Responsible Business Practices to achieve goals of Corporate Social Responsibility

Legal Forum

India's CSR framework revolves around Section 135 of the Companies Act and is supplemented with various rules, regulations and non-binding standards

In a country of more than one billion, government alone cannot build a welfare state enshrined in the Constitution of India. Corporates must now share the onus of nation building as well, which requires a holistic Corporate Social Responsibility (“CSR”) culture. Although business philanthropy is deeply rooted within the traditions of India, it is not until recently that the Companies Act, 2013 (“Companies Act”) actively “invites” companies to use its business acumen and resources towards solving some of India’s most challenging issues regarding the poor and under-served, and act as a protectorate of Indian society. Nevertheless, unless the fledgling law is interpreted to embrace the integration of responsible business practices (“Responsible Practices”), the adoption of this progressive CSR law may not usher in the new era as some might imagine.

India’s CSR framework revolves around Section 135 of the Companies Act and is supplemented with various rules, regulations and non-binding standards. The Indian Ministry of Corporate Affairs (“MCA”), with respect to this section, leaves the definition of CSR relatively open-ended, although includes (but does not limit) it to those subjects enumerated within the amended schedule VII of the Companies Act (“Schedule VII”). In view of the clarifications sought by various stakeholders, the MCA issued a general circular on June 18, 2014 stating that the Schedule VII should be interpreted in a manner to capture the essence of the subjects enumerated and are broad based to include a wide range of activities. CSR, and therefore the law, should be interpreted as multi-dimensional, encompassing to some degree social, economic, and environmental issues, and addressing the various relationships between the stakeholders.1 It inherently places expectations on companies to refrain from practices that could cause harm and negate that very philanthropic programmes they seek to establish.

Spending towards Responsible Practices

The purpose and spirit of the law is to encourage businesses, as trustees, to improve Indian society in key areas identified by the MCA, in line with India’s values and history along with the ancillary responsibility to refrain from contributing, directly or indirectly, to practices that adversely affect the poor, under-served and disenfranchised. That is, should companies be allowed to wash their hands of “injurious” practices, albeit legal practices, by contributing two percent of their profits towards philanthropic programmes and projects?

The CSR law should not be contrary to any holistic approach to improving or protecting Indian society. Further support for this position is gained when considering India’s unambiguous commitment towards other domestic and international initiatives to integrate socially Responsible Practices. For example, India, in 2011, was one of four core sponsors of the UN Guiding Principles on Business and Human Rights, an international set of principles that was unanimously adopted by the UN Human Rights Council and endorsed by business enterprises and civil society. The Guiding Principles identified measures businesses can take to identify, prevent and mitigate human rights abuse, such as requiring human rights policy statements, conducting human rights due diligence and establishing grievance mechanisms for internal and external complaints (Principle 15). Notably, one of the objectives of the Guiding Principles is to guard against companies offsetting human rights abuses through philanthropic work.

Interpreting the “Capacity Building” Exception

The plain language of Section 135 appears to only favour philanthropic action. However, under Rule 4(6) of the Notification of 27 February 2014, the MCA included an exception to the general rule. Companies are allowed to spend five percent (of the two percent allotment) towards the CSR capacity building of their employees. In other words, developing, reinforcing and building the skill set of employees, the corpus of the company. The Indian Government partially acknowledged the wisdom of this approach when it included the capacity building exception referenced above. This exception should be read to include Responsible Practices such as those outlined in the Guiding Principles as well as other CSR activities.

Consequences for failing to encourage Responsible Practices Should the Indian Government fail to endorse such an interpretation, a systemic problem may begin to appear. For example, Goldman Sachs’ (“Goldman”) 10,000 Women Initiative is a philanthropic initiative that includes numerous business partners, non-profits and academic institutions from around the world. It is targeted to address one of the main, critical issues facing the financial sector – non-discrimination of women in the workplace. 10,000 Women is an admirable initiative that addresses a human right promoted by various international human rights instruments. However, Goldman was recently named as the defendant in a class action gender discrimination lawsuit.2 The claimants allege, inter alia, that Goldman treats woman disproportionality, that women are paid less than their male counterparts; are promoted less often; and are not afforded the same opportunities as men.3 These actions by any company, if true, run contrary to the initiative and promoting gender equality and empowering women, one of the specific subject areas enumerated in Schedule VII of the Companies Act.

It is irrelevant whether Goldman’s actions or inactions amount to civil liability under the law - that is a separate issue. The fact remains that companies similarly situated to Goldman should take action in their own business practices to address inequality and empowerment. Does a philanthropic programme alone remedy the substantive issue or would a holistic approach, addressing both sides of the coin resolve the problem?

Conclusion

Without a company complementing its philanthropic projects by developing and implementing Responsible Practices, these issues will only compound. There can be no doubt that there is a need for a holistic approach to implementing India’s CSR law as businesses cannot help with one hand and harm with the other.

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Author

David Martini is a Professor of Law at the Université d’Auvergne in Clermont-Ferrand, France, and Scott Martin (from Global Rights Compliance (GRC), LLP), an American lawyer with more than 13 years of work experience human rights litigation, international trade, international criminal and humanitarian law, working in diverse locations throughout the world. GRC and Delhi based law firm, Legal Imperials are jointly working in India to provide business and human rights compliance advice to corporates including CSR. You can connect with us at info@legalimperials.com

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    References

    1 Dahlsrud, A. (2008), How corporate social responsibility is defined: An analysis of 37 definitions; Corporate Social Responsible Environmental Management, 15: 1–13. DOI: 10.1002/csr.132.

    2 Chen-Oster v. Goldman Sachs, Inc., Case No. 10-6950 (S.D.N.Y.). See also http://www.goldmangendercase.com/.

    3 Bob Van Voris and Max Abelson, “Goldman ‘Boys Club’ Accused of Mocking Women as ‘Bimbos’ and ‘Party Girls’”, accessed at http://www.bloomberg.com/news/2014-07-01/goldman-sachs-boys-club-accused-of-mocking-women.html.

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