Corporate social responsibility (CSR) is typically assumed as a voluntary initiative rather than a legal mandate. Yet, over the past few decades, the world has witnessed the rise of explicit CSR legislation—a body of laws that specifically target corporations and explicitly incorporate CSR or its synonyms.
To date, most scholarly and policy attention of explicit CSR legislation is focused on mandatory CSR reporting under which companies are required to disclose extensive information about their social and environmental plans, actions or performance. Yet, it is important to expand the focus beyond disclosure and explore other possibilities, especially given the limitations of the mandatory disclosure approach. A variety of innovations has recently emerged, including mandatory CSR due diligence, mandatory corporate philanthropy, mandatory governance structure, and a mandatory CSR duty under corporate law.
Mandatory CSR Due Diligence
CSR is increasingly understood as a management process, which inspires process-oriented laws. This regulatory approach is to require companies to identify social and environmental risks associated with its business operation and establish and execute reasonable plans to prevent harm resulting from the identified risks. France’s duty of vigilance law, adopted in 2017, spearheads this approach. French law requires large French companies to develop, disclose and implement a vigilance plan in order to identify risks and prevent severe human rights violations and environmental damage resulting directly or indirectly from the operations of the company, its subsidiaries or its subcontractors with whom it has an established relationship. Importantly, those harmed by the company’s failure to establish or implement a plan may launch civil action and seek damages for corporate negligence.
Mandatory Corporate Philanthropy
CSR used to be seen as synonymous to corporate charity. As modern CSR has expanded far beyond corporate charity and focused on accountable management of any negative externalities resulting from daily business operations, corporate philanthropy is a narrow or even outdated aspect of CSR. Nevertheless, corporate philanthropy remains a popular (mis)understanding of CSR. There seems to be a growing interest in this legislative mode. Mauritius is the first country that adopted mandatory corporate philanthropy in 2009. India and Nepal followed suit. While mandatory philanthropy statutes vary across countries, the gist of this legislative mode is to require companies to commit a certain percentage of their profits to designated CSR programs such as programs to build schools and to provide shelters for the poor.
Mandatory Governance Structure
CSR is a concept often juxtaposed to shareholder wealth maximization. CSR expects corporations to consider and balance the interests of various stakeholders in the course of doing business. A progressive way of implementing such stakeholder-concerned CSR through the law is to require the corporation’s central decision-making institution (ie the board of directors) to be composed of representatives of various stakeholders. An embodiment of this structural approach of mandatory CSR is the so-called co-determination in which employees have representation at the board level. A new approach, albeit less structurally dramatic, is to require a CSR committee within the corporate governance structure. The CSR committee is responsible for enacting and supervising the company’s CSR policies and implementation. South Africa’s 2008 corporate law is the forerunner of this approach.
Mandatory CSR Duty under Corporate Law
As CSR has evolved into a comprehensive system of daily business management, mandatory CSR may refer to a general legal duty to act in a socially responsible way. Available legal experiences suggest that such a CSR duty is often established under corporate law. Exiting corporate law literature tends to equate the CSR duty with part of directors’ fiduciary duty. This tendency is attributable to the influence of common law jurisdictions. For instance, the UK Companies Act 2006 requires directors to consider the interests of employees, consumers, suppliers, the environment, and the community when pursuing the interests of shareholders. However, less noted is that the CSR duty can be a corporate obligation rather than merely part of directors’ fiduciary duty. The corporate statutes of China and Indonesia illustrate this legislative mode. Article 5 of the Chinese Company Act, revised in 2006, requires companies to ‘undertake social responsibility’. Article 74 of the Indonesian Limited Liability Company Act, amended in 2007, requires that ‘companies in natural resources sectors or in connection with natural resources are obliged to implement corporate social and environmental responsibility’.
A comparison of the national legislative histories in my study reveals that the governments adopting mandatory CSR regulation are often motivated to pursue their own interests unrelated to the protection of labour, the environment or human rights. Non-CSR related motivations, such as appeasing political allies, shaming political enemies, and unloading welfare burdens to corporations, play a critical role in enacting the laws. The political interests of governments carry far more weight than the nature of the pre-existing corporate law (whether shareholder-oriented or stakeholder-oriented) in explaining the adoption of mandatory CSR laws. Although CSR laws appear mandatory, politics and the open-ended notion of CSR significantly weaken the compulsory nature of these laws. At least for now, the major function of mandatory CSR laws appears largely symbolic rather than regulatory or adjudicative. At best, they may send signals about appropriate corporate behavior and potentially lead to the reform of business norms that prioritize economic interests over social and environmental concerns. At worst, mandatory CSR laws as they currently stand may be exploited as a political signaling device through which politicians send a symbolic message to their constituents purporting that they care about society and nature.
Nevertheless, considering many laws began with a tentative design and as compromise of conflicting interests, but gradually improved over time, the recent CSR laws might be viewed optimistically as an experimental step toward the development of better CSR legislation. Currently CSR laws generally lack governmental monitoring, legal punishment for non-compliance, and/or any remedial mechanisms for stakeholders. For more details about the legislative backgrounds and reform suggestions, please refer to my study.
Li-Wen Lin is an assistant professor of law at the Peter A. Allard School of Law, University of British Columbia.