Corporate law requires that directors to take only those decisions which they honestly believe (good faith) will serve the ‘best interest of the company as a whole’.

For long it was considered that company is collective of shareholders and therefore, best interest of shareholders is the best interest of the company. However, in some jurisdictions, courts are taking the view that company is a legal entity separate from shareholders and therefore, ‘best interest of the company as a whole’ does not imply best interest of shareholders. Directors must consider the interest of other important stakeholders also. Governments are incorporating that view in corporate law. For example, Section 166 of the Indian Companies Act 2013 (Indian CA) stipulates, “A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.”

Corporate law imposes a responsibility on the directors that while taking decisions in the commercial interest of the company, they should evaluate the impact of their strategies and operations on employees, neighbourhood communities, and environment. Directors must ensure safe and good working conditions to employees and safety to neighbouring communities, chose business models that produce minimum negative externalities and minimum negative impact on the environment. They must also ensure that the company is taking actions to mitigate the pain inflicted on neighbouring communities and to conserve and protect the environment. This responsibility is called corporate social responsibility (CSR). Business defines CSR little broadly. According to it, CSR is not limited to mitigating pain on neighbouring communities. CSR is to support the neighbouring communities and communities in which firms work in their development initiatives.

The above perspective on CSR is reflected in the requirements of Section 135 of the Indian CA, which mandates large and profitable companies to spend two percent of the average net profit of past three years in CSR activities listed in schedule VII of the Act, which lists wide range of developmental activities. It stipulates that in spending the money the company should give preference to the local area and areas around it where it operates. American Business also hold similar view. Business Round Table (BRT), which is an association of CEOs of America’s leading companies, in its 2019 statement on the Purpose of a Corporation, signed by 181 CEOs, states that, among other things, Business are committed to supporting the communities in which they work and protecting the environment.

Incorporation of CSR in corporate law is a huge progress in making Business responsible. A recent development is more significant. It is the emergence of the concept of corporate irresponsibility. Companies that fail to fulfil CSR and adopts unethical practices in dealing with customers, vendors and other stakeholders are labelled as irresponsible companies. Corporate irresponsibility is now a taboo. Irresponsible companies fail to attract and retain talent. Recent research shows that ‘meaningfulness’ quotient of jobs increases when employees see top management’s sincerity in fulfilling CSR and adopting ethical practices. This has made CEOs and directors cautious that the reputation of the company and their own reputation are not tarnished by media exposure to company’s irresponsible behaviour. This has strengthened commitment of companies to CSR and adoption of ethical practices.

Public pressure on Facebook to stop political advertisements before Presidential election in U.S.A. or to remove President’s statement on movement against racial discrimination in U.S.A. shows that Big firms have enormous power to impact the social culture and outcome of important social events. CEO and the Board should take the responsibility to assess the impact of every strategy and policy on social culture and fabric. Their social responsibility is not to adopt strategies and policies which might hurt the society, even if those benefit the company commercially.

We see that CEOs and chairpersons often express concerns about social evils, like discriminations and inequality, in social media and public fora. They must realise that their statements are seen with suspicion by employees and other stakeholders. They consider those as rhetoric, unless the company demonstrates sincerity in eradicating those evils. In times to come, companies which will fail to demonstrate that sincerity, will be considered irresponsible.

Reimaging CSR is necessary to present a better society to future generations. The current trend creates the hope that the change is coming. New generation CEOs and directors, who as students were part of social activism, will take the society forward.

66 views0 comments

Recent Posts

See All