EE Unit 1: Introduction of CSR 9 social or economic This introduces An organization is a system with an objective of attaini end through legal means and by being socially responsible. the concept of Corporate Social Responsibility (CSR) in which organizations and corporations create wealth from the society, and share the profits with it too. It is a responsibility which must be fulfilled by corporations in light of changing regulations hence it becomes important to understand the concept, philosophy, implementation, challenges and future scope of CSR through this. preparatory material 1.1 Understanding the importance of responsible living Being responsible implies an ethical and sensitive behavior by the people and| organizations towards social, economic, cultural and environmental issues When individuals, organizations and governments strive for social responsibility they tend to have a positive impact on business, development SEVIS CHF and society and also contribute to bottom-line results positively Ss Leave = Message Previous Next4.2 Individual Social Responsibility (ISR) achieves Corporate Social Responsibility (CSR) The ISR concept is as old as The Golden Rule — “Do unto others as you woul have them do unto you”. ISR promotes a proactive stance towards positively influencing and affecting the people and environment in and around one’s immediate circle jon is Comprised of individuals and hence ISR determines the culture of social responsibility it creates. Individuals are increasingly becoming socially responsible and, thus, Corporations and Companies are required to become more socially responsible to meet demands. The International Organization for Standardization (SO) states: “In the wake ¢ increasing globalization, we have become increasingly conscious not only of what we buy, but also how the goods and services we buy have been produced. Environmentally harmful production, child labor, dangerous working environments and other inhumane conditions are examples of issues being brought into the open. All companies and orof Ss Leave = Message a} aa : Hin weebeing brought into the open. All companies and organizations aiming at long- term profitability and credibility are starting to realize that they must act in accordance with norms of right and wrong. Many organizations exist to make money. There are others who are serious about giving back to the society and provide a required service to a community or to the world. Each of these organizations have a corporate responsibility towards its shareholders, customers, employees, to the public, and the world it trades in. The public has now become much more globally aware There are a number of groups that have been moni a] 5 9 corporations clos groups that have been monitoring corporations closely. These groups are the ones concerned about the conditions of the world like the social issues of the world, labor laws, exploitation of workers, environmental issues, like the ution, etc rainforests disappearing, desertification, pol Large global corporations are aware of people watching them and that any of their wrongdoings will not go unnoticed. Many corporations have forcefully ae acl) taken up corporate responsibility. For them, it does not make good business sense to be perceived as a company that damages our world. Huge penalties and fines also loom corporations who do not adhere to ethical and environmental laws Ss Leave = Message—————— a * A recent report indicated that majority Investors are now willing to invest in a corporation that has depicted corporate responsibility. Investors are fully aware of the strength of customer opinion regarding unethical companies. The customer is now in a better position to shape corporate responsibil than ever before. Previous Next Ema] ISE 2 Wy people etre ps NEE © 5 esrandustainablity com/-3-uhy-people-beiove 1.3 Why people before profits? People before profits is an expectation rather than a philosophy that the public has. Some business owners find this a difficult concept because they primarily desire profits. However, the irony is that putting people first can actually prove to be profitable for an organization. oI a a v x 6 pe A business can begin putting people before profit by creating a mission, or business philosophy, based on the key benefit of the service or product it sells. ee Reel ( i]; 2G bam CRE ® 12 Wy people Detore pr © esandsustainablty com/1-5-uhy-people-beore- pets ice ay An organization is in a business to solve people’s problems and to provide them what they demand. In exchange they pay the organization. Rephrasing it, primary task is determining how the organization is helping people, and then seeking to achieve that particular solution in each transaction. For instance, by selling chocolates the purpose of an organization is to make people happy. By selling accounting services, the purpose of an organization is to provide people with the information they require to take sound decision: An unhappy customer for whatever reason deserves his money back - no contention on that. Business that focus on delivering the benefit promised and not profits, will definitely end up with a healthy bottom line. Taking IX RENCE; 2G bam _t____{$ii, Te) © esandsustainablty com/1-5-uhy-people-beore- pets ice ay Business that focus on delivering the benefit promised and not profits, will definitely end up with a healthy bottom line. Taking forward, employees have now been regarded as Human Capital. Fun is becoming a signature characteristic attributed to people-centric management; an approach that put| employees ahead of the bottom line. A recent American Management Association study indicated that such workplace culture is less vulnerable to market fluctuations or economic cycles. Making things fun is essential as proved by financials that organizations can’t provide a premium service and charge accordingly without a happy, motivated employee workforce. People centric organizations take care of their employees, put them before their profits. They hav@i©M eee: (; 2G bam _t____{$ii, Te) © 5 esandsustainabality com/1-3-uhy-peopie-b employees, put them before their profits. They have realized that they can’t satisfy customers with employees who are freaked. They cut into profits, buta 3 to 5 percent raise makes a huge difference to the employees and the cost will be realized manifold via loyalty and quality service. People-centric organizations also realize that managers are the most effective leaders in tough times. Management is by way of inclusive decision making and open door policies. They don’t sacrifice training in turbulent times. IT is essential that employees understand and connect with the company’s strategy to their daily activities, while striving for enhanced performance and client retention. Hence, the market would not dictate an organizatiol effort towards engaging employees, improving cult CTTa Se 12 Wy pete etre 9) er So GT a © 5 esrandsustainablity com/-3-uhy-people-beove-prt ie a Hence, the market would not dictate an organization’s culture if it puts in effort towards engaging employees, improving culture, and thus, being better prepared for the next crunch. oI a a v x 6 pe Previous Next ee Reel ( i]Se ED © 1 Defiwton of CSR} Cs: € > © A csandsustanabitycom/1-tdeincon-oky ce ay 1.4 Definition of CSR The fundamental principle of corporate social responsibility is based on the idea that not only public or government policy but companies too should tak responsibility for different social issues where companies voluntarily integrat the social and environmental concerns into their business operations along with the interaction with their stakeholders. A socially responsible company should do more than to just comply with the law when investing in the humai resources and environment and give back to the community in which it operates. According to the EU Commission, eee: (; 2G bam ES © 4 Deion of CSR] Ca: © 5 csandsustaiabity com’ -tdetinon-ohci7 a ce ay 66 “CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.” Some people differ with the philosophy of social performance of a business ig desirable and think that corporation should not be concerned with social responsibility. In line with the same idea, Milton Friedman, said that: ¢€ = “There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fram] eee: (PS meng revere cast_x |S seepmeney an a # toetrnoearcen © = eevee _ SPIO crcsuanany conden Seis eer ae aE Some people believe CSR is conditional and in 2001, Mori being ambivalent said: 6 “Whether or not business should undertake CSR, and the forms that responsibility should take, depends upon the economic perspective of th firm that is adopted.” The term Corporate Social Performance was first coined by Sethi in 1975, th expanded by Carroll in 1979 and finally refined by Wartick and Cochran in 1985. Sethi gave three tiers of behavior of CSR which are: * Social obligation - a response to legal and mark ee Reel (Me NN EEE es a © 5 csrandsustanabliy com -t-etinson-otsi ie a « Social obligation - a response to legal and market constraints « Social responsibility - congruent with societal norms « Social responsiveness - adaptive, anticipatory and preventive oI a a v x 6 pe Previous Next ee Reel ( i]ap an € > © csandsustanabitycom/1-4-1-dimensionsots cel ay 1.4.1 Dimensions of CSR There are three dimensions with which we can characterize the concept of CSR: « The self-regulation approach is characteristic of most company-related initiatives. In this case, companies decide about how they want to go abot engaging in CSR and what measures they should take to implement it. Here the role of government is limited as the initiatives are taken by the company itself so its liability is very limited. + In legal regulation, the government is the most eee: (; 2G bam ES © 41 Devensiors ofCSR| © 5 csrandsustaably cm nt--ainersions-oFs a cel ay « In legal regulation, the government is the most important player. In this i the legal commitments are enforced on the companies by the government. So the CSR work by the companies depend on their code of conduct or their values along with the legal instruments of the government Multi-stakeholder initiatives are located between the two extremes and can be defined conceptually as co-regulation approaches in which stakeholders are involved in a company’s CSR policy-making process. In this, NGOs, business associations, governmental organizations and multilateral institutions, among others, work together in a constructive manner to achieve complementary goals in the CSR process Taking into account the beneficiaries of CSR, it can 7] eee: (; 2G bam ES © 41 Devensiors ofCSR| © 5 csrandsustaably cm nt--ainersions-oFs cel ay Taking into account the beneficiaries of CSR, it can divided into two parts: « Internal CSR - where workers, shareholders and investors are the beneficiaries « External CSR - where communities, civil society groups, other companies or institutions are the main beneficiaries In India as in the rest of the world there is a growing realization that busines cannot succeed in a society which fails. An ideal CSR has both ethical and philosophical dimensions, particularly in India where there exists a wide gap between sections of people in terms of income and standards as well as socio- economic status (Bajpai, 2001). According to InfosygiM eee: (A EEE ————eeeEeEEOEEeeEeEeEeEeEeEeEeEeEeEeEeEeEeEeee es C | exandutarablycom- rennet a i ie a between sections of people in terms of income and standards as well as socio- economic status (Bajpai, 2001). According to Infosys founder, Narayan Murthy, 6¢ ‘Social responsibility is to create maximum shareholders value working under the circumstances, where it is fair to all its stakeholders, worker: consumers, the community, government and the environment” Previous Next i] ee Reel (PO mene revereti cast _x | # seepewenyan nt sean otc Go = eee _ € > X 1 csandsustanabitycom/1-s-evoluion-o ies a 1.5 Evolution of CSR India has witnessed a rich history of close involvement of businesses in social causes for national development. The tradition of corporate philanthropy had} been practiced since late 1800s. In 1900s, socially responsible business practices took different forms - seal) « Philanthropic donations or charity « Servicing the community « Enhancing employee welfare Promoting religious conduct ee Reel ( i]; 2G bam SRE * 1S Hohston of CSR | Coe © cstandsustaiablity com -S-volton-o-0) cee ay The CSR ideology in the 1950s was primarily seen as an obligation of business towards the society. To a growing degree it was realized that the companies which had genuinely paid attention to behaving in a socially responsible manner were also favored by the general public and preferred in terms of the} goods and services, thus, giving rise to the concept of CSR. By the last decade of the twentieth century, India witnessed a swing which differed from charity and traditional corporate philanthropy and was more towards direct business engagement in mainstream development and concern for disadvantaged societal groups. The driving force behind this has been both internal, or the corporate will, and external, or pogros a and public expectations. Today, the companies and OC oer)ee SE © FohNon of C52 | C2s € 9 © A csandsustanabitycom/1-s-evoision-es DUUT Miter tial, UF Ue CUrpOrdte WIT, aN1U EXLETTAL, OF IICTEASEU YUVETTIMTET Lat ; and public expectations. Today, the companies and stakeholders are moving towards adaptation of some aspects of the mainstream agenda, like integration of CSR into their business practices and processes as well as engagement in multi-stakeholder dialogues. lei4 models India’s political and economic history must be taken into account while comprehending the current state and future prospects of CSR as well as the role of the UNGC in India. With this background, according to Sundar (2000), the CSR development in India can be divided into fo Oeyey 2 PckGen of CHE) Cas x € 9 © A csandsustanabitycom/1-s-evoision-es ee ay the CSR development in India can be divided into four primary phases. These phases run parallel to India’s historical development and resulted in varied CSR practices. However, the phases are not static, and features of one phase can overlap with that of the others, as evident from the last phase. a) First phase: CSR motivated by charity and philanthropy The first phase of CSR was predominantly determined by culture, family tradition, religion and industrialization. Operations and CSR engagement for corporations were mainly based on corporate self-regulation. This being the oldest form of CSR, charity and philanthropy still comtip B practices, especially in terms of community develop aMBLCO MOE COOL)ay i € 9 © A csandsustanabitycom/1-s-evoision-es ice practices, especially in terms of community development. In the 1850s, merchants had committed themselves to the society for religious purposes, sharing their wealth by building temples, etc. In the 19th century in India, the pioneers of industrialization were a few families such as the Tatas, Birlas, Godrej, Shriram, Singhania, Lalbhai, Sarabhai, Mahindra, Modi, Bajaj and Annamali. These business houses were strongly devoted to philanthropically motivated CSR. Nevertheless, they also had business considerations influenced by caste groups along with political objectives. eee: (ay i €.9 © [0 crundusababtnjcom clan Te In this phase, the underlying pattern of charity and philanthropy indicated that entrepreneurs sporadically donated money (e.g. to schools or hospitals) without any concrete long-term engagement in mind. CSR focused on such external stakeholders as communities and general social welfare bodies. b) Second phase: CSR for India’s social development The second phase of CSR in India (1914-1960) was dominated d by the struggle for independence. It was influenced fundamentally by Ga trusteeship, with an aim to consolidate and amplify MRCSee SE © FohNon of C52 | C2s € 9 © A csandsustanabitycom/1-s-evoision-es cans trusteeship, with an aim to consolidate and amplify social development. i During the struggle, Indian businesses actively engaged in the reform process. They not only perceived country’s economic development as a protest agains the colonial rule but also participated in the institutional and social development. The corporate sector’s involvement was stimulated by the visio of a modern and free India. Under the notion of trusteeship, businesses (especially the well-established family businesses) had set up trusts for schools and colleges as well as established training and scientific institutes. The corporate heads largely eee: (a eS ¢ Sees: € FC 5 csandsustanabitycom/1--evoision-t Fie ae oe nee alain aligned the activities of their trusts with Gandhi’s reform programs like the abolition of untouchability, women’s empowerment and rural development. leiCSR Phase | oI a a v x 6 pe © Third phase: CSR under the paradigm of the “mixed economy” The third phase of Indian CSR (1960-1980) was affected by the paradigm of the “mixed economy,” characterized by the emergence of PSUs and ample legislation on labor and environmental standards. = a shift from corporate sel ee Reel ( i]ey 2 PckGen of CHE) Cas x € 9 © A csandsustanabitycom/1-s-evoision-es a anes eatin legislation on labor and environmental standards. [his phase is also witnessed i a shift from corporate self-regulation to stringent legal and public regulation of business activities. Corporate governance, labor and environmental issues rose on the political agenda and had become the subject of legislation. Businesses were expected to be respectable corporate citizens, and regular stakeholder dialogues, social accountability and transparency were amongst other expectations. Despite these progressive acknowledgements, this CSR approach failed to materialize. 7] eee: (ay i €.9 © [0 crundusababtnjcom clan Te d) The fourth phase: CSR at the interface between philanthropic and business approaches In the fourth phase (1980 until today), Indian companies began abandoning traditional philanthropic engagement and moved towards integrating CSR int a coherent and sustainable business strategy, partly by adopting the multi- stakeholder approach. In the 1990s, the Indian government had initiated reforms to liberalize and deregulate the Indian economy while tackling the shortcomings of the “mixed economy” and trying to integrate India with the global market. Consequently, the controls and license systems were partially abol Oeyi oS * OEE P 1 Foon € FC 5 csandsustanabitycom/1--evoision-t ies a the controls and license systems were partially abolished, and a pronounced boom was experienced by the Indian economy persisting until today. India has now become an important economic and political player in the process of globalization which has also affected the Indian CSR agenda. Previous Next seal) Search Q ee Reel (ee ee ¢ res * € > © D csandsustanabitycom/1-5-incipe-a-cr es a 1.6 Principles of CSR Itis very difficult to define CSR and identify the activities which it should consist of. So there are three principles which comprise of all the CSR activity] and define its parameters. These are: seal) « Sustainability * Accountability + Transparency « The actions taken in the present affects the options available in the future for everyone and sustainability refers to the actiq future better for future generations. Oey; 2G bam Ey © ©! Porcipts CSR Ca: © 5 csandsustainabity om -b-snciplesoFs ce ay future better for future generations. > The resources available are limited and if they are all utilized in the present, they will not be available for the future use > So it is necessary to look for alternatives which would help replacing the function of currently used resources > As the resources are depleted, their availability decreases and hence lead to increase in its price. So to keep the cost of organizations lower] in the future, it is necessary to use the current available resources optimally > So implication of sustainability is that society must use no more of a resource than can be regenerated. If we take example of paper industry, the hargfMJ eee: (ap an € > © B csandsustanabitycom/1-5inciples- ocr a ice ay If we take example of paper industry, the harvested trees should be replaced by replanting trees which has the effect of retaining costs in the present rather than temporally externalizing them. Viewing an organization as part of a wider social and economic syste! implies that these effects must be taken into account, not just for the measurement of costs and value created in the present but also for th future of the business itself. Measures of sustainability can be the rate at which resources are consumed by the organization in relation to the rate at which resources can be regenerated. Unsustainable operations can be accommodate developing sustainable operations or by planP 2 ¢ LEE TEE |B csandiustatincon/ 1-5 Ao it a pnt nth I ae o Unsustainable operations can be accommodated for either by developing sustainable operations or by planning for a future lacking in resources currently required. In practice organizations mostly tend to aim towards less unsustainability by increasing efficiency in the way in which resources are utilized. © An organization should recognize that its actions affect the external environment and therefore have to assume responsibility for the effect of its actions © This implies for quantification of the effects of actions taken, both internal to the organization and externally ang should be reports to all the parties affected b; 2G bam Ey © ©! Porcipts CSR Ca: x a © 5 csandsustainabity om -b-snciplesoFs rr iteriar tw Ure UlgalliZadUr aru exLeriany any att Ure YuarunTcauruns. should be reports to all the parties affected by those actions This concept recognizes that the organization is part of a wider societal network and has responsibilities to all of that network rather than just to the owners of the organization Accountability therefore necessitates the development of appropriate measures of environmental performance and the reporting of the actions of the firm This leads to more costs to the organization in developing, recording and reporting such performance and to be of value the benefits must exceed the costs. Benefits must be determined by the usefulness of the measures selected to the decision-making pr which they facilitate resource allocation, botl Oey; 2G bam Ey © ©! Porcipts CSR Ca: © 8 csandsstanabty com/1-5incpes oF —SrS es measures selected to the decision-making process and by the way in which they facilitate resource allocation, both within the organization and between it and other stakeholders > The characteristics of the reporting are as follows: Understandability to all parties concerned Relevance to the users of the information provided Reliability in terms of accuracy of measurement, representation of impact and freedom from bias Comparability, which implies consistency, both over time and between different organizations The report will also consists of qualitative facts which will inhibit comparability over time and will tend to eee: (e 2 ¢ Lan TE © 5 csandsstainabtycom/1-5incpes oF for oe cto ib: ni assessed differently by different users of the information, reflecting their individual values and priorities. There is a lack of proper understanding of effects of the actions of the organization along with the judgmental nature of relative impacts and this leads to existence of only few standard measures for the accountability This also then restricts the inter-organization comparison of such reports. The external impact of the actions of the organization have to be reported and the facts contained in the report should not be disguised Thus all the effects of the actions of the o| eee: (; 2G bam Ey © ©! Porcipts CSR Ca: © 5 csandsustainabity om -b-snciplesoFs a cela unogureu ts o Thus all the effects of the actions of the organization, including external impacts, should be apparent to all from using the information provided by the organization’s reporting mechanisms. © Transparency is of importance to external users of such informatio} as these users lack the background details and knowledge availablq to internal users of such information. Transparency therefore can be seen to follow from the other two principles and equally can be seen to be a part of the process of recognition of responsibility on the part of the organization for the external effects of its actions and equally part of the process of transferring power to external stakeholde 7] eee: (Sn SS VT VUE CER | Cas € > © B csandsustanabitycom/1-Pvake-os7 ee ay 1.7 Value of CSR Itis apparent that any action undertaken by an organization will have an effe not just upon itself but also on the external environment within which that organization resides. In considering the effect of the organization upon its external environment it must be recognized that this environment includes both the business environment in which the firm is operating, the local societal environment in which the organization is located and the wider glob environment. This effect of the organization can take many forms, 7] eee: (; 2G bam ey © VaucetCIR|cas! x © 5 csrandsustaiably com -7atveocr ice ay This effect of the organization can take many forms, such as: « The utilisation of natural resources as a part of its production processes « The effects of competition between itself and other organizations in the same market + The enrichment of a local community through the creation of employmeny opportunities « Transformation of the landscape due to raw material extraction or waste product storage + The distribution of wealth created within the firm to the owners of that firm (via dividends) and the workers of that firm (through wages) and the effect of this upon the welfare of individuals eee: (; 2G bam ey © VaucetCIR|cas! x © 5 csrandsustaiably com -7atveocr saneneinaadiaiaiaeaa ste, tan « And more recently the greatest concern has been with climate change and the way in which the emission of greenhouse gases are exacerbating this. So an organization can have a very significant effect upon its external environment and can actually change that environment through its activities. Also it can be seen that these different effects can in some circumstances be viewed as beneficial and in other circumstances be viewed as detrimental to the environment. Indeed the same actions can be viewed as beneficial by some people and detrimental by others.Me ee OE ——OOOOOOOOOewes a © csrandsustaiably com -P-aise oc ie a a The benefits of an effective CSR approach to an organization can include: + Stronger performance and profitability « Improved relations with the investment community and access to capital « Enhanced employee relations and company culture « Risk management and access to social opportunities * Stronger relationships with communities and legal regulators oI a a v x 6 pe Previous Next i] ee Reel (SS 121 Agency Theory | C2 € > © D csandsustanabatycom/1--1-agency-ineon cea 1.8.1 Agency Theory Much of the research about corporate governance has been derived from Agency Theory. Principal-agent problems arise from the dispersed ownership in the organizational structure of modern corporations. Corporate Governanc| has been regarded as a mechanism by which Board of Directors (BOD) undertake crucial monitoring to minimize the problems arising from the principal-agent relationship. As per this theory, managers are agents and the owners and BOD acting as the monitoring mechanism are regarded as the principal. 7] : ENE MC) ) The role of BOD in governance includes serving the a; 2G bam _t_$ix wie © 5 esandsustaiabaliy com/'-5-1-agencyineony) @ cea The role of BOD in governance includes serving the shareholders by ratifying the decisions taken by the managers and monitoring the implementation of such decisions. The separation of ownership from management can entice managers to take action that may not be in the best interests of the shareholder’s wealth. In order to prevent the managers from misusing their firm specific knowledge and expertise to benefit them and not the owners, a monitoring mechanism is deliberated to protect the shareholder interest. Here, accounting plays a vital role in reducing the agency costs (monitoring costs and disciplining the agent to prevent abuse) in an organization, effectively via written contracts tied to the accounting systems. It represents a crucial component of corporate governance structurf™W] eee: (; 2G bam _t_$ix wie © 5 esandsustaiabaliy com/'-5-1-agencyineony) crucial component of corporate governance structures, as if a manager’s reward is based on factors like accounting profits, efforts would be made to deliberately fudge increased profits leading to an increase in bonus or remuneration just by the selection of a particular accounting policy that will increase profits. Arising from the above is the agency problem on how to induce the agent to act in the best interests of the principal. Assumptions of the Agency Theory are: Individuals have access to complete information Investors possess significant knowledge of oTSS > ¢ Tee ————————eeEeEeEeEeEeEeEeEOOeenew es a © cstandsustainabaity com’ -5-I-agency-theoy i a Investors possess significant knowledge of whether or not governance activities conform to their preferences Board has knowledge of investors’ preferences Therefore, as per the agency theorists’s view, an efficient market for corporat control, management labor and corporate information is regarded as a solution to reduce the agency problem. seal) Previous Next eC CeoeySe © 12 Suchebcr Try € > C6 cxandsstanyco'--2eeboltean) pie 1.8.2 Stakeholder Theory This theory advocates that organization invariably seeks to strike a balance between the interests of its diverse stakeholders in order to ensure that each stakeholder gets some degree of satisfaction. Stakeholder theory better explains the role of corporate governance than the agency theory by highlighting different constituents of a firm. This model addresses the needs of employers, suppliers, investors and customers. Stakeholder also argues that the stakeholders should include governmental bodies, political groups, trade unions, trade associay eee: (; 2G bam _t_____— $e © 5 csrandsustaiablty com-8-7-sakehole-theoy] ice ay bodies, political groups, trade unions, trade associations, communities, prospective employees associated corporations and the general public. In some cases competitors and prospective clients can also be regarded as stakeholders in order to aid improvement in business efficiency in the marke! Stakeholder theory has gained prominence as the activities of an organizatio! impacts its external environment thus, requiring accountability of the organization to a wider set of audience than to just its shareholders. In order to differentiate among various stakeholder categories, Rodriguez et al., (2002): the following classification has been adopted: eee: (; 2G bam _t_____— $e © 5 csrandsustaiablty com-8-7-sakehole-theoy] ie aay Consubstantial stakeholders - The stakeholders essential for the business’s existence (strategic partners, shareholders and investors, employees) . Contractual stakeholders - Stakeholders having some type of a forma contract with the business (suppliers and sub-contractors, financial institutions, customers) Contextual stakeholders - These are representatives of social and natural systems within which the business operates. They play a fundamental role in obtaining business credibility and, ultimately, organization’s activities (local communities, countriEE ee ee) € > C5 csendsstanaiiycom'-5-7-ssteholde tear e 02 tat an penne ne oan: opt ne TOle If OULAITIINY DUSINIESS CrEUIDIILy Ati, UIUTTIdlely, Ue dCCeptanice OF F organization’s activities (local communities, countries and societies, public administration, knowledge and opinion makers) The company, ideally, should safeguard the interests of all who contribute to the value creation process or make specific investments in it. These compan specific investments are diverse and include human, physical and social capital. Previous Next i] ee Reel (cstandsustanably. com /1-5-51esuc= ie 1.8.3 Resource Dependency Theory This theory proposes the need for environmental linkages between the firm and outside resources. Here, directors connect the firm with external factors by co-opting the resources needed to survive. Thus, BOD are an important mechanism for absorbing critical elements of environmental uncertainty into the firm. Environmental linkages or network governance tends to reduce transaction costs associated with environmental interdependency. ee Reel ( Mas neue Oepende * | eee am seal); 2G bam EE © 122 Pesource Dopensen, © esandsustainabltycom/-8-5-1esoue=dependeney they ical ay The organization requires resources and this creates dependency or gives rise to exchange relationships or network governance between organizations. The scarcity and unequal distribution of required resources result in interdependence amongst organizations. Thus, this theory focuses on reducing transaction costs of external association. According to this theory, the directors pool in resources such as information, | skills, key constituents (public policy decision makers, suppliers, buyers, social groups) and legitimacy that reduces uncertainty. This theory is in view of the appointment of directors to multiple boards as it would ensure exposure to opportunities to gather information andggap fn © 9G [0 crrcunanaaty conre-esenaciipes ieee 1.8.4 Stewardship Theory This theory proposes that managers are considered good stewards who will act in the best interest of the owners (Donaldson & Davis 1991). The fundamentals of this theory are derived from social psychology, which focus: on the behavior of executives. It says that the steward’s behavior is pro- organization and collectivists. The steward’s behavior is not expected to depart acting in the interests of the organization because the steward is believed to strive to attain the objectives of the organization. Stewards also try to even out di eee: (; 2G bam EY © 24 Perwsresp Teco, © 5 esandsustainabality com/-8-«-sewaidsip-heon ice ray of the organization. Stewards also try to even out differences between different stakeholders and other interest groups. Stewardship theory sees a strong relationship between managers and the success of the firm, and therefore the stewards protect and maximize shareholder wealth through fir performance. Since the focus of stewardship theory is on organizational structures which facilitate and empower rather than monitor and control, this theory supports appointment of a single person for the position of chairman and CEO and a majority of specialist executive directors rather than non-executive directors (Clarke 2004). 7] eee: (i ene © EE 152 Sci Conrace The € > © B csandsustanabitycom/1-8.5-sci-cotactheary he a 1.8.5 Social Contract Theory This theory perceives society as a series of social contracts between member: of society and society itself (Gray, Owen& Adams 1996). An integrated social contract theory refers to macro social and micro social contracts. The former refers to the communities and the expectations from the organization to provide support to the local community, and the latter refers to a specific form of involvement. ee Reel (Se Ey © 14 Poltical Teory| Ce € > CB cxandsustainaty com/'--6-pobteatheon) ce ay 1.8.6 Political Theory Political theory proposes to develop voting support from shareholders, rather, than purchasing voting power from them. Hence a political influence in corporate governance can drive corporate governance within the organizatiot The political model emphasizes on the allocation of corporate power, profits and privileges determined by government favor. This theory has the potential to influence governance developments immensely. Thus, good corporate governance should result in an accountable BOD who ensure that the investors’ interests are not jeopardi: Oey; 2G bam eee eS © csrandsustalaty com-8--polia-theony/ cele ay ensure that the investors’ interests are not jeopardized. The accountability i and transparency element of corporate governance would enable companies to gain shareholders’ and investors’ trust assuring them that the company will be run both honestly and intelligently. This would aid long run organizational sustainability. Therefore, it is critical to re-visit corporate governance in conjunction of these theories and with a fresh angle, which would provide a holistic view incorporating subjectivity from the viewpoint of social sciences. Previous Next 7] eee: (Oe SE * 19 C3 requstion © cxrandsustaiatiy com, oand-govenanced 0 Frei ac pl rbakmat 1.9 CSR regulation and governance in India The 2009 Companies Bill and its 2011 counterpart represent the first major effort at comprehensively overhauling corporate law in India since 1956. See The original proposal required moderate-sized and large companies to set aside two percent of their profit margin averaged over the past three years on socially responsible expenditures. ee Reel ( seal); 2G bam eee a ee © extandustaiably com-2-<-reguatonand-govecnancesi-kay ie aay The proposal gave no guidance as to what “corporate social responsibility” meant in the context of the Bill, and provided no enforcement mechanism other than mandated reporting In response to the Committee's overwhelming concerns on the extent of Corporate Social Responsibility (CSR) being undertaken by corporates and th need for a comprehensive CSR policy, the Ministry of Corporate Affairs have included following provisions Every company having net worth of rupees 500 crore or more, or turnover of rupees 1000 crore or more or a net profy more during a year shall be required to formulate a oT; 2G bam AE TTS © extandustaiably com-2-<-reguatonand-govecnancesi-kay a “Ulimnover eror rupees TUUU Crore Or more Of ad net prot OF rupees 5 Crore OF i more during a year shall be required to formulate a CSR Policy to ensure that every year at least 2% of its average net profits during the three immediately preceding financial years shall be spent on CSR activities as may be approved, and specified by the company. The directors shall be required to make suitable disclosures in this regard in their report to members. Corporates have to function as economic persons within the Union of India in a manner that contributes to the social and economic wellbeing of the country as a whole, and as such must be subject to the Parliament for the welfare of its citizens 7] eee: (; 2G bam eee a ee © extandustaiably com-2-<-reguatonand-govecnancesi-kay i aay country as a whole, and as such must be subject to the laws pronounced by the Parliament for the welfare of its citizens . This was done to assure that corporations would be held legally accountable for contributing to communities and spreading their wealth The mandatory expenditure to be monitored via public disclosure The boards of moderate-sized and large companies should convene a Corporate Social Responsibility Committee and to approve a Corporate Social Responsibility Policy. This policy must be disclosed and posted on the company’s webs! eee: (ee Ee——EE———e————————eeeEeEeEeEeEeEeEeEeEeEeeeeeee es = a Schedule VII of the Bill lists several possible genres of CSR expenditure, ranging from “eradicating extreme hunger and poverty” to “promotion of education” to “ensuring environmental sustainability. Previous Next Search ee Reel ( i] oI a a v x 6 pe© 13.1 Companies an 2001 * ae ceandeutanably. com 0 Frei ac pl rbakmat 1.9.1 Companies Bill 2011: Clause 135 Clause 135 of the Companies Bill 2011 says that every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during an financial year should spend, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility i] seal) ee Reel (© 13.1 Companies an 2001 * ae ceandeutanably. com 0 Frei ac pl rbakmat 1.9.1 Companies Bill 2011: Clause 135 Clause 135 of the Companies Bill 2011 says that every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during an financial year should spend, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility i] seal) ee Reel (TT (© 5 estandsustaiablity com-$-1-companis-bil201-lase-135) he Tek formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company 2.b. recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and Bbc. monitor the Corporate Social Responsibility Policy of the company from time to time seal) 4) The Board of every company referred to in sub-section (1) shall,; 2G bam _t_________“ Ae ian ae Tia. after taking into account the recommendations made by the i Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and 2.b. ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company 5) The Board of every company referred to in sub-section (1), shall make every endeavor to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediate preceding financial yea eee: (TT ee year, at least two per cent of the average net profits of the company made i during the three immediate preceding financial years, in pursuance of its Corporate Social Responsibility Policy: Provided that if the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount. Previous Next oI a a v x 6 pe Search ee Reel ( i]1.9.2 Activities which may be included by companies in their Corporate Social Responsibility Policies i Eradicating extreme hunger and poverty S 3 a e x 6 pe 7 Promotion of education u eee)A eee eee ————EEeEeEeeeeee es a (© 6 cxandsstanably con /--2-actesic- bec i eS ee eae ae Promoting gender equality and empowering women 4. Reducing child mortality and improving maternal health %. Combating human immunodeficiency virus, acquired immune % deficiency syndrome, malaria and other diseases i & ki 6. Ensuring environmental sustainability 7. Employment enhancing vocational skills Oey Social business projectsA eee eee ————EEeEeEeeeeee es a © (5 esrandsustalably com/-3-7-acouteswhichonay-be-ndde ee 9. Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio- economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women oI a a v x 6 pe Previous Next ee Reel (a € > CB caandsustenabiycom/1-3-2-enath ce ray 1.9.3 Strengths Around 2,500 companies fall into this “mandatory” CSR category which will make CSR activities spending in the first year between Rs. 9 to 10 thousand crores, enhancing resources spent in social welfare, considerably. The requirement for a CSR Committee will be a key way for companie: to set out a strong strategy that links to their core business. This will also ensure a gradual shift from the traditional charity model to a more strategic CSR model that fits in with the long term objectives of the company eee: (ee > ¢ ee OO we: C |S cranial con tert i ee a cE Often taxpayers are unsure how much of their tax money actually trickles down to the bottom and how it is used. This bill gives them the freedom to use their money for their chosen social cause, and see the impact for themselves. Most companies will be able to develop a CSR strategy simply becaus: every year they will be publicly stating what they did or did not do. Reporting CSR spends in their annual reports and making it public is a measure of goo corporate governance. ee Reel (By PO ssvesnse|cs = ceandeutanably. com aoe ee 9.4 Weaknesses CSR does not have a clear definition given by the Government, although there are nine principles where areas like development, human rights and inclusive growth have been highlighted. seal) The new Companies Bill needs clear guidelines and rules on how to calculate the mandatory two percent CSR spending. If a company fails to meet the desired standard; it may get away by providing the reason. Such a statement may, in pra eee a Ceery TyMe OE Eee a © 5 csrandsustaiabliycom-S-- wees ser fran etn Ira Company Talis CO Meet tne aesirea stanaara; It may get away Dy providing the reason. Such a statement may, in practice, defeat the very purpose of the legislation The imposition takes out the sanctity of CSR making it more of a forced exercise and a new form of tax on profits. oI a a v x 6 pe Previous Next ee Reel ( i] Search..ap an > C5 csarditahabtycon 1a ee 1.10 Corporate Backlash Most of the companies were not happy with the mandatory CSR and wanted that the law should not specify any amount to be spent on CSR activities and should be left to the decision of the board. According to the companies making CSR mandatory takes away from its core principles and what companies spend on community welfare, education, health, development an environmental activism is for them to decide. Voluntary CSR in India, however, has a mixed track record at best. In 2006, despite the economic boom, India spent only $5 bill eee: (; 2G bam _t___{$iii © csrandsustaiatliy com-10-coxporate-bakashy ice ay despite the economic boom, India spent only $5 billion, or 0.6 percent of its GDP on corporate responsibility whereas Americans give about $307.75 billion, or about two percent of GDP, to charity annually. In 2009, voluntary guidelines suggesting the same two percent expenditure was issued, but CSR spending has not seen sufficient movement since then. There are many objections that are made to mandatory CSR spending which are as follows: « It creates market inefficiencies that may damage the economy in the long run as India has been doing quite well under its eee: (; 2G bam _t___{$iii © csrandsustaiatliy com-10-coxporate-bakashy ice ay « It creates market inefficiencies that may damage the economy in the long run as India has been doing quite well under its liberal economic regime and its GDP has been increasing at a rate of almost eight percent per year. « Even the lower classes have benefited from privatization and globalizatio: Though millions of Indians remain in poverty, millions more have broken past the poverty line and are edging closer to a middle-class existence. It might put India at a competitive disadvantage in the global marketplace and might slow or reverse the country’s near-miraculous growth. The proposal is not developed or regulatory enough. Without a coercive eee: (