CORPORATE SOCIAL RESPONSIBILITY

What is Corporate Social Responsibility (CSR)?

Corporate Social Responsibility = Corporate + Social + Responsibility
In essence, CSR covers the relationship between corporations and the societies with which they interact
CSR also includes the responsibilities that are inherent on both sides of these relationships.
“CSR defines society in its widest sense, and on many levels, to include all stakeholders and constituent groups that
maintain an ongoing interest in the organisation’s operations.” – Werther, JR, William B., and David Chandler
“CSR is generally understood to be the way a company balances the economic, environmental and social aspects of its
operations, addressing the expectations of its stakeholders.” – Katsoulakos, Dr. P. and Y. Katsoulakos
“CSR is concerned with treating the stakeholders of the firm ethically or in a responsible manner, meaning treating
stakeholders in a manner deemed acceptable in civilised societies. The wider aim of social responsibility is to create
higher and higher standards of living, while preserving the profitability of the corporation, for people both within and
outside the corporation.” – Michael Hopkins
CSR is the continuing commitment by business to behave fairly and responsibly and contribute to economic
development while improving the quality of life of the work force and their families as well as of the local community
and society at large.” – European Union
The real meaning of CSR of a company should be undertaking all actions as would maximise the probability of its long
term survival and sustained growth.

Historical Context / Emergence of CSR

The roots of CSR lie in the 19th Century idea of ‘enlightened self-interest’ promulgated by British industrial
philanthropists such as Titus Salt, James and George Wilson, the Clark family, and the Cadbury brothers. In addition to
worker housing, their philanthropy extended to a range of public and social buildings, such as churches, shops, parks
and hospitals.
However, it was not until 1960s and 70s that formal corporate codes of conduct and environmental policies first
appeared in response to changing social and legal conditions in many northern countries.
The subject of CSR first emerged and came into prominence in the late 60s and early 70s in the US when few
multinational corporate bodies coined the term ‘stakeholders’ over and above the term ‘shareholders’ and in the list of
stakeholders, they included public as one of the stakeholders.
However, Nobel Prize Winner, Milton Friedman criticised CSR and stated that businesses should focus only on making
as much money for their shareholders as possible, and suggested that CSR was misuse of company’s resources, which
should only be used for the betterment of shareholders.
In the late 80s, the corporate sector in many countries was surrounded with problems of questionable corporate policies
or unethical practices.
It was the period when Junk Bond fiasco in US and Maxwell, BCCI, and Polypeck happened in UK (1991), which
resulted in the beginning of codes and standards on corporate governance, ethics and CSR.
The widespread corruption, lack of transparency and accountability during that period led to the rise of CSR.

Significance of CSR
1) Service to Society: According to Bhargava RC, “it is the duty of the company to undertake CSR activities because
company and society are mutually interdependent on each other. The health, stability, and prosperity of the communities
are a matter of concern for the company...the companies cannot succeed in a society which suffers from social unrest
like economic disparity, inequality and social injustice....the socially responsible companies are favoured by the public
and preferred for their goods and services.”

2) Balancing Act in Satisfying Company’s Stakeholders: CSR takes into account each and every stakeholder and
assumes the responsibility to improve their living by undertaking welfare programmes to create stable social
environment. CSR is a balancing act in satisfying the company’s stakeholders with the desire to act ethically and
contribute to the economic development and quality of life of the workforce, environment, community and society at
large.

3) Contribution to Long-term Sustainable Growth: It is in the interest of all the direct stakeholders that the company
should have long term sustainable growth, as closure of company would lead to disruption in the loves of many, and
often cause severe hardship to the weaker amongst stakeholders, including small shareholders. It is also in the interest
of workers that the company should have long term sustainable growth.

4) Protects Environment: Every manufacturing process causes damage to the nature by the exploitation of natural
resources and results in pollution and damage to the environment in many ways. Polluter must pay for the damage and
to repair the damage done to the nature.

CSR: An Emerging Power of Corporate Governance

CSR vs. Philanthropy
Philanthropy is giving of grants and donation, usually unrelated to an company’s social and environmental
responsibilities or its business objectives. The corporate donate huge amounts of money towards the cause which is not
part of the main business of the company by may add commercial value through reputation enhancement and also taken
as a strategy for publicity. E.g., donating computers to schools, staff volunteering to work with local community groups,
etc.
CSR is no longer restricted to philosophy. The corporate are focusing on CSR as an integral part of long term business
strategy and also addressing issues like poverty, healthcare, education, employment and environment degradation.

CSR vs. Corporate Responsibility

According to Institute of Corporate Responsibility (ICR), Malaysia, CSR means ad hoc doing good to dowell, whereas
CR means sustainable doing good to do well.
CR is about integrating responsible ad ethical practices in all aspects of a company’s operations.
• CR is wider than CSR because the former deals with issues of ethics, governance and environment in addition
to the social issues that are primary concern of the latter.
• Corporate Responsibility (CR) = Corporate Financial Responsibility (CFR) + Corporate Environment
Responsibility (CER) + Corporate Social Responsibility (CSR). – World Business Council for Sustainable
Development

CSR and Corporate Sustainability

World Commission on Environment and Development (Brundtland Commission) report in 1987 defined Corporate
Sustainability as development that fulfils the needs of the present without limiting the potential for meeting the needs of
future generations.
Pricewaterhouse Coopers defines corporate sustainability as meeting society’s expectations that company adds social,
economic and environment value from their operations, products and services.
World Business Council for Sustainable Development defines sustainable development as a form of progress that meets
the needs of the present without compromising the ability of future generations to meet their needs.
CSR defines the social responsibilities of a corporation which, if implemented, will lead to the corporation being
sustained. Thus, CSR is the beginning and CS is the ultimate, which implies that CSR is a tool to achieve sustainable
development and forms part of it.
Three pillars of corporate sustainability:
• The Environment Pillar or Planet;
• The Social Pillar or People;
• The Economic Pillar or Profits.

The Environment Pillar or Planet: companies focus on reducing their carbon footprints, packaging waste, water usage
and their overall effect on the environment.
• Companies have found that having a beneficial impact on the planet can also have a positive financial impact.
• Lessening the amount of material used in packaging usually reduces the overall spending on those materials.

The Social Pillar or People: A sustainable business should have the support and approval of its employees,
stakeholders and the community it operates in.
The approaches to securing and maintaining this support are various, but it comes down to treating employees fairly and
being a good neighbour and community member, both locally and globally.
On a global social scale, a business needs to be aware of how its supply chain is being filled. Is child labor going into
your end product? Are people being paid fairly? Is the work environment safe?
Many of the large retailers have struggled with this, as public outrage over tragedies like the Bangladesh factory
collapse, which have illustrated previously unaccounted for risks in sourcing from the lowest-cost supplier.

The Economic Pillar or Profits: To be sustainable, a business must be profitable.

• That said, profit cannot trump the other two pillars. In fact, profit at any cost is not at all what the economic
pillar is about.
• It is the inclusion of the economic pillar and profit that makes it possible for corporations to come on board
with sustainability strategies.
• The economic pillar provides a counterweight to extreme measures that corporations are sometimes pushed to
adopt, such as abandoning fossil fuels or chemical fertilisers instantly rather than phasing in changes.

CSR and Corporate Governance

• CSR and CG are positively related to the market value of the firm.
• The company must satisfy both the financial needs of the shareholders as well as the social, environmental and
economic needs of the stakeholders.
• An effective corporate governance system would prevent illegal actions against stakeholders whilst an
effective socially responsible corporate code would prevent actions which are legal but inappropriate because
of their consequences on some of their shareholders.

Reporting on CSR
Section 134(3)(o), Companies Act, 2013, provides that there shall be attached to financial statements laid before a
company in general meeting, a report by its board of directors, which shall include a report containing the details about
the policy developed and implemented by the company on CSR initiatives taken during the year.
A brief outline of the company’s CSR policy, including the statement of intent reflecting the ethos of the company,
broad areas of CSR interest and an overview of activities proposed to be undertaken should be provided in the report.
Weblink to CSR Policy should be indicated.
The CSR Policy should include the full list of projects, activities, programmes proposed to be undertaken by the
company.
The composition of CSR Committee should be given in the report.
Average net profit of the company for last 3 financial years should be given.
Following details of CSR activities or projects undertaken during the year should be given: total amount to be spent for
the year; amount carried forward from earlier years; amount spent during the year; amount carried forward for the year.
Report to be signed by CEO/MD/any director or chairman of CSR Committee.
A responsibility statement of CSR Committee should be given that the CSR policy implementation and monitoring
thereof is, in letter and spirit, in compliance with CSR objectives.
Penalty: between Rs. 50,000 – Rs. 25 Lakh, and every officer who is in default may be punished with imprisonment for
up to 3 years or fine between Rs. 50,000 – Rs. 5 lakh or both.

CSR Accounting
To assist with accounting of the expenditure on CSR activities, the Institute of Chartered Accountants of India (ICAI)
issued a Guidance Note on May 5, 2015 titled “Guidance Note on Accounting for Expenditure on Corporate Social
Responsibility Activities”
Ordinarily, expenditure on CSR activity is to be charged to statement of profit and loss based on it`s occurrence, and no
provision is required to be created for the expense to be incurred. In exceptional circumstances, the treatment will be
different.
All expenditure on CSR activities, that qualify to be recognised as expense should be recognised as a separate line item
as ‘CSR expenditure’ in the statement of profit and loss.
Further, the relevant note should disclose the break-up of various heads of expenses included in the line item ‘CSR
expenditure’.
The notes to accounts relating to CSR expenditure should also contain the following: (i) Gross amount required to be
spent by the company during the year; (ii) Amount spent during the year on construction/acquisition of any asset.

CSR Laws in India

Section 135, The Companies Act, 2013 makes CSR compulsory for all companies - government or private or otherwise,
provided they meet any one or more of the following fiscal criterions:
The net worth of the company should be Rs. 500 crores or more;
The annual turnover of the company should be Rs. 1000 crores or more;
Annual net profits of the company should be at least Rs. 5 crores.
If the company meets any one of the three fiscal conditions as stated above, they are required to create a committee to
enforce its CSR mandate, with at least 3 directors, one of whom should be an independent director.
The responsibilities of the above-mentioned committee will be:
Creation of an elaborate policy to implement its legally mandated CSR activities. CSR acts should conform to Schedule
VII of the Companies Act, 2013;
The committee will allocate and audit the money for different CSR purposes;
It will be responsible for overseeing the execution of different CSR activities;
The committee will issue an annual report on the various CSR activities undertaken;
CSR policies should be placed on the company’s official website, in the form and format approved by the committee;
The board of directors is bound to accept and follow any CSR related suggestion put up by the aforementioned
committee;
The aforementioned committee must regularly assess the net profits earned by the company and ensure that at least 2
percent of the same is spent on CSR related activities;
The committee must ensure that local issues and regions are looked into first as part of CSR activities.

CSR Activities Listed in Schedule VII Include

“eradicating hunger and poverty, promotion of education and employment, livelihood enhancement projects, promoting
gender equality, women empowerment, hostels for women and orphans, old age homes, day care, environmental
sustainability, protection of flora and fauna, contributions to PM relief fund, measures to benefit armed forces veterans,
war widows and dependants, promotion of sports, and rural development projects”.

Features of CSR in India

Net profits are calculated on the basis of Section 198 of Companies Act, 2013. However, only domestic branches are
included and dividend-related payments are left out of the final calculation of total net profits.
Companies are allowed to implement CSR via any of the following means possible.
Setting up a Trust or Society under Section 8 of the 2013 Companies act under its direct administrative control.
Corporates can outsource the CSR tasks to established social enterprises- institutions engaged in CSR activities for 3
years or more. These institutions are meant to engage in not for profit activities. The corporates though are supposed to
monitor the social enterprises meant to enforce their CSR mandate.
Companies can collaborate with fellow companies and work out some arrangement based on the CSR rules.
CSR activities should follow the below-mentioned rules:
Any familial activity or act of personal charity is not to be included as part of CSR activity.
Any sort of contribution-fiscal or otherwise by political organizations is outside the purview of CSR activities as
indicated under Section 182 of the 2013 Companies Act.
All CSR activities are to be conducted in Indian territory to be considered valid.
Companies can utilize a maximum of 5 percent of their total expenditure to help in capacity building of their society,
trust or outsourced social enterprise.
As stated before listed public companies are mandated to have up to 3 directors as part of their CSR committee- one of
whom should always be independent. Unlisted and private companies are allowed to have at least 2 directors and no
independent director.
CSR reports are to be compulsorily published on an annual basis. The reports have a fixed format as designed by the
CSR rules, which must include details like official CSR policy, the number of funds dedicated to CSR and its detailed
utilization as well as a detailed explanation for non-utilization of funds if any. The said format and its constituents must
be displayed on the official website of the company.
CSR activities initiated by a foreign company has to be via its Indian subsidiary to be considered legitimate under
Section 135 of the companies act.
Trusts created by companies to carry out their mandated CSR tasks, are to be compulsorily registered in some states
where it is mandatory under Income Tax, 1956.
Companies are allowed to co-operate with their independent counterparts, provided the latter has a proper tracking and
reporting system for CSR activities that may be undertaken.
Companies are allowed to engage in capacity building by allotting up to 5 percent of all expenses to be incurred on CSR
activities to be devoted to training and equipping of personnel to carry out CSR and related activities.
Activities that cannot be considered as CSR include:
Operational and administrative activities of the business.
CSR activities that do not take place in Indian territory.
Employee and familial welfare activities are strictly outside the purview of CSR tasks as well.
Fiscal help rendered to political outfits is not considered as a CSR activity as well.
Events like the marathon, award functions, fiscal help rendered to charitable institutions, sponsoring TV shows etc that
are strict “one-off”-i.e. meant to happen just once in a while are not considered CSR.
Companies cannot report lawful duties rendered under acts or regulation like Labour Act, Land act etc cannot be
considered as CSR tasks.