To regulate or not to regulate
The core of Corporate Social Responsibility (CSR) deals with the societal and environmental aspects of economic activity. Historically, the question of what and how much corporations should be responsible for has been answered differently.
In some cases, corporations were legally obliged to be responsible, while in others their responsibility was only voluntary. In the earlier times of English capitalism, for instance, large amount of corporate social costs went to workers and environment, whereas later companies were more responsible for external stakeholders around them.
Nowadays, both in the UK and many other countries there are laws or regulations covering things such as a minimum salary, minimum job safety and health protection requirements. However, in very few states there are regulations concerning overall disclosure of a company’s environmental impact, supplier relationships and community impact. France, Denmark, South Africa, China and Indonesia are among countries where some corporations are legally enforced to disclose such information, or in other words, to provide CSR reports. The grounds for mandatory CSR disclosure may include belonging to a particular industry (e.g. extractive industry in Indonesia), size or type of ownership of a company.
Currently there is a discussion about India’s new Companies Bill, which is expected to be legislated by the end of this year. This law would institute mandatory CSR disclosure for qualifying corporations and require that those corporations spend a prescribed two percent of annual profits on CSR and, in case of violation, explain why they have failed to do so. Opponents to the Companies Bill suggest that it is a bad proposal and the initiative will prove to be ineffective; and that such regulations contradict voluntary nature of CSR. Moreover, without particular sanctions for noncompliance of the law, or coercive enforcement mechanism, it is unlikely that such regulations will result in widespread adoption of CSR programs and activities. Furthermore, a requirement of a particular proportion of annual profits to be spent on CSR in many corruption prone countries would cause an increase in money laundering through various affiliated NGOs and other organisations, hence decreasing the tax base and thus state budget incomes. Proponents, on the contrary, believe that mandatory CSR disclosure can make a country a safe and attractive destination for investment, being a crucial step towards full stakeholder engagement and corporate accountability. In other words, a usual question arises on whether to regulate, or not regulate.
In order to prove that regulation in the sphere of CSR disclosure is more so effective than simply another legal burden on corporations, I would like to support the idea that CSR is not necessarily voluntary. For decades, European governments have been presenting legal conditions for local companies, in which they have been obliged to provide much more for both inside and outside stakeholders than, for example, American companies. This is especially the case for European welfare states, such as Denmark, Norway, Iceland, Sweden and France. Therefore, it is not surprising that these particular countries are among the leaders in terms of adoption of laws regarding CSR disclosure. As a result, in these countries where businesses based on law are delegated with functions, the overall CSR effectiveness of the business sector must be higher due to isomorphism and, hence, further convergence of CSR practices in the local organizational fields and markets.
There are four possible CSR sources, namely; public international instruments, NGO guidelines, individual business codes of conduct, and domestic legislation relating to CSR. However, influence of the first three factors will be weaker in cases of poor domestic legislation. For example, introducing the Sustainability Index on the stock market and including CSR disclosure among the main listing requirements would increase coercive institutional pressure and encourage more companies to adopt more sustainable practices. However, unless direct legal requirements are indirectly underpinned by strong educational, cultural and political systems, effectiveness of such introductions may amount to zero.
All in all, the higher standards companies face the higher performance they will have. Eventually, it does not really matter if we call a good deed volunteer or not. The presence of the good deed and its social and environmental impacts are the ultimate goal.
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De Villiers, C. and Alexander, D. (2010): The Institutionalisation of Corporate Social Responsibility Reporting. Available at: http://w3.unisa.edu.au/commerce/docs/seminars/2011%20seminars/csrr%20unisa%20(de%20villiers).pdf. Accessed on August 08, 2013.
Hiss, S. (2009): From Implicit to Explicit Corporate Social Responsibility: Institutional Change as a Fight for Myths. Business Ethics Quaterly, 19(3), 433-451.
Karnani, A. (May 20, 2013): Mandatory CSR in India: A Bad Proposal. Available at: http://www.ssireview.org/blog/entry/mandatory_csr_in_india_a_bad_proposal. Accessed on August 08, 2013.