Published online by Cambridge University Press: 02 January 2018
This paper aims to lay the foundations for a more critical approach to the relationship between corporate social responsibility (CSR) and corporate law. Limitations on legislative approaches including directors’ duties, disclosure of information, sustainable decisions, direct promotion and corporate internal management structure are critically analysed, trying to find well thought-out and effectively implemented adjudication that provides meaningful instruction for regulating CSR. The paper explores the manner in which corporate law may contribute to accommodating CSR principles within corporate strategies, in order to establish a transformative legal regulatory framework within corporate law by using the authoritative legal mode to promote corporate regulatory mechanisms. The paper critically studies a few legislative measures supported by the relevant legislative experiences from various jurisdictions as examples of currently enforced CSR laws at national level, in order to offer comprehensive and potentially effective legislative suggestions for accommodating CSR elements. However, a ‘one size fits all’ approach is clearly not desirable, and these suggestions should be interpreted and implemented in a locally relevant manner, according to path dependence theory.
I am immensely grateful to the anonymous referees for their constructive and insightful comments. I am greatly indebted to Professor Andrew Keay for providing me with valuable comments on the draft of this paper. I also want to thank Professor Blanaid Clarke for her encouragement and support.
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114. A provision that is similar to Esvp, also introduced in the new Companies Act, states that ‘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’ (s 166 (2) of Indian Companies Act 2013).
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118. For example, KMPG believes, from a practical point of view, that corporate responsibility reporting has established its position as the de facto law for business, delivering a compelling insight into the expectations that companies face; see KPMG, above n 35, p 2.
121. See eg G20/Oecd, above n 17, ch 5.
122. Section 414C(7)(b) Companies Act 2006.
123. Section 414C(7)(b) Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013.
124. The Business Review was the previous legal requirement before the enforcement of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013. Legislatively, under s 417 of the Companies Act 2006, directors are obliged to include in the Business Review ‘a fair review of the company's business and a description of the principal risks and uncertainties facing the company’. The purpose of the Business Review was ‘to inform members of the company and help them assess how the directors have performed their duty under Section 172’. The obligations imposed on quoted companies are more onerous in comparison. Their Business Review must ‘to the extent necessary for an understanding of the development, performance or position of the company's business’, include ‘the main trends and factors likely to affect the future development, performance and position of the company's business and information about environmental matter, the company's employees, social and community issues’.
125. Section 414C (1) Companies Act 2006.
126. Ibid, at 442.
127. See Art 5 of Chinese Company Law 2006 (Ccl 2006); ss 134–135 of the Indian Companies Act 2013.
128. This implies that the controlling bodies of companies, when pursuing the interests of their shareholders, have to be socially responsible, and responsible to internal and external stakeholders.
129. The abstract provision could act as a guidance principle for future provisions, such as: detailed corporate responsibilities at different levels; enforcement measures for these responsibilities; directors' duties towards stakeholders in realising these responsibilities; and corporate liability and directors' liability in breach of these responsibilities.
130. Typical primary stakeholders are employees or creditors who input human capital and loan capital to companies, while shareholders inject equity capital.
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136. Since the Sixth Plenary Session of the Sixteenth Central Committee of the Chinese Communist Party in 2006, the policy has been adopted as the long-term goal of Chinese socialism; see Long, G, Zadek, S and Wickerham, J ‘Advancing sustainable competitiveness of China's transnational corporations’ (2009) AccountAbility (London) 35 Google Scholar.
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140. The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) issued the ‘Guidelines to the state-owned enterprises directly under the central government on fulfilling corporate social responsibilities’; the Chinese Academy of International Trade and Economic Cooperation, a subsidiary of the Ministry of Commerce, issued ‘Guidelines on corporate social responsibility compliance by foreign invested enterprises’; and the Shanghai Stock Exchange issued ‘Notice on strengthening listed companies’ assumption of social responsibility and guidelines on Shanghai Stock Exchange listed companies' environmental information disclosure'; see also Zhao, J Corporate Social Responsibility in Contemporary China (Cheltenham: Edward Elgar, 2014) pp 136–141 Google Scholar; Sarkis, J, Li, N and Zhu, Q ‘Winds of change: corporate social responsibility in China’ (2011 January–February) Ivey Bus J 1 Google Scholar.
141. On the basis of empirical research, human rights issues have been largely ignored by corporations in their corporate reports: see Li, Z and Cui, XN Corporate Social Responsibility in China (Beijing: China Economic Publishing House, 2011)Google Scholar. This may be a useful opportunity for the UN to introduce human rights law and jurisprudence developed by the UN treaty bodies to the Chinese legal and constitutional system. See Subedi, SP ‘China's approach to human rights and the Un human rights agenda’ (2015) 14 Chinese J Int'l L 437 CrossRefGoogle Scholar.
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143. See eg O Lui ‘Mining companies explain their operations abroad – and so do their problems’ CSR Asia, 7 October 2008. However, it is argued that the settlement of human rights related issues still has a long way to go in China: see H Zhang and C Qian ‘Merging business and human rights in China: still a long way to go’ (2014) 76 Focus, available at http://www.hurights.or.jp/archives/focus/section3/2014/06/merging-business-and-human-rights-in-china-still-a-long-way-to-go.html (accessed 22 February 2016); see also Hanlon, RJ Corporate Social Responsibility and Human Rights in Asia (Abingdon: Routledge, 2014) pp 91–116 Google Scholar.
144. According to path dependence theory, an outcome or decision is shaped in specific and systematic ways by the historical path leading to it, as well as by other factors within the socio-economic context; see Hathaway, OA ‘The course and pattern of legal change in a common law system’ (2001) 1 Iowa L Rev 103–104 Google Scholar.
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147. Of course, taking into account a nation's corporate law, enforcement processes, shareholder structure, civil procedures, stage of economic development, and other aspects including the culture, history and traditions that are embedded within a particular jurisdiction. See Bell, J ‘Path dependence and legal development’ (2013) 87 Tulane L Rev 787 at 787Google Scholar.
150. Kerr, M, Janda, R and Pitts, C Corporate Social Responsibility: A Legal Analysis (Ontario: LexisNexis, 2009) p 101 Google Scholar; see also Filatotchev, I and Nakajima, C ‘Corporate governance, responsible managerial behaviour, and Csr: organizational efficiency versus organizational legitimacy’ (2014) 28 Acad Mgmt Perspect 289 CrossRefGoogle Scholar; Benn, S, Dunphy, D and Griffiths, A Organizational Change for Corporate Sustainability (Abington: Routledge, 33rd edn, 2014 Google Scholar).
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153. KPMG's Global Sustainability Services and UN Environment Programme Carrots and Sticks for Starters: Current Trends and Approaches in Voluntary and Mandatory Stands for Sustainability Reporting (South Africa: UNEP, 2006) p 9.Google Scholar
154. A ‘comply or explain’ approach reduces reporting costs for companies by not requiring companies to report on matters which are not relevant in practice; see European Commission The EU Corporate Governance Framework COM(2011) 164 final 5.4.2011 at 18.
155. This concept of ‘comply or explain’ originated in the UK with the Cadbury Report in 1992, which provided the first serious code, and states that a company should comply with a set code of practice, but if it does not then it must state this in the annual directors' report and explain why; see Keay, A ‘Comply or explain in corporate governance code: in need of greater regulatory oversight’ (2014) 34 Legal Stud 279 CrossRefGoogle Scholar; MacNeil, I and Li, X ‘“Comply or explain”: market discipline and non-compliance with the combined code’ (2006) 14 Corp Govern: Int'l Rev 486 CrossRefGoogle Scholar; Andres, C and Theissen, E ‘Setting a fox to keep the geese – does the comply-or-explain principle work?’ (2008) 14 J Corp Fin 289 CrossRefGoogle Scholar; Arcota, S, Brunob, V and Faure-Grimaud, A ‘Corporate governance in the Uk: is the comply or explain approach working?’ (2010) 30 Int'l Rev L & Econ 193 CrossRefGoogle Scholar; Seidl, D, Sanderson, P and Roberts, J ‘Applying the “comply-or-explain” principle: discursive legitimacy tactics with regard to code of corporate governance’ (2012) 17 J Mgmt & Govern 791 CrossRefGoogle Scholar.
156. For example, it is suggested by Horrigan that new rules are needed, with governments, companies and the community all playing a part and proposing a framework of international agreement focusing on CSR; see Horrigan, above n 19, pp 269–270.
157. Kerr et al, above n 150, p 100; see also BE Olsen and KE Sorensen ‘Strengthening the enforcement of CSR guidelines: finding a new balance between hard law and soft law’ (2014) 41 Legal Issues Econ Integ 9.
158. For example, corporate codes of governance to which listed companies should adhere could be one of the legal documents that help to promote CSR. They are useful in the context of voluntary principles that acquire recognition by companies, international financial institutions and civil societies as the result of an industry drive towards self-regulation, globally re-enforcing norms that have received multilateral and international acceptance; see B Nwete ‘Corporate social responsibility and transparency in the development of energy and mining projects in emerging markets: is soft law the answer?’ (2007) 8 German L J 311 at 327. As another example, stock exchanges require social and environmental disclosure as part of their listing requirements: Australia's ASX, Brazil's Bovespa, India's Securities and Exchange Board, and the London Stock Exchange; see Initiative for Responsible Investment Corporate Social Responsibility Disclosure Efforts by National Government and Stock Exchange (12 March 2015).
159. Pillay, above n 104, p 136.
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161. Ireland and Pillay, above n 41, p 91; see also Ronnegard, D and Smith, NG ‘Shareholder primacy as an impediment to corporate social responsibility’ in Coutinho de Arruda, MC and Rok, B Understanding Ethics and Responsibilities in a Globalizing World (Heidelberg: Springer-Verlag, 2016) p 43Google Scholar; Sjåfjell, B et al ‘Shareholder primacy: the main barrier to sustainable companies’ in Sjåfjell, B and Richardson, B (eds) Company Law and Sustainability: Legal Barriers and Opportunities (Cambridge: Cambridge University Press, 2015) p 79 CrossRefGoogle Scholar; Pillay, above n 104, pp 32–67.
163. Emeseh, E et al ‘Corporations, Csr and self regulation: what lessons from global financial crisis’ (2010) 2 German L J 230 at 243.Google Scholar
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166. Tan, above n 9, at 250.
167. Kirton, JJ and Trebilcock, MJ ‘Introduction: hard choices and soft law in sustainable global governance’ in Kirton, JJ and Trebilcock, MJ (eds) Hard Choices, Soft Law (Aldershot, Ashgate, 2004) p 3 at p 12.Google Scholar
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170. Section 50 L (1)Income Tax Act 1995; ‘CSR programme’, according to 2 (iv) means ‘a programme having as its objects the alleviation of poverty, the relief of sickness or disability, the advancement of education of vulnerable persons or the promotion of any other public object beneficial to the Mauritian community’.
171. Section 135 Indian Companies Act 2013; the government shifted responsibility to corporate sectors, and it is estimated that the law will cover about 3,000 companies in India and about US$2 billion per annum of expenditure on CSR activities related to social welfare initiatives. See Ernst and Young ‘Understanding the Company Bill 2012’ (2013), available at http://www.ey.com/publication/vwluassets/ey_understanding_companies_bill_2012/$file/ey-understanding-companies-bill-2012.pdf (accessed 28 July 2016); Ernst and Young ‘Corporate social responsibility in India: potential to contribute towards inclusive social development: Global CSR Summit 2013, an agenda for inclusive growth’ (2013), available at http://www.ey.com/Publication/vwLUAssets/EY-Government-and-Public-Sector-Corporate-Social-Responsibility-in-India/$File/EY-Corporate-Social-Responsibility-in-India.pdf (accessed 20 February 2016).
172. It is argued that since time immemorial, CSR has had its origins in Dural, The Great Book of Tiru Valluvar’s Verses; see C Raja Gopalachari Kural, The Great Book of Tiru Valluvar (Hindu Books Universe, 2003), available at www.hindubooks.org/dynamic/modules.php?name¼Content&pa¼showpage&pid¼44 (accessed January 2016).
173. Pillay, above n 104, p 228.
175. Sanjay, CA and Sharma, K ‘A 360 degree analysis of corporate social responsibility (Csr) mandate of the new Companies Act, 2013’ (2013) 3 Global J Mgmt & Bus Stud 757 at 761.Google Scholar
176. That is to say that if the company fails to spend the required minimum of 2% of its average net profit over the previous three financial years on its CSR initiatives, the board must provide reasons for not spending this amount in its Board Report, based on s 135 (5) of the Indian Companies Act 2013. The ‘comply or explain’ principle was first introduced in the Cadbury Report to accommodate the need for flexibility and experimentation in corporate governance, and it has had a profound impact on corporate governance worldwide; see IM Millstein ‘Sir Adrian Cadbury’ in Financial Reporting Council (Frc) Comply or Explain: 20th Anniversary of the Uk Corporate Governance Code (London: Stock Exchange, 2012).
177. For example, the 2% requirement will result in a reluctance to comply for loss-making companies, and it is not clear whether the list of CSR activities provided in Sch VII is an inclusive or exhaustive list.
178. Comments of Venkateshwaran, partner and head of accounting advisory services at KMPG India ‘India now only country with legislated CSR’ Business Standard 3 April 2014); available at http://www.business-standard.com/article/companies/india-now-only-country-with-legislated-csr-114040300862_1.html (accessed 28 July 2016).
179. Gopalan, S and Kamalnath, A ‘Mandatory corporate social responsibility as a vehicle for reducing inequality: an Indian solution for Piketty and the millennials’ (2015) 10 Nw J L & Soc Pol'y 34 at 44.Google Scholar
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184. The approach does not lead to compulsory Csr-related corporate actions and decisions.
185. See Gimbel v Signal Cos. 316 A.2d 599, 608 (Del. Ch. 1974); In re The Walt Disney Co. Derivative Litigation 906 A.2d 27 (Del. 8 June 2006); Aronson v Lewis 473 A.2d 805, 812 (Del. 1984); Sinclair Oil Corp. v Levien 280 A.2d 717, 720 (Del. 1971); see also Davis, KB ‘Once more, the business judgment rule’ (2000) Wis L Rev 573 Google Scholar; Johnson, L ‘The modest business judgement rule’ (1999–2000) 44 Bus Law 625 Google Scholar.
186. See eg s 172 of the Companies Act 2006; see also Ghlm Trading Ltd v Maroo  Ewhc 61 (Ch); Smith & Fawcell Ltd, Re  Ch. 304.
187. Sjåfjell, B ‘Internalizing externalities in Eu law: why neither corporate governance nor corporate social responsibility provides the answers’ (2008) 40 Geo Wash Int'l L Rev 977 Google Scholar; A Johnston ‘Governing externalities: the potential of reflexive corporate social responsibility’, Centre for Business Research, University of Cambridge, Working Paper No 436, 3, http://ssrn.com/abstract=2165616.
188. Mitchell, RK, Agle, BR and Wood, DJ ‘Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts’ (1997) 22 Acad Mgmt Rev 853 at 854–858Google Scholar; for more discussions on guidance related to enforcing directors' duties to make integrated decisions by giving directors legitimacy to have regard to stakeholders' interests, see section 4.
189. This legislative approach may be traced not only to the ESVP in the UK Companies Act 2006, as discussed in the last section, but also to Art 1174 of the Italian Civil Code, which provides that performance can also correspond to non-monetary interests of the creditors, and Art 1141 of the Code, whereby an agreement in favour of a third party may be considered admissible if it is relevant to the interests of the stipulans (the contracting party).
190. 134 S Ct 2751 (2014).
191. Ibid, at 2771.
192. People's Department Store Inc. (Trustee of) v Wise  SCJ No 64, 2004 SCC 68, 2004 3 SCR 461 (SCC) at paras 42 (SCC); see also BCE Inc v 1976 Debentureholders 2008 SCC 69 (CanLII),  3 SCR 560. For discussion of the case and integrated decision-making, see Francis, C ‘ People's Department Stores Inc. v Wise: the expanded scope of directors’ and officers’ fiduciary duties and duties of care’ (2005) 41 Can Bus L J 175 Google Scholar; Rousseau, S ‘Director's duties of care after people's: would it be wise to start worrying about liability?’ (2005) 41 Can Bus L J 236 Google Scholar; Gray, WD ‘A solicitor's perspective on People's v Wise’ (2005) 41 Can Bus L J 184Google Scholar; Lee, IB ‘ People's Department Stores v. Wise and the “best interests of the corporation”’ (2005) 41 Can Bus L J 212 Google Scholar; Waitzer, E and Jaswal, J ‘People's, Bce, and the good corporate “citizen”’ (2009) 47 Osgoode Hall L J 439 Google Scholar; MacIntosh, JG ‘Bce and the People's Corporate Law: learning to live on quicksand’ (2009) 48 Can Bus L J 255 Google Scholar.
193. People's Department Store Inc. (Trustee of) v Wise  SCJ No 64, 2004 SCC 68, 2004 3 SCR 461 (SCC) at paras 42–43 (SCC).
194. It was found in a 2010 report by Calvert Asset Management and the Corporate Library that 65% of S&P 100 companies have board committees at varying levels for the oversight of corporate social and environmental responsibility concerns; see Calvert Asset Management and the Corporate Library ‘Board oversight of environmental and social issues: an analysis of current North American practice’ (2010) at 14–16. This implies that having a CSR committee is possible, necessary and fits with practice, and could be beneficial if it was made mandatory.
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200. Such as the Un Global Compact, the Ruggie Principle, the Oecd Guidelines or international standards such as Iso 26000.
201. Buhmann, above n 15, at 192.
202. For example, the strategic report from the Uk Companies Act could be helpful for other jurisdictions (s 414C (7)(b) Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013).
203. Watt, R and Zimmerman, J ‘Towards a positive theory of the determination of accounting standards’ (1978) 53 Acc Rev 112 at 115–116.Google Scholar
204. For example, s 414(C)(1) of the Uk Companies Act 2006 states that ‘the purpose of the strategic report is to inform members of the company’.
205. Ireland and Pillay, above n 41, p 77.
206. Tan, above n 9.
207. See also Esser, above n 161, at 334.
208. P Utting and Jc Marques ‘Introduction: the intellectual crisis of Csr’, in Utting and Marques, above n 41, pp 5–6.
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221. This is particularly important in Anglo-American jurisdictions, where the quasi-legal shareholder primacy norm is regarded as unchallengeable. See Stout, above n 51; Stout, LA ‘Killing conscience: the unintended behavioural consequences of pay for performance’ (2014) 39 J Corp L 525 Google Scholar; Stout, LA ‘The toxic side effects of shareholder primacy’ (2013) 161 U Pa L Rev 2003 Google Scholar; Stout, LA ‘Why we should stop teaching Dodge v Ford ’ (2008) 3 Va L & Bus Rev 163 Google Scholar.
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