessed a shift from this model to the stakeholder participation model. Therefore, it is here that the concept of governance comes in.

Corporate Governance in the light of CSR

Corporate Governance refers to a set of principles, systems, and processes to which a company ought to adhere to. Although not initially recognised, the concept of corporate governance was introduced in India by way of the Securities and Exchange Board of India (SEBI) in the late 1990s by way of the Listing Agreement for Listed companies only. According to the Organization for Economic Cooperation and Development, the corporate governance structure specifies the distribution of rights and responsibilities among different participants in an organization like the Board, managers, shareholders, and stakeholders. As both concepts focus on ethical practices of companies, they converge. This is supplemented by the fact that, both these concepts focus on ethical practices in the business and the response of a business towards stakeholders and the environment to which it operates. In India, the concept of Corporate Social Responsibility is predominantly featured in the following legislations;

  1. The Companies Act, 2013

  2. The Securities Exchange Board of India Regulations

Apart from this, one can also look at Clause 49 of the Listing Agreement.Being applicable to all listed companies, the clause contains provisions to improve the quality of governance thereby ensuring transparency, disclosure, and appointment of independent directors, remuneration committee, and audit committee. Although Corporate Social Responsibility has propelled standards of governance, it is not without its perils.

How could CSR be misused?

The current legal framework mandates 2% of companies profits on CSR activities. However, there always arises question with regard to the participation of the donor agency in the administration of the done. For eg; A recent instance involved making the donation on the fulfillment of three conditions. Namely, that the trust to be renamed to include the name of the donor; a permanent place for the donor on the board of trustees; and that the land or building be named after the donor. The point here is not the outcome, but that of intent.

The idea behind Corporate Social Responsibility is to encourage corporate philanthropy. While it is not uncommon for non-profit organization to pay gratitude to their donors, this alone must not be the cause for making donations under Corporate Social Responsibility. Further, CSR must not be used as a tool for corporate expansion.Another issue is with regard to making sure that companies eligible for CSR activities adhere to that requirement under law.Hence,a fool-proof mechanism must be established for non-adherence to CSR activities.Mechanisms must therefore be put in place to ensure that the donor does not interfere in the affairs of the donnee organization thereby ensuring better corporate governance.

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