CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILITY (CSR)

THE SOCIETAL RESPONSIBILITY OF COMPANIES

Jayendra A Kasture

 LL.M (Business Laws)-Gold Medalist RTM Nagpur University, Nagpur Maharashtra, India

 Email id: jakasture@gmail.com

INTRODUCTION:

The voluntary compliance of social and ecological responsibility of companies is called Corporate Social Responsibility (CSR).  Corporate social responsibility is basically a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment. The Term Corporate Social Responsibility is imprecise and its application differs. CSR can not only refer to the compliance of human right standards, labor and social security arrangements, but also to the fight against climate change, sustainable management of natural resources and consumer protection.

While there is no universal definition of corporate social responsibility, it generally refers to transparent business practices that are based on ethical values, compliances with legal requirements, and respect for people, communities, and the environment. Thus, beyond making profits, companies are responsible for the totality of their impact on people and the planet.

With businesses focusing on generating profits, sustainability was not a popular concern among companies up until recently. Now, in an era of globalization, multinational corporations (those that conduct business in more than one country) and local businesses are no longer able to conduct destructive and unethical practices, such as polluting the environment, without attracting negative feedback from the general public. With increased media attention, pressure from non-governmental organizations, and rapid global information sharing, there is a surging demand from civil society, consumers, governments, and others for corporations to conduct sustainable business practices. In addition, in order to attract and retain employees and customers, companies are beginning to realize the importance of being ethical
while running their daily operations. The corporate response has often meant an adoption of 'a new consciousness', and this has been known as Corporate Social Responsibility (CSR) since the 1970s.

While corporate social responsibility can only be taken on by the companies themselves, employees, consumers and investors can also play a decisive role in areas such as working conditions, environment or human rights, in the purchasing of products from companies which already adopted CSR or in prompting companies to adopt socially responsible practices

UNDERSTANDING CSR:

Corporate social responsibility (CSR), also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business  is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. The goal of CSR is to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Furthermore, CSR-focused businesses would proactively promote the public interest (PI) by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality. CSR is the deliberate inclusion of Public Interest  into corporate decision-making, that is the core business of the company or firm, and the honoring of a triple bottom line: people, planet, profit.

BACKGROUND:

The term "corporate social responsibility" came in to common use in the late 1960s and early 1970s. The term stakeholder, meaning those on whom an organization's activities have an impact, was used to describe corporate owners beyond shareholders as a result of an influential book by R. Edward Freeman, Strategic management: a stakeholder approach in 1984.

Over the last years an increasing number of companies worldwide started promoting their Corporate Social Responsibility strategies because the customers, the public and the investors expect them to act sustainable as well as responsible. In most cases CSR is a result of a variety of social, environmental and economic pressures. Corporate social responsibility is represented by the contributions undertaken by companies to society through its business activities and its social investment. This is also to connect the Concept of sustainable development to the company’s level.

 Critics suggest that better governmental and international regulation and enforcement, rather than voluntary measures are necessary to ensure that companies behave in a socially responsible manner.

NEED:

We all have a personal responsibility to each other and the world around us. Everything we do has an effect on other people. It is the same for businesses, large and small, public or private, that their actions affect a large number of stakeholders. 

A strong CSR program is an essential element in achieving good business practices and effective leadership. Companies have explored that their impact on the economic, social and environmental sector directly affects their relationships with investors, employees and customers. As companies face themselves in the context of globalization, they are increasingly aware that Corporate Social Responsibility can be of direct economic value. Although the prime goal of a company is to generate profits, companies can at the same time contribute to social and environmental objectives by integrating corporate social responsibility as a strategic investment into their business strategy.

A number of companies with good social and environmental records indicate that CSR activities can result in a better performance and can generate more profits and growth. Research has shown that company CSR programs influence to an extensive degree consumer purchasing decisions, with many investors and employees also being swayed in their choice of companies.

 CSR represents "the integrity with which a company governs itself, fulfills its mission, lives by its values, engages with its stakeholders, measures its impact and reports on its activities". 

Companies are now expected to perform well in non-financial areas such as human rights, business ethics, environmental policies, corporate contributions, community development, corporate governance, and workplace issues. Some examples of CSR are safe working conditions for employees, environmental stewardship, and contributions to community groups and charities   

INDIAN SCENARIO:

In India there are an existent but small number of companies which practice CSR. This engagement of the Indian economy concentrates mainly on a few old family owned companies, and corporate giants  such as the Tata and Birla group companies which have led the way in making corporate social responsibility an intrinsic part of their business plans. These companies have been deeply involved with social development initiatives in the communities surrounding their facilities. Jamshedpur, one of the prominent cities in the northeastern state of Bihar in India, is also known as Tata Nagar and stands out at a beacon for other companies to follow. Jamshedpur was carved out from the jungle a century ago. TATA’s CSR activities in Jamshedpur include the provision of full health and education expenses for all employees and the management of schools and hospitals. The Tatas, through their various trusts in early nineteenth century, showed the way to the rest of the world in terms of working hours and social security measures, earning them goodwill for many future decades.

In spite of having such life size successful examples, CSR in India is in a very nascent stage. 

Post-1990, India adopted a policy of liberalization and many Multi and Trans National Corporations (MNCs/TNCs) made forays into the growing Indian market. Very few foreign companies had a robust CSR programme nor were they known for responsible practices – in fact the practice of double standards was rampant where companies took advantage of weak regularity environments to get away with shoddy goods and weak consumer services.

In 1984, the Union Carbide gas leak in Bhopal led to one of the most irresponsible industrial accidents and many lives were lost. This led to one of the longest litigations, resulting in the company paying inadequate compensation for the accident. Clothing group GAP was found with child labour in their outsourced supply chains leading to debates on the use of exploitative child labour in carpets, garments and sports goods. McDonald’s gave universal access the go by in their outlets in India and their use of beef tallow led to public uproar. Vedanta was found violating environmental laws with far-reaching adverse impacts for tribal communities settled in Niyamgiri and other examples of failure in corporate governance continued.

The Prime Minister’s “Social Charter” called for inclusive growth & affirmative action from the corporate sector. In December 2009 voluntary CSR guidelines were issued by the Ministry of Corporate Affairs .

India has 37.2% of its population as per the Planning Commission living below the poverty line, an agrarian and water crisis, income disparities and lack of access to basic necessities, therefore as country it requires calls for action from all stakeholders including the corporate sector which can respond with not just financial resources but also with strategies, tools & management techniques that can address development priorities in the country.

REGULATORY FRAMEWORK:

The Companies Bill 2009, which is likely to be tabled in the forthcoming budget session, has proposed that companies will have to earmark 2% of their average net profits during the preceding three years for corporate social responsibility spending or disclose to their shareholders if they fail to do so.

The government had earlier taken a similar stance before the Parliamentary Standing Committee on Finance. It had told the panel that it could ask companies having a minimum net worth of Rs 500 crore, or an annual turnover of Rs 1,000 crore, or a net profit of Rs 5 crore in a year to spend at least 2% of their average net profit during the three preceding fiscal years on CSR. However, later the ministry diluted the proposal following intense lobbying from the industry.

In an earlier presentation to the government, the Confederation of Indian Industry had demanded that the new law should not specify an amount to be spent on CSR, and that a decision on the actual spend be left to company boards. The industry body had suggested that CSR should be voluntary and backed by a system of state recognition and honour.

To check non-compliance, the parliamentary committee had recommended separate disclosures by companies in their annual reports through a CSR statement indicating the company policy as well as specific steps taken.

APPROACHES:     

 
Community-based development:

 An approach for CSR that is becoming more widely accepted is a community-based development approach. In this approach, corporations work with local communities to better themselves. For example, the Shell Foundation's involvement in the Flower Valley, South Africa. In Flower Valley they set up an Early Learning Centre to help educate the community's children as well as develop new skills for the adults. Marks and Spencer is also active in this community through the building of a trade network with the community - guaranteeing regular fair trade purchases. Often activities companies participate in are establishing education facilities for adults and HIV/AIDS education programmes.

Philanthropy:

A more common approach of CSR is philanthropy. This includes monetary donations and aid given to local organizations and impoverished communities in developing countries. Some organizations do not like this approach as it does not help build on the skills of the local people, whereas community-based development generally leads to more sustainable development.

Incorporate the CSR strategy directly into the business strategy of an organization

 Another approach to CSR is to incorporate the CSR strategy directly into the business strategy of an organization. For instance, procurement of Fair Trade tea and coffee has been adopted by various businesses including KPMG. Its CSR manager commented, "Fairtrade fits very strongly into our commitment to our communities.

 Creating Shared Value:

 Another approach is garnering increasing corporate responsibility interest. This is called Creating Shared Value, or CSV. The shared value model is based on the idea that corporate success and social welfare are interdependent. A business needs a healthy, educated workforce, sustainable resources and adept government to compete effectively. For society to thrive, profitable and competitive businesses must be developed and supported to create income, wealth, tax revenues, and opportunities for philanthropy.

ARGUMENTS AGAINST CORPORATE SOCIAL RESPONSIBILITY:

Of course, one of the challenges in considering cases "for" and "against" CSR is the wide variety of definitions of CSR that people use. We assume here we are talking about responsibility in how the company carries out its core function - not simply about companies giving money away to charity.

Below are some of the key arguments most often used against CSR.

a)      Businesses are owned by their shareholders - money spent on CSR by managers is theft of the rightful property of the owners.

b)      Our company is too busy surviving hard times to do this. We can't afford to take our eye off the ball - we have to focus on core business.

c)      It's the responsibility of the politicians to deal with all this stuff. It's not our role to get involved

d)      I have no time for this. I've got to get out and sell more to make our profit line.

However valid these arguments may be, they have been silenced by the overwhelming majority of those in favor of CSR (NGOs, businessmen and academics), and the benefits it can provide to society.

CRITICISMS:

Critics of CSR as well as proponents debate a number of concerns related to it. These include CSR's relationship to the fundamental purpose and nature of business and questionable motives for engaging in CSR, including concerns about insincerity and hypocrisy.

It is argued that a corporation's purpose is to maximize returns to its shareholders, and that since only people can have social responsibilities, corporations are only responsible to their shareholders and not to society as a whole. Although they accept that corporations should obey the laws of the countries within which they work, they assert that corporations have no other obligation to society.

MAKING THE CASE FOR CORPORATE SOCIAL RESPONSIBILITY:

Corporate social responsibility is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large to improve their lives in ways that are good for business and for development.

 However, there is no set definition of CSR to which all agents follow, and this has led to confusion regarding what, if anything should be expected of companies in the area of social responsibility. Whatever way it is defined, it assumes that a company is responsible for its wider impact on society, not merely the return to stockholders.

From a more objective viewpoint, there are several reasons why firms should practice CSR, such as:

a)       to balance corporate power with responsibility;

b)      discourage creation and imposition of government regulations;

c)      to help correct negative externalities, many of which are created by corporations and

d)      a sense of moral obligation of firms to help society deal with its problems and to contribute to its welfare.

In a world where 51 of the 100 largest economies in the world are corporations, it behooves these corporations to take on responsibilities that are similar to those of governments.

It is a tricky position for CEOs of companies to decide whether or not they should do CSR, and it is a difficult business decision to anticipate a consumer’s reaction to such practices. More and more, companies have to deal with the prevalence of CSR advocates, and to take their responsibility and role in society seriously. Perhaps this is the most conclusive argument that can be made in favor of CSR at this time. Today more and more companies are realizing that in order to stay productive, competitive and relevant in a rapidly changing business world, they have to become socially responsible.

Hence we all have a personal responsibility to each other and the world around us. Everything we do has an effect on other people. It is the same for businesses, large and small, public or private, that their actions affect a large number of stakeholders. Such stakeholders include customers, shareholders, employees, suppliers and society in general.

The content of this article is intended to provide general information to the subject matter.

                                                                         

Understanding Law , Legal Concepts.

THEORIES OF CORPORATE PERSONALITY

Jayendra A Kasture

 LL.M (Business Laws)-Gold Medalist RTM Nagpur University, Nagpur Maharashtra, India

 Email id: jakasture@gmail.com

BACKGROUND:

Generally there are two types of persons which law recognizes namely the natural and artificial person. The natural is confined merely to human beings and the artificial person is generally referring to any being other than human which the law recognizes as capable of having rights and duties.

Scholars all over have constantly explored the issue on the recognition of corporation as a “legal person” or “legal entity”. The House of Lords in Salomon v A Salomon & Co ltd is often credited with the principle of separate legal entity of the corporation distinct from the members.

HISTORY:

In the common law tradition, only a person could sue or be sued.  This was not a problem in the era before the Industrial Revolution, when the typical  business venture was either a Sole Proprietorship or Partnership- here the owners were simply liable for the debts of the business. A feature of the corporation, however, is that the owners / shareholders enjoyed limited liability. The owners were not liable for the debts of the company. Thus, when a corporation breached a contract or broke a law, there was no remedy, because limited liability protected the owners and the corporation wasn’t a legal person subject to the law. There was no accountability for corporate wrong doing.

To resolve the issue, legal scholars proposed a solution. A corporation could instead be considered a person, and could therefore be recognized and held subject to the law. This understanding was not only adopted by the courts but also by the legislatures. Thus, legislatures intentionally used the word ‘person’ to include both natural persons and juristic persons.

ARTIFICIAL / JURISTIC / LEGAL PERSON: CORPORATE PERSONHOOD

A juristic person is an artificial entity through which the law allows a group of natural person to act as if it were a single composite individual for certain purposes. Unlike a partnership firm, which has no existence apart from its members, a company is a distinct legal or juristic person independent of its members. Legal persons are real or imaginary beings to whom personality is attributed by law by way of fiction where it does not exist in fact. Juristic persons are also defined as those things, mass of property, group of human beings or an institution upon whom the law has conferred a legal status and who are in the eye of law capable of having rights and duties as natural persons.

This legal fiction does not mean these entities are human beings, but rather means that the law recognizes them and allows them to act as natural persons for some purposes most commonly for lawsuits, property, ownership and contracts. In England, US and also in India the use of this terminology (juristic person) does not mean that artificial legal entities are considered human beings. Its simply a “technical legal meaning” where a person is any subject of legal rights and duties. To distinguish them from natural persons, we call them juristic persons…eg cooperatives, corporations, municipalities etc.

A juristic person is sometimes called a legal person, artificial person or legal entity. Although the concept of a juristic person is more central to western law as well as common law and civil law countries, it is also found in virtually every legal system.

JURISPRUDENTIAL THEORIES: CORPORATE PERSONALITY

The separate legal personality of corporation is based upon theories which are concentrated upon the philosophical explanation of the existence of personality in beings other than human individuals.

In jurisprudence, discussion on the nature of corporate personality has always become one of the major focuses. Even though there are many theories which attempt to explain the nature of corporate personality, none of them is said to be dominant. It is contented that while each theory contains elements of truth, none can by itself sufficiently interpret the phenomenon of a juristic person. This paper highlights two principal theories which are generally applied to explain corporate personality and confer the justification for recognition of corporation as a legal personality.

The acceptance of the corporate personality of a company basically means that another non-human entity is recognized to assume a legal entity. Although this theory has been accepted as a well-established principle it is actually essentially a metaphorical usage of language, clothing the formal group with a single separate legal entity by analogy with a natural person.

Majority of the principal jurisprudence theories on corporate personality contented that the legal entity of the corporation is artificial. The fiction, concession, symbolist and purpose theories supported the contention that existence of corporation as a legal person is not real. It only exists because the law of the state recognized it as legal person and it is recognized either for certain purpose or objective.  The fiction theory for example clearly stated that the existence of corporation as a legal person is purely fiction and that the rights attached to it totally depend on how much the law imputes upon it by fiction.

Even though there are many theories which attempted to explain the nature of corporate personality none of them is said to be dominant. It is claimed that each theory contains elements of truth; none can by itself sufficiently interpret the phenomenon of juristic person. Nonetheless the paper highlights two principal theories which are used more amongst others to explain corporate personality, namely the fiction theory and the realist theory.

FICTION THEORY: Promulgated by Pope Innocent IV (1243-1254).

According to this theory the legal personality of entities other than human beings is the result of a fiction. Hence not being a human being corporation cannot be a real person and cannot have any personality of its own. Under this theory rights and duties attached to corporation as artificial person totally depend on how much the law imputes to it by fiction. The juristic personality of the corporation is a fiction and the author is the state. The personality the corporation enjoys is not inherent in it but as conceded by the state. Due to the close connection made in this theory as regards to relation of legal personality and the power of the state, fiction theory was claimed to be similar to the theory of sovereignty of state which is also known as the concession theory.

This theory is supported by many famous jurists, particularly, Von Savigny, Coke, Blackstone and Salmond. Sir John Salmond is of the view that a corporation is so far distinct from its members that it is capable of surviving even the last of them.  One of the distinguished followers of fiction theory is Coke, who took the view that corporations are invisible, immortal and resting only in intendment and consideration of law. Salmond the principal English fiction theory advocate made it clear that a human being is the only natural person whilst legal person govern any subject matter other than a human being to which the law attributes personality. States, corporations and institutions cannot have rights of a person but they are treated as if they are persons.

Under the fiction theory, to exist as a legal person it depends upon impediment of law. The fiction theory has a reasonable reasoning to justify the position of unincorporated associations and partnerships. Therefore, partnerships and unincorporated associations can also be treated as a legal person if the law granted to them such status. In Scotland and Continental European countries, as the law granted partnership a legal entity, then it exists as a legal person but the position is not so in England and also in India, even though its partnership have similar attributes to partnership in Scotland and Continental European countries, it is not an entity because the law of England and of India refused to grant such status to partnership.

The fiction theory reasoning is able to justify that the existence of a legal person does not solely belong to corporations. Hence it is possible for other organizations to be treated as an entity provided that the law granted it such recognition.

This finding is vital to justify that the concept of separate legal entity in corporation is not an exclusive right of corporations. The corporate personality of corporation which granted it the right to be treated as legal person is actually a mere metaphor and not real. To be a legal person, it does not actually depend upon incorporation but on the recognition of law of the land.

THE REALIST THEORY: JOHANNES ALTHUSIUS

According to this theory, a legal person is a real person. The theory assumes that the subjects of rights need not belong merely to human beings but to every being which possesses a will and life of its own. As such being a juristic person and as alive as the human being, a corporation is also subjected to rights. Under this a corporation exists as an objectively real entity and the law merely recognizes and gives effect to its existence. The realist jurists also contended that the law has no power to create an entity but merely having the right to recognize or not to recognize an entity.

Gierke the great German jurist was the main propounder of this theory. He believed that every collective group has a real mind, a real will and a real power of action. A corporation therefore has a real existence irrespective of the fact whether it is recognized by the State or not. The corporate will of the corporation finds expression through the acts of its Directors, employees or agents. The existence of a corporation is real and not based on any fiction. It is a psychological reality and not a physical reality.

Apart from these two important theories we have the Concession, Symbolist and Purpose theories which supported the contention that existence of corporation as a legal person is not real.

The Concession theory:  Theory of Sovereignty of State

            According to this theory, the only realities are the sovereign and the individual. The other groups cannot claim recognition as persons. They are treated as persons merely by a concession on the part of the sovereign. The theory is often regarded as the offspring of the fiction theory as it has similar assertion that the corporations within the state have no legal personality except as it is conceded by the State. Due to the close connection made in this theory as regards to relation of legal personality and the power of the State the Concession theory is also known as the theory of sovereignty of State.

Therefore concession theory is basically linked with the philosophy of the sovereign national State. Under this theory the State is considered to be in the same level as the human being and as such it can bestow on or withdraw legal personality from other groups and associations within its jurisdiction as an attribute of its sovereignty. Hence a juristic person is merely a concession or creation of the State.

The Symbolist theory: the Bracket theory--Ihering

            According to this theory the members of a corporation are the bearers of the rights and duties which are given to the corporation for the sake of convenience. The theory is similar to the fiction theory in that it recognizes that only human beings have interests and rights of a legal person. It is not always practicable or convenient to refer to all the innumerable members of a corporation. A bracket is placed around them to which a name is given. That bracket is the corporation.

            According to Ihering, the propounder of this theory, the conception of corporate personality is indispensable and merely an economic device by which simplify the task of coordinating legal relations. Hence when it is necessary it is emphasized that the law should look beyond the entity to discover the real state of affairs. This is clearly in line with the principle of lifting of the corporate veil.

The Purpose theory: Brinz

According to this theory juristic person is no person at all but merely as a subjectless property destined for a particular purpose and that there is ownership but no owner. Entities other than human is regarded as an artificial person and merely functions as a legal device for protecting or giving effect to some real purpose.

Brinz the German jurist has propounded this theory which is similar to the fiction and concession theory as it declares that only human beings can be persons and have rights. The theory rationalized the existence of many charitable corporations or organizations such as trade unions which have been recognized as legal persons for certain purposes.

APPLICABILITY OF THEORIES:

From the discussion on the two important jurisprudence theories and the other theories, on corporate personality, it is observed that the main argument is that, the fiction theory claimed that the entity of corporation as a legal person is merely fictitious and only exists with the intendment of the law. On the other hand from the realist point of view the entity of the corporation as a legal person is not artificial or fictitious but real and natural. The realist also contended that the law merely has the power to recognize a legal entity or refuse to recognize it but the law has no power to create an entity.

The personality of the corporation is different from that of its members. It is observed therefore that there is double fiction in the case of a corporation. By one fiction the corporation is given a legal entity. By the second fiction, the corporation is clothed with the will of an individual person. Hence the fictitious personality of the corporation comes to have a will of its own which is different from that of its members.

It is also observed that fiction theory provide the most acceptable reasoning in justifying the circumstances whereby court lifted the corporate veil of corporation. If the entity of the corporation is real then the court would not have the right to decide the circumstances whereby the separate legal entity of the corporation should be set aside. No human being has the right to decide circumstances whereby the entity of another human being should be set aside. Only law has such privilege.

PARTNERSHIP & UNINCORPORATED ASSOCIATIONS:

Before concluding the discussion on incorporation, it would be desirable to contrast it with unincorporated associations and partnership. The fiction theory has a reasonable reasoning to justify the position of unincorporated associations and partnerships. Under the fiction theory to exist as a legal person it depends upon impediment of the law. Therefore, unincorporated associations and partnerships can also be treated as legal persons if the law granted to them such status. In Scotland and Continental European countries, as the law granted partnership a legal entity, then it exists as a legal person but the position is not so in England and also in India, even though its partnership have similar attributes to partnership in Scotland and Continental European countries, it is not an entity because the law of England and of India refused to grant such status to partnership.

Today the development of partnership laws has proved that the status of legal person can also be embraced by partnerships. The limited liability partnership (LLP) structure is an example of partnerships which are treated by law as legal persons. Other than having separate legal personality from the partners limited liability partnerships also enjoy main attributes of corporation namely limited liability. Applying the fiction theory again this is justifiable as the attributes of corporation are not naturally generated by corporation by it but exists because they are granted by the law to corporations, then once the law granted the entity as legal person and attributes of corporation to limited liability partnership, it can act similar to corporations.

CONCLUSION:

From the foregoing analysis it may be concluded that incorporation has great importance because it attributes legal personality to non-living entities such as companies, institutions and group of individuals which helps in determining their rights and duties. Clothed with legal personality these non-living entities can own, use, dispose of property and can sue and be sued in their own names. Unincorporated institutions are denied this advantage because their existence is not different from the members.

Thus the existence of corporation requires a special legal framework and body of law that specifically grants the corporation legal personality, and typically views a corporation as a fictional person or a legal person. As such corporate statutes typically give corporations the ability to own property, sign binding contracts, pay taxes in a capacity that is separate from that of its shareholders.

Finally expressing these views about the two important theories of legal personality, it can be observed that the existence of corporation is neither wholly fictitious nor wholly real, instead it is partly fictitious and partly real. However this assertion hardly serves any useful purpose in the determination of rights and duties of corporate entities. On each theory the duties imposed by the State are the same and the persons on whose actual wills those duties are enforced are same, hence it would not be incorrect if contended that the difference between the fiction theory and the realist theory is merely verbal.