Corporate Social Responsibility In Whose Interest?
I. Voluntary CSR in the United States and Mandatory CSR in India
Is it desirable for corporations to spend corporate profits on socially responsible activities? If the answer is yes, can we expect corporations to do so voluntarily, in satisfactory amounts, and to appropriate social causes?
The Indian legislature answered this question in the negative in 2013 when growing dissatisfaction with corporations’ voluntary CSR efforts prompted a legislative mandate on corporate social responsibility (“CSR”) spending.[1] This made India the first nation to make CSR spending anything but voluntary.[2] The mandate requires that large corporations create a CSR Committee within their boards of directors and spend at least 2% of corporate profits on specific social causes.[3] Though CSR remains voluntary in the United States, it is “nonetheless seen as obligatory by most corporations because of consumer expectations and internal norms.”[4]
II. What do the regimes have in common? Whether as a legal or practical matter, only large companies are expected to engage in CSR.
As voluntary regimes of CSR are primarily driven by firms seeking to meet consumer pressures, it is unsurprising that only fairly large (often public) companies make significant contributions in CSR.[5] This is simply due to the reality that larger public companies are more likely to face social pressures, desire the reputation boost, and have the resources and structure necessary to engage in these activities profitably.[6]
The Indian mandate is expressly limited to large corporations, defined as firms meeting one of three thresholds.[7] An estimated 16,000 firms are captured by the mandate.[8] This limitation is significant because large companies (in general and particularly in India) are often already engaged in forms of voluntary CSR.[9] Therefore, we may see the mandate as simply providing a uniform model for companies that were already making significant CSR expenditures.
III. The first significant difference between the two regimes: Directors in the United States are subject to conflicting directives, whereas those in India are given a clear mandate.
The greatest conundrum of CSR in the United States is that we expect that corporations will engage in CSR spending for social issues that don’t directly have anything to do with the business’ purpose, yet enforce a duty of loyalty which in a literal sense requires that these social expenditures somehow serve the shareholders’ interest.
Our state corporate codes require that directors act in their shareholders’ best interests.[10] The interests of other stakeholders, such as employers, customers, suppliers, and creditors, may only be considered to the extent to that they are “rationally related benefits to the welfare of shareholders.”[11] When applied to CSR, this fiduciary duty requires that corporations only spend corporate profits on social causes to the extent that the expenditures reasonably relate to promoting the corporation’s goodwill.[12]
In other words, if we apply these precedents strictly, social expenditures can’t be charity for charity’s sake if a director is to satisfy her duty of loyalty. It isn’t done solely for the furtherance of any particular social cause. A board of directors should be ready to explain exactly how these expenditures benefit their shareholders (not the firm’s stakeholders, society at large, or anyone else).
On the other hand, directors in India are told the exact expenditures that they must make to satisfy the mandate, and there is no requirement that these expenditures ultimately serve the company’s shareholders somehow.
The Companies Act lays out specific categories of social issues that the corporation’s activities must fall within to be counted towards the spending requirement,[13] which were selected in order to develop “longer term strategies” for some of India’s most persistent social, economic, and environmental problems.[14] These causes include the empowerment of women, the improvement of child mortality rates and maternal health, and extreme hunger.[15]
The Companies Act also marked India’s adoption of the “stakeholder theory” model of corporate law, where directors are expressly authorized (in fact, they are actually ordered to) consider the interests of non-shareholder stakeholders.[16] Because of this, directors in India are not subject to the conflicting directives that American directors are, and do not need to explain how engaging in CSR is ultimately beneficial to the corporation’s shareholders.
IV. The second significant difference: Indian firms may not internalize the benefits the CSR spending, whereas United States firms regularly do just that.
Indian corporations are expressly barred from counting towards the mandate any expenditures that would’ve been taken in the “normal course of business” and those “that are meant to benefit employees.”[17] This is a sharp contrast from the United States’ CSR regime, where the shareholder primacy model actually requires that the expenditure ultimately provides some benefit to the firm. The mandate limited the extent that Indian companies could use CSR as a marketing strategy, which was actually one of the reasons companies initially resisted the mandate.[18]
The American requirement that social expenditures ultimately serve the interests of a corporation’s shareholders has resulted in the commodification of social action, where CSR is regularly utilized as a part of marketing, talent acquisition, or employee morale strategies.[19] All of this begs the question: How effective can social expenditures be if they are driven by individualist gain?
Emily Rubino is a staff member of Fordham International Law Journal Volume XLIV.
This is a student blog post and in no way represents the views of the Fordham International Law Journal.
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[1] See Abhishek Mukherjee et al., Mandatory Corporate Social Responsibility: The Indian Experience, 14 J. of Contemp. Accounting & Economics 254, 255 (2018) (noting that, despite a robust and established voluntary CSR regime existing in India, the Companies Act’s mandate was the result of the voluntary regime being deemed insufficient).
[2] See Gerlinde Berger‐Walliser & Inara Scott, Redefining Corporate Social Responsibility in an Era of Globalization and Regulatory Hardening, 55 Am. Bus. L.J. 167, 184 (2018) (discussing the voluntary regime of CSR in India predating the Companies Act’s mandate); see also Deva Prasad, Companies Act, 2013: Incorporating Stakeholder Theory Approach Into the Indian Corporate Law, 39 Statute L. R. 292 (2017) (noting that, though many countries have mandated CSR disclosure, India was the first nation to enact a spending mandate).
[3] See The Companies Act, 2013 §135(1) (limiting the obligation to firms meeting certain net worth, turnover, or net profit annual thresholds); Companies Act, 2013 §135(2) (mandating the creation of the CSR committee and laying out its obligations); Companies Act, 2013 §135(5) (requiring at least 2% of average net profits be spent on CSR); Mukherjee et al., supra note 1 at 255 (listing the exact areas that spending must fall within to be counted towards the mandate, which include activities related to environmental sustainability, extreme hunger and poverty, and promoting gender equality and empowering women).
[4] Elizabeth George, Can Corporate Social Responsibility Be Legally Enforced?, Forbes (Oct 11, 2019), https://www.forbes.com/sites/uhenergy/2019/10/11/can-corporate-social-responsibility-be-legally-enforced/?sh=257fd7d03d44 (noting that, even though CSR is legally voluntary, increased consumer expectations have made it obligatory and prompted 85% of the companies on the S&P 500 Index to engage in CSR).
[5] See N. Craig Smith, When It Comes to CSR, Size Matters, Forbes (Aug. 2013), https://www.forbes.com/sites/insead/2013/08/14/when-it-comes-to-csr-size-matters/#22f53ab952a2 (discussing the reality that CSR is generally only associated with large companies).
[6] See Monika Kansal, et. al, Determinants Of Corporate Social Responsibility Disclosures: Evidence from India, 30 Advances in Accounting 217, 219 (2014) (discussing correlations between firm size and CSR engagement).
[7] See Companies Act, 2013 §135(1) (limiting the obligation to firms meeting certain net worth, turnover, or net profit annual thresholds).
[8] Lucia Gatti, et al., Are We Moving Beyond Voluntary CSR? Exploring Theoretical and Managerial Implications of Mandatory CSR Resulting from the New Indian Companies Act, 160 Journal of Business Ethics 961, 967 (2019).
[9] See Kansal, supra note 6 at 218 (discussing a 1991 study which evidenced that larger firms in India were more likely to engage in voluntary CSR).
[10] The duty of loyalty requires that directors act in the best interests of the corporation, which has consistently been interpreted as the best interests of the corporation’s shareholders. See Kevin V. Tu, Socially Conscious Corporations and Shareholder Profit, 84 Geo. Wash. L. Rev. 121, 132 (2016).
[11] See Eduardo Gallardo, On an Expansive Definition of Shareholder Value in the Boardroom, The CLS Blue Sky Blog (Oct. 22, 2019), https://clsbluesky.law.columbia.edu/2019/10/22/on-an-expansive-definition-of-shareholder-value-in-the-boardroom/#_ftn3 (discussing the legality of Delaware corporation’s consideration of stakeholder interests).
[12] See generally A.P. Smith Manufacturing v. Barlow, 13 N.J. 145, 98 A.2d 581, (1953) (holding that corporations are permitted to make substantial contributions where the activity being promoted reasonably promotes the goodwill of the business).
[13] See Mukherjee et al., supra note 1 at 255 (listing the exact areas that spending must fall within to be counted towards the mandate, which include activities related to environmental sustainability, extreme hunger and poverty, and promoting gender equality).
[14] Madhavi Kulkarni, A Study of the CSR Policies and Practices of Indian Companies, J. For Contemp. Research In Mgmt., Jan. 2015, at. 18.
[15] See generally Mukherjee et al., supra, note 1.
[16] See Afra Afsharipour, Redefining Corporate Purpose: An International Perspective, 40 Seattle U. L. Rev. 465, 467 (2017) (discussing the various ways that the Companies Act incorporated the interests of stakeholders).
[17] See Dhammika Dharmapala & Vikramaditya Khanna, The Impact of Mandated Corporate Social Responsibility: Evidence from India 's Companies Act of 2013, 7 (Coase-Sandor Working Paper Series in Law and Economics, No. 783, 2016), https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2482&context=law_and_economics.
[18] See Mukherjee et al., supra, note 13 at 256 (discussing the use of CSR as a means of gaining goodwill, which would be hurt by the requirement that all large companies engage in it).
[19] See Giovanna Michelon, The Marketization Of Social Movement: Activists, Shareholders, And CSR Disclosure, 80 Accounting, Organizations, & Society (2019) at 3 (stating that “[w]hile initially grounded on collective activism on CSR is now also described as ‘increasingly commodified, marketized, and shaped by the ideals and practices of business and finance.’”).