Abstract
This chapter provides a critical look at the definition of CSR based on the subject matter literature available. Because CSR is an emerging term in both definition and reality, this study aims to illustrate CSR in relation to the different stakeholders and entities termed as CSR ecosystem in this study. Furthermore, this study also offers an outline of factors, interactions, and contexts under review, such as CSR, Section 135 of the Indian Companies Act 2013, the effect of the Act on corporate bodies' CSR operations, the impact of CSR on societal and environmental concerns, contrasting CSR schools of thinking, and gaps in the views of management, government, shareholders, and stakeholders.
TopIntroduction
The study gives an overview of variables, associations, and contexts under study, such as CSR, Section 135 of Indian Companies Act 2013, the impact of the Act on CSR activities of corporate bodies, the effect of CSR on societal and environmental issues, conflicting schools of thought in relation to CSR, and difference in perceptions of managers, government, shareholders, and stakeholders towards CSR activities. This study seeks to examine the effect that the enforcement of Section 135 of Indian Companies Act 2013 has had on CSR spending of firms and firm performance. Thus, this study gives an overview of CSR spending of firms before and after the enforcement of Section 135, and its effect on firm performance.
CSR is a complex subject, especially when the various complications related to CSR definition, scope and performance are taken into consideration. For example, the stakeholder perspective of CSR advocates that multiple stakeholders must be served, but the question then arises, the interests of how many stakeholders may be served by a firm, and to what extent? This would lead to some areas receiving more attention and others, less so. This in turn would lead to a gap in the expected or intended service and actual service rendered. The present study seeks to examine this gap along with issues mentioned in preceding sentences, and this study gives brief descriptions of the same.
In the aspect of business organizations, James Moore’s use of the term “ecosystem” that included buyers, intermediaries (marketing channels, agents, and those producing similar goods and services), suppliers, and industry itself. In the context of this study, the effect and association of CSR on and with multiple elements such as environment, society, shareholders, stakeholders, and the firm itself are examined, and these elements form a larger part of the CSR ecosystem. Thus, this study is a comprehensive study of the CSR ecosystem in India in light of the enforcement of Section 135 of Companies Act 2013.
In the following section, the objectives of the study are listed. Next, the study establishes the context of the study which broadly revolves around Section 135 of Companies Act 2013. The section begins by establishing that formal focus on CSR at the policy level concluded with the enactment of Section 135 of the Companies Act 2013 (MCA, 2013), which made CSR spending and disclosure mandatory for firms falling in certain categories. The section goes on to specify conflicts and opinions that arose due to the enforcement of Section 135 and attempts to objectively evaluate these opinions and schools of thought. The debate whether CSR is voluntary or mandatory, especially after nations such as Indonesia, Denmark, France, Philippines, Spain, Argentina, Brazil, India, Norway, and European Union enforced laws related to CSR, has been highlighted. Elements affecting participation of firms in CSR activities, such as firm size and motivation are discussed. The need, significance and interpretation of CSR and its role in relation and conjunction with government responsibility and duty are examined in the section and later in the study. The section also discusses how the absence of a clear definition of CSR may lead to undesirable outcomes and practices. The difference in the nature of CSR in developed and developing countries and its effect on CSR activities actually being carried out in the two different contexts are considered. It is these issues that lead to gaps in intended and actual services rendered under CSR. As mentioned earlier, firm size and motivation play important roles in how and to what extent firms are engaged in CSR. Voluntary and mandatory CSR and their outcomes and implications are discussed in the section. The section specifically explains and discusses performance driven and stakeholder-oriented approaches of CSR. Financial performance would certainly be a very important consideration for all firms, and the relation between CSR and financial performance is one of significant interest. The section discusses the association through findings of studies on the topic. The section also attempts to highlight the nature and extent of CSR activities and spending of firms before and after Section 135. The point of view that mandating CSR is indeed an implicit tax has been considered.
The following sections provide definitions of CSR, an overview of CSR in India and explanation of the CSR ecosystem. The study further identifies research gap and establishes the need for the study. Study-wise organization of the present study is provided before conclusion.
Key Terms in this Chapter
CSR Ecosystem: The CSR ecosystem refers to the network of interconnected stakeholders and entities involved in the realm of Corporate Social Responsibility (CSR). This ecosystem includes businesses, government bodies, non-governmental organizations (NGOs), communities, consumers, employees, and the environment. Understanding the CSR ecosystem is crucial because it highlights the interdependencies and relationships that influence how CSR is implemented, managed, and perceived. At the center of the CSR ecosystem are businesses, which are the primary drivers of CSR activities. Companies engage in CSR to achieve various objectives, such as improving brand reputation, gaining customer loyalty, enhancing employee engagement, and contributing to societal well-being. Within the company, various departments, including HR, marketing, and sustainability teams, play roles in designing and implementing CSR strategies. Governments are key stakeholders in the CSR ecosystem. They establish the regulatory framework within which businesses operate. For instance, in India, the enforcement of Section 135 of the Indian Companies Act, 2013, mandates that certain companies spend a portion of their profits on CSR activities. Governments can also provide incentives, guidelines, and support for CSR initiatives, thereby influencing corporate behavior towards more sustainable and socially responsible practices. Non-Governmental Organizations (NGOs) and civil society organizations are crucial in the CSR ecosystem. They often act as watchdogs, ensuring that companies adhere to their CSR commitments and do not engage in practices such as greenwashing. NGOs can collaborate with businesses on various projects, bringing in expertise, grassroots connections, and credibility. These collaborations can enhance the impact and reach of CSR initiatives. Communities and consumers are direct beneficiaries of CSR activities. Companies engage with local communities through various initiatives such as education programs, healthcare services, and infrastructure development. Consumers, increasingly aware of social and environmental issues, can drive CSR by choosing to support companies with strong CSR commitments. This consumer behavior creates a market incentive for businesses to engage in CSR. Employees are also significant stakeholders in the CSR ecosystem. Companies that prioritize CSR often see higher levels of employee satisfaction and engagement. Employees take pride in working for socially responsible companies, and CSR initiatives can enhance recruitment and retention. Moreover, involving employees in CSR activities, such as volunteer programs, can foster a sense of purpose and community within the organization. The environment is an integral part of the CSR ecosystem. Environmental sustainability is a major focus of CSR, with companies adopting practices to reduce their carbon footprint, manage waste, and use resources efficiently. Environmental NGOs and regulatory bodies work to ensure that businesses comply with environmental standards and contribute positively to environmental conservation efforts. The CSR ecosystem is dynamic and complex, with various stakeholders influencing and being influenced by corporate actions. Effective CSR requires businesses to navigate this ecosystem thoughtfully, balancing the needs and expectations of different stakeholders. This involves transparent communication, genuine engagement, and a commitment to continuous improvement.
Stakeholder-Oriented CSR: Stakeholder-oriented Corporate Social Responsibility (CSR) focuses on the company’s responsibility to serve the interests of all its stakeholders, not just its shareholders. This approach emphasizes ethical business practices, social equity, and environmental sustainability, aiming for a balance between economic goals and societal welfare. Stakeholder-oriented CSR is rooted in the belief that businesses have a duty to consider the impacts of their actions on all parties involved or affected by their operations. The foundation of stakeholder-oriented CSR lies in Stakeholder Theory, which was developed by R. Edward Freeman in the 1980s. Freeman argued that businesses should create value for all stakeholders, including employees, customers, suppliers, communities, and the environment, rather than focusing solely on maximizing shareholder returns. This theory challenges the traditional view of shareholder primacy and promotes a more inclusive and ethical approach to business management. Employees are a key focus of stakeholder-oriented CSR. Companies that prioritize the well-being of their employees tend to offer fair wages, safe working conditions, opportunities for professional growth, and inclusive workplaces. Engaging employees in CSR activities, such as community service projects or sustainability initiatives, can enhance their sense of purpose and loyalty to the organization. A satisfied and motivated workforce is more productive and contributes positively to the company’s overall performance. Customers are another critical stakeholder group. Stakeholder-oriented CSR involves ensuring product safety, quality, and ethical marketing practices. Companies that demonstrate a commitment to social and environmental responsibility often enjoy greater customer loyalty and trust. In today’s market, consumers increasingly prefer to support brands that align with their values and contribute positively to society. This preference drives companies to adopt responsible practices, such as using sustainable materials, reducing environmental impact, and supporting social causes. Suppliers and business partners are also essential stakeholders. Ethical supply chain management is a crucial aspect of stakeholder-oriented CSR. Companies must ensure that their suppliers adhere to fair labor practices, environmental standards, and ethical sourcing guidelines. Building strong, transparent, and mutually beneficial relationships with suppliers can lead to improved product quality, reduced risks, and enhanced corporate reputation. Communities where companies operate are significantly impacted by corporate activities. Stakeholder-oriented CSR emphasizes giving back to these communities through initiatives such as education programs, healthcare services, infrastructure development, and environmental conservation. Engaging with local communities and addressing their needs can enhance the company’s social license to operate, fostering goodwill and long-term sustainability. The environment is a non-human stakeholder that plays a central role in stakeholder-oriented CSR. Companies are increasingly recognizing the importance of sustainable practices to mitigate their environmental impact. This includes reducing greenhouse gas emissions, minimizing waste, conserving natural resources, and promoting biodiversity. Environmental sustainability not only benefits the planet but also reduces operational costs and regulatory risks for businesses. Implementing stakeholder-oriented CSR requires a holistic approach that integrates ethical considerations into all aspects of the business. Companies must engage in regular dialogue with stakeholders to understand their needs and expectations, set clear CSR goals, and measure and report on their progress transparently. Tools such as stakeholder mapping, materiality assessments, and sustainability reporting frameworks can aid in this process. While stakeholder-oriented CSR offers numerous benefits, it also presents challenges. Balancing the diverse and sometimes conflicting interests of various stakeholders can be complex. Companies must navigate these complexities thoughtfully, ensuring that their CSR efforts are genuine and aligned with their core values. Additionally, there is a risk of superficial or symbolic actions, known as “CSR-washing,” which can undermine stakeholder trust and corporate credibility.
Section 135 of the Indian Companies Act, 2013: Section 135 of the Indian Companies Act, 2013, marks a significant milestone in the legal framework governing Corporate Social Responsibility (CSR) in India. It mandates that certain categories of companies spend a minimum percentage of their profits on CSR activities. This legislation represents a shift from voluntary to mandatory CSR, aiming to ensure that businesses actively contribute to social and environmental welfare. The introduction of Section 135 was driven by the need to formalize CSR activities and ensure that companies are accountable for their social and environmental impacts. According to this section, any company with a net worth of INR 500 crore or more, a turnover of INR 1000 crore or more, or a net profit of INR 5 crore or more during any financial year must constitute a CSR Committee. This committee is responsible for formulating and recommending CSR policies, deciding on the CSR activities to be undertaken, and monitoring the implementation of these activities. The law requires eligible companies to spend at least 2% of their average net profits of the preceding three years on CSR activities. If a company fails to spend this amount, it must specify the reasons for not doing so in its annual report. This provision ensures transparency and accountability, compelling companies to justify their CSR expenditure or lack thereof. Section 135 outlines specific areas where CSR funds can be allocated. These include activities related to eradicating hunger and poverty, promoting education, enhancing vocational skills, ensuring environmental sustainability, and contributing to the national heritage. The act encourages companies to focus on local areas where they operate, thereby addressing community-specific needs and fostering local development. The impact of Section 135 has been significant. It has institutionalized CSR in India, making it a strategic priority for businesses. Many companies have established dedicated CSR departments and appointed CSR professionals to ensure compliance with the law. The mandatory nature of the law has led to increased CSR spending and more structured and impactful CSR initiatives. However, the legislation has also sparked debates and challenges. Critics argue that mandatory CSR can be seen as an implicit tax on businesses, potentially diverting resources from core business activities. Some businesses may engage in CSR merely to comply with the law, without genuine commitment to social responsibility. Additionally, the lack of a clear and comprehensive definition of what constitutes CSR can lead to varied interpretations and implementations. Despite these challenges, Section 135 has been a catalyst for positive change. It has brought CSR to the forefront of corporate strategy and governance, encouraging companies to integrate social and environmental considerations into their business models. The law has also promoted greater collaboration between companies, NGOs, and government bodies, leading to more effective and impactful CSR projects.
Stakeholders: Stakeholders are individuals, groups, or organizations that have an interest in or are affected by a company’s operations, decisions, and activities. The concept of stakeholders is central to Corporate Social Responsibility (CSR) and business ethics, emphasizing the importance of addressing the needs and expectations of various parties involved with or impacted by a business. The term “stakeholder” was popularized by R. Edward Freeman in his 1984 book “Strategic Management: A Stakeholder Approach.” Freeman's Stakeholder Theory argues that businesses should create value for all stakeholders, not just shareholders. This approach challenges the traditional shareholder-centric view, which prioritizes maximizing shareholder returns, by advocating for a more inclusive perspective that considers the interests of all parties affected by business activities. Stakeholders can be broadly categorized into two groups: internal and external stakeholders. Internal stakeholders include individuals and groups within the organization, such as employees, managers, and shareholders. Employees are crucial stakeholders as they are directly involved in the company’s operations and can influence its success. Ensuring fair wages, safe working conditions, and opportunities for professional development are essential aspects of CSR related to employees. Managers are responsible for decision-making and strategic planning, and their actions significantly impact the company’s direction and performance. Shareholders, or owners, invest in the company and expect returns on their investments, making their interests aligned with the company's financial success. External stakeholders encompass entities outside the organization that are affected by its activities. These include customers, suppliers, communities, government bodies, and the environment. Customers are vital stakeholders whose satisfaction and loyalty are critical to the company’s success. CSR initiatives aimed at ensuring product safety, quality, and ethical marketing practices are essential for maintaining customer trust and loyalty. Suppliers provide the necessary goods and services for the company’s operations, and fostering ethical and sustainable supply chain practices is crucial for maintaining positive relationships and ensuring long-term sustainability. Communities are significantly impacted by corporate activities, especially in areas where companies have a physical presence. CSR initiatives that support local education, healthcare, infrastructure, and environmental conservation can enhance community well-being and strengthen the company's social license to operate. Government bodies regulate business activities and ensure compliance with laws and regulations. Engaging with government stakeholders and adhering to regulatory requirements is essential for maintaining operational legitimacy and avoiding legal issues. The environment is a non-human stakeholder that is increasingly recognized in CSR and sustainability discourse. Companies impact the environment through resource extraction, emissions, waste generation, and land use. Sustainable business practices that minimize environmental harm and promote conservation are critical components of CSR. These practices include reducing carbon footprints, managing waste effectively, and utilizing renewable resources. Effective stakeholder management involves identifying key stakeholders, understanding their interests and concerns, and engaging with them through transparent communication and collaboration. Companies use various tools and frameworks to manage stakeholder relationships, such as stakeholder mapping, which helps identify and prioritize stakeholders based on their influence and interest.
Performance-Driven CSR: Performance-driven Corporate Social Responsibility (CSR) is a strategic approach where companies engage in CSR activities with the expectation that these efforts will ultimately enhance their financial performance. This perspective aligns CSR with business objectives such as profit maximization and shareholder value enhancement, viewing social and environmental initiatives as investments that can yield measurable returns. The premise of performance-driven CSR is that socially responsible behavior can lead to tangible business benefits. These benefits can include improved brand reputation, increased customer loyalty, enhanced employee engagement, cost savings through operational efficiencies, and better risk management. By strategically integrating CSR into their core business operations, companies can create value not only for society but also for themselves. One of the primary drivers of performance-driven CSR is the growing consumer preference for socially responsible companies. Consumers today are more informed and concerned about the social and environmental impacts of their purchases. They tend to support brands that demonstrate a commitment to ethical practices, sustainability, and community engagement. This shift in consumer behavior creates a competitive advantage for companies that prioritize CSR, leading to increased sales and market share. Employee engagement is another critical aspect of performance-driven CSR. Companies that are perceived as socially responsible often enjoy higher levels of employee satisfaction and retention. Employees take pride in working for organizations that align with their values and contribute positively to society. CSR initiatives, such as volunteer programs and sustainable business practices, can foster a sense of purpose and community among employees, enhancing their motivation and productivity. Operational efficiency is a significant benefit of performance-driven CSR. Companies that adopt sustainable practices, such as reducing energy consumption, minimizing waste, and optimizing resource use, can achieve substantial cost savings. For instance, implementing energy-efficient technologies or recycling programs can lower operational costs and improve profitability. Additionally, sustainable practices can mitigate risks associated with environmental regulations and potential liabilities. Risk management is another crucial element of performance-driven CSR. By proactively addressing social and environmental issues, companies can reduce the risk of negative publicity, legal disputes, and regulatory penalties. Effective CSR strategies can enhance a company’s reputation and build trust with stakeholders, making it more resilient in the face of crises and challenges. To implement performance-driven CSR effectively, companies need to adopt a strategic and systematic approach. This involves setting clear goals and metrics, integrating CSR into the company’s business model, and continuously monitoring and reporting on progress. Companies often use frameworks such as the Global Reporting Initiative (GRI) or the United Nations Sustainable Development Goals (SDGs) to guide their CSR activities and measure their impact. However, performance-driven CSR is not without its challenges. One of the main criticisms is the potential for companies to prioritize profit over genuine social impact. This can lead to superficial or insincere CSR efforts, commonly known as greenwashing, where companies engage in CSR activities primarily for positive publicity rather than meaningful change. To avoid this, companies must ensure that their CSR initiatives are authentic, transparent, and aligned with their core values.