Economics · Law · Management

CSR as an Emerging Approach to Promoting Integrity and Corporate Governance

Introduction

“Business has a responsibility beyond its basic responsibility to its shareholders; a responsibility to a broader constituency that includes its key stakeholders: customers, employee, NGOs, government – the people of the communities in which it operates.” – Courtney Pratt, Former CEO Toronto Hydro.

Ecology and economy are both derived from the Greek word oikos, which means a house or dwelling. Our survival depends on the rational management of this home: the space in which life can be sustained.[1] In other words, a clean and pollution-free environment is one of the most basic needs of the human race for a proper and healthy sustenance.

In the developing era of today, a thrust for development is being felt at a global level. Article 8(1) of The United Nations Declaration on the Right to Development 1986 emphasizes on the same, and imposes on the member States an obligation to undertake all necessary measures for the realization of the Right to Development, and to ensure inter alia, equality of opportunity for all in their access to basic resources, education, health services, food, housing, employment and the fair distribution of income.[2] But, there is always the other side of the coin. The development process has always been a challenge to the corporations in terms of sustainable growth of the environment, which as per the Brundtland Report of 1987 (formally known as World Commission on Environment and Development), is defined as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs.’[3] It does include the need for a clean environment. But, the development work, be it pertaining to construction, mining, quarrying or others, always poses a threat to the concept of sustainable development and there is an urgent need to look into the ins and outs of the issue.

CSR as a tool to protect environment

The International Institute for Sustainable Development, Deloitte & Touche and the World Business Council for Sustainable Development (WBCSD) define sustainable development for business enterprises as “[. . .] adopting business strategies and activities that meet the needs of the enterprise and its stakeholders today, while protecting, sustaining and enhancing the human and natural resources that will be needed in the future.”[4]

Case study

Infosys, as its CSR scheme, celebrated Environment Day on June 5, 2009 by rededicating itself towards becoming carbon neutral. Employees at Infosys global Development Centers made a commitment to ban polythene bags and reduce their consumption of non-bio-degradable plastic.[5] Similarly, the e-waste generated at Accenture facilities is given to authorized recyclers to ensure environment friendly disposal of the e-waste, and in order to ensure that old PCs are utilized in an optimal manner, they are donated to non-profit organizations.[6]

Barclays Global Retail and Commercial Banking (GRCB) India, celebrated ‘Earth Month’ through the month of June 2009 with a ‘go-green’ campaign called ‘Plant a Tree’. The campaign contributed towards a greener planet by virtue of Barclays pledge to ‘Plant a Tree’ for all new customers who choose to opt for the Barclays ‘Systematic Investment Plan’ or any of the Insurance products distributed by Barclays GRCB India on behalf of its Insurance partners.[7]

Similarly, Nokia’s environment initiatives are based on life-cycle thinking and aims at focusing on all facets of operations, devices and services to reduce their overall impact on the environment. It has rolled out its take-back and recycling initiative in India on. Customers can drop their old and used Nokia phones, chargers and accessories, irrespective of the brand and Nokia takes care of the rest. Within the first 45 days of the launch, Nokia was able to collect 3 tonnes of e-Waste including 10,000 handsets and the same has been was to authorized recyclers for recycling.[8]

Co-relation between Corporate Governance and CSR

Sir Adrian Cadbury in e-Global Corporate Governance Forum, World Bank, 2000, stated that “Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.”[9]

In the same way, corporate social responsibility is concerned with treating the stakeholders of the firm ethically or in a socially responsible manner. Stakeholders exist both within a firm and outside. Consequently, behaving socially responsibly will increase the human development of stakeholders both within and outside the corporation.[10]

Corporate governance aims at promoting corporate interests and objectives. On the same way, CSR practices can also be categorized on the basis of corporate interests, which can be divided into three main groups:[11]

(1) Must-responsibilities (consumer needs and law requirements, neglecting these would endanger immediate survival).

(2) Should-responsibilities (these are vital for long term survival, based on the expectations of societies, not manifested in low, neglecting them can cause boycott, disinvestment).

(3) Can-responsibilities (not expected by the society, not pressed by the law or the market, no sanction applies when neglected, can help better reputation).

CSR as a strategic tool for better governance

Corporate social responsibility is a hard-edged business decision. Not because it is a nice thing to do or because people are forcing us to do it… because it is good for our business” – Niall Fitzerald, Former CEO, Unilever.

Good corporate governance is simply ‘good business’, and it also aims in the attainment of corporate objectives. One of the foremost objectives for the companies is their growth. CSR, as the trend has emerged, does help a company to achieve such objectives.

Academic studies have shown that a company who operates directly with social responsibility is likely to do better in business than those that don’t.

A 1997 DePaul University study found that companies with a defined corporate commitment to ethical principles do better financially (based on annual sales/revenues) than companies that don’t. [12]

Similarly, a two-year study by The Performance Group, a consortium of seven international companies- Volvo, Unilever, Monsanto, Imperial Chemical Industries, Deutsche Bank, Electrolux and Gerling concluded that improving environmental compliance and developing environmentally friendly products can enhance company earnings per share, increase profitability and also be important in winning contracts or investment approval in emerging markets.[13]

Going in the same direction, a 1999 study, cited in US journal Business and Society Review, showed that 300 large corporations found that companies which made a public commitment to rely on their ethics codes outperformed companies that did not do so by two or three times, as measured by market value added.[14]

Development as an externality to environmental degradation

Development comes through industrialization, which in itself is one of the biggest factors behind the degradation of environment, be it in terms of depletion or pollution. Development and environment cannot be taken as separate challenges. Comparative study of many nations in terms of Environmental Sustainability Index shows that the environment has been adversely affected during process of their economic development which has brought many local and global environmental problems in the world.[15] Environmental Sustainability Index (ESI) is a composite index tracking a diverse set of socioeconomic, environmental, and institutional indicators that characterize and influence environmental sustainability at the national scale.[16] The ESI score of a country is directly proportional to the favorable environmental conditions in a country, i.e., higher the ESI score of a country, better is the environmental condition prevailing in the region.[17] The co-relation between development and environmental conditions of a country can be established by the fact that the 2005 reports of ESI reveals that developed countries occupy lower ranking in ESI, whereas comparatively less developed countries had a better rank in terms of ESI categorization.[18] Also, the EIA (Environmental Impact Assessment) reports, which help in evaluation of the potential impacts of development projects on the environmental system,[19] differ in different countries as per their level of development.[20] Besides, the industrialized countries are the biggest emitters of green house gases, where China tops the list, which overtook the United States in 2006.[21] It can be easily deduced that developed nations have been facing the environmental issues the most, and industrialization is the most contributing factor to the pollution.

Rapid economic growth leads to urbanization, industrialization and many other development activities. These factors lead to the degradation of environment in several ways, like emission of harmful gases (air-pollution), sewage discharge in water-bodies (water pollution), dumping of wastes on land (land pollution) etc. It harms the environment in various ways like ozone depletion, global warming, acid rain etc. These environmental risks, in turn lead to other fatal hazards. For instance, Global Circulation Models (GCM), that calculates and predicts what climate patterns will look like in a number of years[22], reports that global temperature can rise 1.5˚ C to 5.5˚ C by year 2030, which can provoke more havoc situations, like floods, droughts, heat waves, etc.[23] Thus, development requires a more vigilant look towards the environmental conditions of the region.

Examination of the role of stakeholders in disciplining firms in emerging market

Stakeholders want companies to make a profit, but not at the expense of their staff and the wider community.” – Brian Gosschalk, CEO, MORI.

Society has reacted to the enormous power of companies. Social pressure by stakeholders and society has placed demands upon companies to require business to adopt ethics, codes of conduct and corporate social responsibility principles that simultaneously contain the power of corporations and consider stakeholder interests. [24]

Stakeholders have been provided with various rights through legislations. Health and safety laws together with anti-discrimination laws operate in the workplace to protect employees. Environmental laws benefit society generally when they oblige companies to ensure that the air, water and land are not polluted. Credit laws and fair trading legislation protect company creditors and consumers. The companies themselves are also considered as restrictive trade practices laws protect them from anti-competitive conduct. Customers receive the benefit of product safety laws and misleading and deceptive conduct laws. [25]

Company managers have an obligation to ensure the company complies with these laws. A failure to do so is a breach of duty. Therefore, indirectly, companies are being managed for stakeholders, not merely shareholders, as it is a legal requirement for managers to consider the particular stakeholder interests as indicated.[26]

Examination of Social Impact in an Indian Perspective:

In a country like India, issues have often been arising with respect to the development projects, which have often been related to environmental issues, either directly or indirectly.  One of the most popular environmental movements in India is Narmada Bachao Andolan, started in 1985, against the construction of huge dam on the Narmada river. The proposed Sardar Sarovar Dam and Narmada Sagar would have displaced more than 250,000 people.[27] It was widely protested and the reasons for this were cited as “non-fulfillment of basic environmental conditions and the lack of completion of crucial studies and plans.”[28] The Supreme Court, in the case, i.e., Narmada Bachao Andolan v. Union of India[29] stated that:

“The adverse impact on the environment can have disastrous consequences for this generation and generations to come… This Court cannot place its seal of approval on so vast an undertaking as the Project without first ensuring that those best fitted to do so have had the opportunity of gathering all necessary data on the on the environmental impact of the Project and of assessing it. They must then decide if environmental clearance to the Project can be given, and, if it can, what environmental safeguard measures have to be adopted, and their cost.”[30] The decision of the Court clearly states the hidden environmental degradation behind the development projects, and also emphasizes upon the need to safeguard the environment. Another such issue which brought development and environment to clash with each other was Tehri Dam Andolan, (Tehri Bandh Virodh Sangarsh Samiti v. State of Uttar Pradesh) in which the construction of dam was widely protested by the environmental organizations and the local people. Again, like the Narmada Bachao Andolan, displacement of people was the main issue, but environmental concerns were also raised, as the dam was planned in the Central Himalayan Seismic Gap, a major geologic fault zone, which was the site of a major earthquake in October 1991. The Apex Court approved the project, but only after several terms and conditions, also ensuring environmental measures.[31] Similar situation was witnessed in other cases like Goa Foundation v. Konkan Railway Corporation[32], where the alignment of the Konkan Railway in certain parts of Goa was protested on the ground that it would cause erosion of soft rocks, disturbance to the mangroves, deterioration of land quality, and destabilization of the tidal basin.[33]

Global efforts towards corporate sustainability

The need for a healthy environment is being realized internationally since decades. The examples of such efforts can be dated back to the Stockholm Conference of June 1972, which was attended by 113 states.[34] It led to Stockholm declaration which emphasized on the protection of environment against development, along with the foundation of United Nations Environment Programme.[35] The UN Conference on the Environment and Development, held at Rio de Janeiro in 1992, which was attended by all the 176 UN member States at that time, led to the formation of treaties like the UN Framework Convention on Climate Change (UNFCC) and the Convention on Biological Diversity, and the Rio Declaration talked about the right to a healthy environment and the right to development.[36]

Again, in 1993, the Right to Development and the World Human Rights Conference took place in Vienna in the same direction. Various other international events and seminars like the World Summit of on Sustainable Development, Johannesburg, the World Summit Outcome, 2005, along with various UN declarations have emphasized on the need to protect the environment against the thrust for development. Apart from these, several treaties and conventions  like the Antarctic Treaty (Washington, 1959), Convention on the conservation of Antarctic Marine living Resources (Canterna, 1980), Convention for the protection of the Ozone Layer (Vienna, 1985), Protocol on substance that deplete the Ozone Layer (Montreal, 1987), Amendments to the Montreal protocol on substance that Deplete the Ozone layer (London, 1990), International tropical inter-Agreement (Geneva, 1994), Protocol on Environmental protection to the Antarctica Treaty (Madrid, 1991) etc. have taken place on the global level have often been emphasizing on the same.

Conclusion- CSR and Corporate Governance as ‘People, Planet, Profit!’: The Emerging Scenario

Development, be it economic or social, is a prime requirement of human race. In fact, economic prosperity often contributes to sustainable development.[37] But, only the economic growth at reduced environmental impact can be said to be a part of sustainable development. Hence, economic growth and environmental impact must be segregated by advanced and ecologically efficient technology.[38] Thankfully, as illustrated in the paper, corporations are being aware of their duties towards sustainability.

CSR, although, need not be an act of philanthropy, and as aforementioned, is often driven by self-interested motives, does still pave the way towards sustainable governance, and hence contributing to better corporate governance, as sustainability has gradually become the need of hour. This need is more evident with new legislations like The Companies Bill, 2011, which states that every company having net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or a net profit of Rs five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Borad consisting of three or more directors, out of which at least one director shall be an independent director. If companies are unable to meet the CSR norms, they will have to give explanations. In case, the companies are not able to do the same, they have to disclose reasons in their books. Otherwise, they would face action, including penalty.[39]

Thus, it can be well stated that Corporate Social Responsibility is coming up as an emerging approach to promoting integrity and corporate governance.

Lastly, in words of Carter Robets, President and CEO of the World Wildlife Fund (WWF): “Companies still thinking about the environment as a social responsibility rather than a business imperative are living in the dark ages.”[40]

By: Avinash Kumar, National Law University, Delhi.

References

[1] P.H.K. Srivastava, “Environmental Problems and it’s Valuation”, A.K. Singh, (ed.), ENVIRONMENTAL ECONOMICS: VARIOUS DIMENSIONS, p. 71.

[2] Taken from: http://www.un.org/documents/ga/res/41/a41r128.htm, (last visited  February 28, 2013).

[3] World Commission on Environment and Development, Our Common Future, p 40.

[4] Labuschagne, C., Brent, A.C., 2005. Sustainable Project Life Cycle Management: the need to integrate life cycles in the manufacturing sector. International Journal of Project Management 23, p. 160.

[5] Taken from: http://www.d-sector.org/article-det.asp?id=301, last visited on: February 25, 2013.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Corporate Social Responsibility & International Development: Is business the solution?, Michael Hopkins, 2007, p. 33.

[10] Corporate Social Responsibility & International Development: Is business the solution?, Michael Hopkins, 2007, p. 33.

[11] Spitzek, H., 2005. Society’s case for corporate responsibility. Paper submitted to theEURAM2005 Pre-Conference Event, Munich.

[12] A Short Course in International Business Ethics: Combining Ethics and Profits in Global Business, Charles Mitchell, World Trade Press, p. 3

[13] A Short Course in International Business Ethics: Combining Ethics and Profits in Global Business, Charles Mitchell, World Trade Press, p. 2.

[14] Ibid.

[15] Rajesh Keshar Khanal, “Environmental Sustainability Index (ESI) and It’s Need in the Developing Economies”, Arun Kumar Singh, (ed.), ENVIRONMENTAL ECONOMICS: VARIOUS DIMENSIONS, pp. 88-89.

[16] http://www.yale.edu/esi/ (last visited February 17, 2013).

[17] Supra note 5.

[18] Ibid p. 91.

[19] Dr. Madabhushi Sridhar, ENVIRONMENTAL EMPOWERMENT, 1st ed. 2009, p. 25.

[20] Neil Clark, THE INTERNATIONAL LAW OF ENVIRONMENTAL IMPACT ASSESSMENT, 1st ed. 2008, p. 42.

[21] http://www.nytimes.com/2007/06/20/business/worldbusiness/20iht-emit.1.6227564.html (last  visited February 28,  2013).

[22] http://www.woodrow.org/teachers/help/temp_presentations/wetherald/WhatisaGlobalCirculationModel.htm (February  26, 2013).

[23] P.H.K. Srivastava, “Environmental Problems and it’s Valuation”, A.K. Singh, (ed.), ENVIRONMENTAL ECONOMICS: VARIOUS DIMENSIONS, p. 71.

[24] THE LAW, STAKEHOLDERS AND ETHICS:THEIR ROLE IN CORPORATE GOVERNANCE, Barbara Mescher, Macquarie Journal of Business Law, (2011) Vol. 8.

[25] The Law, Stakeholders and Ethics: Their Role in Corporate Governance, Barbara Mescher, Macquarie Journal of Business Law, (2011) Vol. 8.

[26] Ibid.

[27] http://www.ecoindia.com/education/narmada-bachao-andolan.html (last visited February 13, 2013).

[28] Fisher, William (1995). Toward Sustainable Development: Struggling Over India’s Narmada River. M. E. Sharpe. pp. 157–158.

[29] AIR 2000 SC 3751.

[30] AIR 2000 SC 3751, p. 3770.

[31] P. Leelakrishnan, ENVIRONMENTAL LAW IN INDIA, 3rd ed. 2008, pp. 339-342

[32] AIR 1992 Bom 471.

[33] Supra note 18, p. 343.

[34] Nico Schrijver, THE EVOLUTION OF SUSTAINABLE DEVELOPMENT IN INTERNATIONAL LAW: INCEPTION, MEANING AND STATUS,  1st ed. 2008, p.43.

[35] Ibid, pp. 44-45.

[36] Ibid, pp. 68-69.

[37] Raj Kumar Sen and Somnath Hazara, ENVIRONMENTAL ECONOMICS AND SUSTAINABLE DEVELOPMENT, 1st ed. 2011, p. 65

[38] Ibid, pp. 65-66.

[39] Taken from: http://www.thehindu.com/business/companies/new-companies-bill-mandates-csr-spending/article4217872.ece, last visited: March 2, 2013.

[40] Taken from: http://www.gsb.stanford.edu/news/headlines/VonGugel_Roberts.html, last visited on March 4, 2013.

Leave a Reply