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Introduction

Corporate social responsibility (CSR) exemplifies the interdependent nature of business and society, and the role of business to be responsible in creating a better future and use resources in ways to benefit society (Snider, Hill, & Martin, 2003). Definitions of CSR are many (e.g., Carroll, 1999; Kakabadse, Kakabadse, & Rozuel, 2007; Valor, 2005), though they all share the commonality that business should not just concentrate on being responsible to its shareholders. Carroll (1979) conceptualized CSR as four types of responsibilities of businesses. The economic component obligates a business to perform well, the legal component requires them to obey the law, the ethical component enjoins them to abide by society’s ethical standards, and the philanthropic component expects them to give back to the society in some form. The components are not mutually exclusive. The CSR perspective assumes that business will focus on all four as a unified whole, through decisions, actions, policies, and practices that simultaneously fulfill all its component parts (Carroll & Buchholtz, 2006). Thus, CSR is recognized to have a strong discretionary component, beyond what is required by law and what is deemed right. Matten and Moon (2008) argue that CSR should be perceived both as a social imperative and social consequence of business success, and the operative definition depends on specific historic, cultural, and political factors of the geography where business operates. This allows for the dynamic nature of CSR, as its content evolves over time contingent on changes in the degree of risk, regulation, reputational challenge, and standards of desirable behavior accepted in the society (Baxi, 2005). This also allows conceptualizing various approaches to CSR based on the interaction between business and society—instrumental (CSR as mere end to profits), political (CSR that recognizes power of the company), integrative (CSR as the company’s assumption of social demands), and ethical (CSR as ethical obligation of the company) (Garriga & Mele, 2004). Further dynamic conceptualization of responsibilities of business also allows for argument that the CSR agenda for developing countries is likely to be markedly different based on contextual and cultural factors and priorities of society (e.g. Gugler & Shi, 2008; Idemudia, 2011; Jamali & Neville, 2011; Lund-Thomsen, 2004).

Worldwide, in the last decade and half, governments are increasingly involved in promoting and encouraging businesses to adopt pro-CSR stance (e.g., Albareda, Lozano, Tencati, Midttun, & Perrini, 2008; Zadek, 2002). Governments actively provide an enabling environment in extending CSR, especially in delivering against public policy goals and priorities (Fox, Ward, & Howard, 2002). Governments adopt four different roles to encourage CSR: mandating role through legislating, facilitating role through creating guidelines on content, fiscal support and frameworks for voluntary action; partnering role by engaging in multi-stakeholder processes to build capacity, and endorsing role through political support and publicity (ibid). In its mandating role, government actions range from conventional social and environmental hard-law regulations to soft-law related to voluntary self-regulation and reporting. Soft legislation refers to quasi-legal requirements that are not legally binding. Soft law developments in European Union regarding CSR mean that “its (law’s) influence lies in how they influence, rather than control, the behavior of corporations … (though) it is not entirely without hard legal efficacy; a number of directives refer to soft law standards as informing their application” (Croquet, Hameed, & Yalkin, 2009, p. 2). Soft law does have practical effects, as it is expected to be implicitly binding. For example, in the UK, soft law involves encouragement of CSR through ministerial leadership, closer public–private partnership to deliver social well-being, and subsidizing CSR activities by changes in tax laws to encourage corporate philanthropy (Albareda, Tencati, Lozano, & Perrini, 2006; Joseph, 2001; Moon, 2004). On the other hand, countries, notably those in middle- and low-income levels and facing major social challenges, have explicitly sought engagement with business in meeting those through forms of hard regulations. Some such examples are Black Economic Empowerment program (South Africa), Presidential encouragement of business efforts to tackle poverty (Philippines), and Citizens Economic Empowerment (Zambia) (UNDESA, 2007). Some other countries are mandating to corporate sector to allocate and spend an obligatory amount for implementing CSR. For example, in Indonesia, companies engaged in natural resources or the forestry sector are expected to allocate and spend an (undefined) obligatory amount for implementing CSR, which can be considered as an operational cost (Waagstein, 2011). India has mandated in 2013 that companies of certain size have to spend 2 percent of their profit on philanthropy.

Thus, the altruistic credo of business to do good for the society over and above legal and ethical requirements is coming under mandating role of the government. We call this aspect as mandated CSR (mCSR), that is, doing good for the society as mandated by legislation. While business insists that CSR be a voluntary commitment but other societal stakeholders like government, non-governmental organizations (NGOs) and civil societies, trade unions, and consumers are increasingly putting on a range of responsibilities on the shoulder of business. Many of these, sometimes representing different expectations from different interest groups, are those which cannot be pursued through existing legal and judicial frameworks. The concept of mCSR links those expectations to requirements under either soft law or hard law.

Expectation from Business: By Governments with Pressing Developmental Needs

In respect of middle- and low-income countries, it is increasingly being suggested that governments of such countries should set the CSR agenda for themselves, by recognizing potential contribution from CSR and aligning it with national development goals (UNDESA, 2007). Middle- and low-income countries are beset with a low per capita income, and low level of human capital index; their social and environmental challenges are distinctive, and the political will and administrative ability to tackle these differ widely. The mainstream CSR agenda is largely driven by concerns and priorities of developed countries and ignores the local realities such as social (e.g., poor access to capacity-building), political (e.g., poorly developed democratic institutions), and economic (e.g., tax avoidance and poor legal enforcements) challenges. It aims at universalizing a set of conditions that does not exist in middle- and low-income countries and ignores the wider ramifications of CSR demands on the very people it seeks to protect, inadvertently harming them (Idemudia, 2011). Visser (2008) identifies six internal drivers of CSR in such countries, namely cultural traditions, political reform, socio-economic priorities, governance gaps, crisis response, and market access. As example of India and Indonesia—the second and fourth largest countries of the world based on population—indicates, such countries are incorporating hard legislation to mandate CSR by business.

With conceptualization of CSR undergoing a change with increasing legislation—both hard and soft—in what was expected to be the discretionary responsibility of the business, we discuss in the present chapter the implications and problems associated with mCSR using the context of the Indian legislation. In the next section, we describe the Indian legislation and explain how it is a definitive and bold move toward underpinning obligations of business toward society in general. Then we discuss the implications and problems that are likely to be inherent in making philanthropy mandatory. Last section discusses the ameliorative steps that can ensure that mCSR delivers content as intended.

Hard Legislation on CSR in India

India is the first country to legislate mandatory involvement of business organizations in the process of development of the society through CSR. Section 135 of The Companies Act, 2013Footnote 1 mandates:

135 (1) Every company having net worth of rupees Footnote 2 five hundred crore Footnote 3 or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

…

(3)The Corporate Social Responsibility Committee shall, (a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII.

…

(5) The Board of every company referred to in sub-section (1) shall 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 immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

Total CSR funds thus generated amounts to an estimated $2 billion per annum.Footnote 4 The government expects companies to spend this amount on various CSR activities, detailed in Schedule VII of the said Act. The said schedule lists these as eradicating extreme hunger and poverty; promoting education; promoting gender equality and empowering women; reducing child mortality and improving maternal health; combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; ensuring environmental sustainability; enhancing employment-linked vocational skills; supporting social business projects; and contributing to funds set up by the government to help various historically disadvantaged groups of the society including women and marginalized communities.

Under mCSR in India, the companies are free to utilize their funds as they deem fit for philanthropic activities like building schools, organizing health camps, planting trees, and so on, leading to reputational legitimacy, trust, and reciprocity from local communities. Thus, mCSR serves a dual purpose: it allows the government to force business to support social welfare, as well as pleases companies by avoiding additional taxes (Zile, 2012). There are no punitive steps prescribed for not spending CSR funds, but reasons for not doing so are required to be disclosed in the Annual Report. Thus, mandatory expenditure by companies is monitored entirely through public disclosure.

The mCSR of India is a definitive and bold move toward underpinning the obligations of business toward society in general. By defining minimum standards for company contribution to philanthropy, the government aims to ensure that business lives up to the expectation of creating social good, along with creating economic profit. It allows the government to harness potential positive benefits of CSR by integrating it with public policy discourses, in line with its commitment to create equity in a socialist, democratic republic.

CSR in India

India has a long tradition of philanthropy based on the rich and nuanced cultural and religious tradition of the country. Home-grown Indian companies have engaged in corporate philanthropy since the advent of industrialization in the country. A prime example is that of the salt-to-software multinational conglomerate of Tata Groups, with market capital of close to $100 billion of its listed companies; 66 percent of shares of its holding company were bequeathed to various trusts since its founding more than a hundred years ago.Footnote 5 The first iron and steel plant of the Group had an eight-hour work-shift since its inception in 1911, when factories in Europe and North America still had a minimum of 10- or 12-hour days. The foremost thought leader of the twentieth century, Mahatma Gandhi, conceived business as a trusteeship wherein the business owners consider part of their wealth in excess of their needs as being held in trust for the larger good of society, and act accordingly (Gandhi, 1939). The trusteeship concept of Gandhi is proactive and intends at transformation whereby the business sees itself using its assets for the benefit of the society, as well as following a moral path in its conduct of business (Gopinath, 2005); this concept has served as a model for many business leaders both during pre- and post-independence (India gained freedom in 1947), the example of the Tata Group being one.

The Indian business society, in modern times, is seen as a complex mix of traditional values and dimensions of contemporary global market imperatives (Chatterjee & Pearson, 2000). This is reflected in mixed expectations from CSR. For example, Balasubramanian, Kimber, and Siemensma, (2005, p. 86) found that there is a clear dichotomy emerging in socio-economic space regarding role of CSR in modern India—on one hand “there is a strong belief that CSR is an essential element in ‘social uplift’ and development, something very relevant to India, but less emphasized in US, UK or Western European nations”, and on the other “this may indicate a potential tension which could emerge if CSR policy development is driven by a ‘link-to-business-objectives’ focus—employee satisfaction, urban needs, transport and so on—while the more pressing traditional issues as noted above remain ‘out in the cold’”. The study also found that deep integration of CSR in mainstream business is scarce, and CSR practice is both reactive and “caring” focused. A more recent study of the top 500 companies in India finds that 229 did not report on CSR activities; the remaining appear to make generally token gestures toward CSR, with funds spread thinly across many activities, and only a few have structured and planned approach (Gautam & Singh, 2010). This study further finds that companies define CSR in distinctive ways as per their own needs, and that it is primarily driven by philanthropy. A comparatively recent study on CSR as practiced by international companies in India found that “profoundness of the commitment varies according to their experience and knowledge of the issue, and a lack of coherence among companies and stakeholders regarding the understanding of, and engagement in, the issue is evident. In its contemporary stage, the development impact of the CSR strategies can be seen as rather modest” (Shankar, Chadwick, Ghafoor, & Khan, 2011, p. 97).

The Indian experience regarding CSR indicates that though, conceptually, business agrees that CSR is important and should be philanthropic in nature based on traditional values, in reality, delivery has been patchy. Also, the expectation of society from companies is diverse—ranging from developmental needs to pragmatic needs of business (Balasubramanian et al., 2005). Drawing a distinction between CSR that has ‘link-to-business-objectives’ focus, or is more directly linked to business goals like revenue-generation and profitability, and that done for the good of society without any obvious return, the government of India has introduced its legislation on CSR. It makes CSR aimed at mitigating problems in the society mandatory. The emphasis is purely on philanthropy—it is clearly stated that any surplus arising out of CSR activities has to be farmed back into CSR corpus, and cannot be offset by the mandated two percent of average net profits.Footnote 6 The Indian legislation on mCSR is likely to become a template for other countries dealing with pressing developmental needs in institutionalizing CSR in the form of legal obligations. Most middle- and low-income countries share similar socio-political-cultural-infrastructural-administrative challenges. Thus, discussing problems and implications of mCSR in the context of Indian legislation has ramifications for other such countries as well.

Problems and Implications of mCSR

The relationship between legislation and company compliance is complex (Waagstein, 2011), and the two do not necessarily coincide. India has a plethora of laws regarding safety and care of important stakeholders to business, viz., employees, customers, vendors, environment, and society. These detail what businesses should or should not do, though implementation is often problematic and is seen as inimical to running a business. An overloaded judicial system, overlap among different laws, antediluvian nature of laws (i.e., not in sync with changing realities), and corruption impair the effectiveness of law as “mock-compliance” (i.e., merely in form) is common. As India tries to find an optimum ground in between challenges of socialistic welfare and economic drivers of economy, mCSR has been designed to force large companies to share the state’s responsibility of providing some of the basic amenities of dignified human existence in respective local communities.

The challenge of mCSR lies not in intent but in delivery of the intent. We raise questions in the next section of it being effective, cost beneficial, and competitive; our contention being that till business is fully satisfied with the answers, intent of the legislation may not be converted into appropriate action. Thereafter, we discuss some ways of amelioration of the problems and implications of mCSR.

Will mCSR Be Effective?

The legislation in India is based on the concept of stakeholder theory (Freeman, 1984). Business has to accept that, apart from shareholders, there are other stakeholders to the business and the company is beholden to look after them as each have an “intrinsic value” (Donaldson & Preston, 1995, p. 67)—this is the normative version of CSR. As per Indian legislation, a committee of the Board will create the CSR policy and monitor the implementation. However, according to the agency theory, managers are engaged, actively monitored, and incentivized by the principals (owners/shareholders) to run the business profitably (Eisenhardt, 1989). Based on the agency theory, most managers are not likely to find intrinsic value in all stakeholders; rather, they are likely to attend to those stakeholders who have the power to reward and/or punish them. These are likely to include those who do not have legitimate stake in the business but have attributes of power and urgency, labeled as ‘dangerous’ by Mitchell, Agle, and Wood (1997). CSR money can actually go into buying support of ‘dangerous’ stakeholder for the business, in guise of espousing the cause of the poor and underprivileged. This can be in the form of patronage extended to local political and social elites—by helping institutions and causes in which they are interested, or supporting non-governmental organizations and civil societies that tend to make maximum noise. The business may see this approach to buy support or silence of stakeholders, typically that of the dangerous variety, as an easy route, rather than investing in long-term supportive relationships, or genuinely working through to alleviate the cause of concern. Thus, the legislation may lead to increase in self-interest-driven behavior or act as “a valuable entrenchment tool for incumbent managers” as Cespa and Cestone (2007, p. 742) found in their study that relations with social activists may become an effective entrenchment strategy for inefficient CEOs.

The other danger of buying off dangerous stakeholders is even more painful. The stakeholders, who started off espousing a genuine cause of the society, for example, mining in an environmentally sensitive area, may be silenced and there will be no one left to take up the case on behalf of the stakeholder. For example, Fooks, Gilmore, Collin, Holden, and Lee (2013, p. 284) argue that tobacco companies use CSR as a political tool to prevent introduction of punitive legislations, as managers use “CSR to broker access to public officials, influence the policy alternatives under consideration by elected representatives, break up opposing political constituencies”.

The present legislation, based on stakeholder theory, does not provide any “principled criterion for decision making” (Jensen, 2010, p. 36). Thus, managers are likely to formulate, adopt and implement those CSR projects which add on to their personal glory or are closer to their personal interest in the form of psychological egoism or add to their reputation as good global citizens in the eyes of various stakeholders (Hemingway & Maclagan, 2004). For example, Barnea and Rubin (2010) found that managers induce companies to over-invest in CSR when they themselves bear little of the cost of doing so.

Continuity of any CSR initiative may be an issue, and with successive regime change, CSR activities may end up representing flavor of the season. Even within the overall CSR policy document, it is likely that projects picked up necessarily do not reflect the optimum choice. Thus, the present legislature may promote mismanagement of funds. Managers, being the most important stakeholder in a firm (Williamson, 1985), will have too much power to distribute CSR fund (Jensen, 2010) without being held accountable for the impact that the expenditure is creating toward social benefit, or worse still, use discretion over CSR to cement their respective position in the company with the help of stakeholder backing to the overall detriment of shareholder (Cespa & Cestone, 2007).

Will Mandatory CSR Increase Company Cost?

The aforesaid legislation is silent on cost of managing the responsibility of mandated CSR. Planning how to spend money well will need investment in appropriate people and processes, as well as in oversight; and companies may be loath to take on the challenge of this extra cost of time, effort, and resources. For example, trying to find out the needs of local community is a long and drawn-out endeavor, and “is inherently constrained by the companies’ lack of developmental expertise and the technical/managerial approaches” dominantly adopted; thus it is highly likely that what passes as developmental needs are demands of locally influential persons (Frynas, 2005, p. 591). In an analysis of the management of charitable giving in large UK companies, it was found that there is considerable inertia in the processes by which the level of giving is determined (Brammer, Millington, & Pavelin, 2006).

Thus, companies may settle down for least cost options for spending the CSR fund by resorting to check-book philanthropy where one issues checks to various delivery partners to support sundry good causes. This low-cost emphasis on spending CSR fund is likely to create patronage-distributor tendencies in the company, toward various claimants for a share in the pie. Also, emphasis on spending would represent an end of process, rather than an ongoing engagement that can be “further developed and refined” (Waagstein, 2011, p. 462), leading to short-term expediency. This is more so as failure to spend the fund needs to be recorded in Annual Reports with public disclosure acting as implicit stress point. This can lead to a fragmented, defensive approach toward CSR, with focused intention on spending money.

CSR spend is expected to create private benefit to the business for its production of social benefits, say, in the form of increased customer and employee loyalty. However, if as argued above, CSR activities continue to be fragmented and oriented by top management’s personal liking or by threat of dangerous stakeholder, then even the expected private benefit for the firm will be a casualty.

A company is neither equipped in extending social benefits nor can it be expected to maximize performance in more than one direction (e.g., profitability and societal impact). Attention to its primary goal of profit-generation may get deflected by making special attempts to put something back into society (Davis, 1973; Jensen, 2010). The company will be spending other people’s money on other people; this may lead to profligacy (Friedman, 1970). Thus, resources may get poorly spent without any appropriate checks and balances, in the name of CSR. With every company trying to spend the money, there may be duplication of effort and wastage. Frynas (2005) shared an example of a road built parallel to another road built by the local development authority in Nigeria to highlight failure of planning and coordination, along with the absence of integration with macro-level development plan due to emphasis on short-term expediency which favors form more than substance. So, due to mCSR, companies may scale back voluntary initiatives, and the expected private benefit to the company may also be poorer.

Will mCSR Result in Competitive Disadvantage?

Companies which fall under the ambit of legislation may find it tougher to source money from the marketplace. As a portion of the profits, which could have been paid as dividend or retained for future expansion, has to be spent on CSR, prospective investors may decide to support smaller size businesses which do not fall under ambit of mCSR. Thus, mCSR is likely to create obstruction in free business.

Similarly, imposing legal obligations may limit voluntary initiatives, as well as place companies on the defensive and discourage them from embracing that responsibility. For example, environmental protection under mCSR will mean donation to environmental conservation issues or planting trees; however, it may preclude integrative CSR that aims at setting up an environmental management system at production facilities or innovative CSR that encourages firms to invest in development of innovative solutions like eco-efficient products or services (Halme & Laurila, 2009). In their decisional role (Mintzberg, 1990), managers are likely to practice opportunistic and self-serving behavior, as suggested above. For example, managing negative externalities of business leads to better financial performance for the firm compared to generating positive impact for nonmarket stakeholders (Lankoski, 2009). Thus, beyond mandated responsibility, business may just concentrate on managing negative externalities, rather than investing in products and processes to reduce creation of negative externalities. This may have long-term implication and mar competitiveness in the marketplace—for example, proactive launch of business models that provide the poor with affordable products or services that solve their problems may take a back seat, and thus companies may miss out market opportunities at the bottom of the pyramid. As all companies are not legally mandated to observe CSR norms in their operations, the regulation effectively discriminates against large companies, subjecting them to obligations from which smaller ones are exempt (Deva, 2004).

Amelioration of Problems and Implications

As a primary decision maker (Mintzberg, 1978), the CEO plays a critical role in social strategies and resource allocation to such pursuits (Agle, Mitchell, & Sonnenfeld, 1999; Wood, 1991). Upper echelons theory argues that executives strongly impact an organization’s outcomes (Hambrick & Mason, 1984). Research has shown that there is “overwhelming importance of top management’s values, ethics and morals in setting the tone of organisational culture” that acts as the foundation upon which CSR is built (Sirsly, 2009, p. 88), and that CEO discretion is the greatest influencer in corporate giving across institutional environments (Brammer et al., 2006). Thus, responsible spending of CSR funds can be linked to directions set by the upper echelon of the firm, tempered by their respective values, ethics, and morals.

The CSR fund, as per the legislation, is essentially money out of the pocket of shareholders, in the form of missed dividend. Hard data may not tell the whole story, and thus the Board may need to spend judicious time in finding out how the CSR policy is being implemented. However, there are no universally accepted criteria to collect, assess, and compare the output. For example, a firm, using its available CSR fund, achieves 100 percent literacy rate in its immediate community. The amount of resources spent to achieve this result cannot be compared, or commented upon within any generally accepted or notified standards. So, questions around appropriate utilization of resources remain open to debate. Codification and certification of practices that lead to societal benefit, and allow comparison of net benefit across diverse settings, and “makes visible whether a firm indeed does things in the way they should be done” (Terlack, 2007, p. 972) may actually help both the shareholders as well as civil society to oversee the appropriate social benefit against resources used “by achieving transparency, communication, and accountability” (Waddock, 2000, p. 343).

Conclusion

The expectations from business have undergone drastic changes in recent years. In countries like the United Kingdom, Italy, and Norway, it is accepted that business has a role to play in sustaining the modern welfare state, though this comes fore in different ways (Albareda et al., 2008). The role has been to promote and encourage CSR, as well as “mediate in and catalyze perceptions and expectations … to encourage and lead multi-stakeholder dialogues and partnership projects” (ibid, p. 360). Examples of such soft legislation and practices are not deemed enough by proponents arguing for stricter regulation, and mCSR seems to be the way ahead. However, charities, NGOs, and civil society groups may yet not celebrate as there now seems to be too much managerial discretion available in spending CSR funds, without commensurate mechanism of oversight.

In reference to Indian legislature, as a business starts providing welfare state services, the boundary between role of government and business gets blurred. We argue that the Board’s very close attention to the creation of appropriate CSR policy, and oversight regarding its implementation will be buoyed by right “upper echelon” at the top, and by rigorous vigil by civil societies with an appropriate, generally accepted measurement system of societal impact. The battle of getting capitalist business to spend for the good of society has been won, but the war to make an impact in the society through this means is yet to begin. After all, as pointed out by Leisinger (2007, p. 331) the challenge of corporate philanthropy—whether motivation comes from heart or through a mandate—is that “the outcomes (or impact) must be achieved in the most efficient, cost-effective and significant way”.