2010: more CSR legislation ahead?

Interesting article from Erin Lyon

What does 2010 have in store for corporate social responsibility? One issue that keeps coming up is regulation. A recent research report states that companies want ‘regulatory consistency’ on CSR issues. When we speak to companies they say that they do want certainty and to know what is expected of them. The challenge is that for many companies they are waiting to find out what it is that the law, and any future law, will expect of them. But if new laws are passed then CSR simply becomes compliance and we have always argued that CSR is about going beyond the law. In other words CSR is about taking the initiative and finding out what is expected from stakeholders, rather than taking the passive route and waiting to find out what the law will dictate.

But we should be very clear that there is a role for legislation on key CSR issues. The fact that some companies chose to voluntarily shift towards a sustainable business model does not absolve government from ensuring that basic standards are both met and improved. But where is the balance? Beside legislation on specific areas, for example: working conditions, permitted levels of chemical usage, governance requirements (the list is long), can there be workable legislation for CSR that a company (and those who have a fiduciary duties within that company) can be held accountable to?

For India, the Philippines and Indonesia it would seem that they are, in the case of Indonesia, or are considering, in the case of India and the Philippines, taking on CSR regulation and companies with operations in those countries would be well served to monitor these developments to ensure they are aware of coming requirements.
The Indonesian Law No 40/2007 for Limited Liability Companies, which was the first in the world to mandate that companies ‘undertake CSR’ was passed on 16 August 2007. When a draft of the law was first released in early 2007 it stated that the law would be applicable to all Limited Liability Companies. This provoked widespread complaints from the business community in Indonesia, including a Jakarta based NGO promoting CSR, Indonesia Business Links. The law was subsequently amended and made the front page of the Jakarta Post when it was reported that Article 74 of the bill requires “natural resources companies” to enact CSR programs, stating that they will be liable to sanctions if they fail to do so. No details were provided as to how ‘CSR funds’ must be spent and in what amounts or where it should be spent. The law only specifies that CSR programs must be budgeted for and calculated as an operating cost that can be offset against taxation liabilities.

According to the Law, activities related to CSR implementation need to be disclosed in a company’s Annual Report. However, no implementing regulation for Article 74 currently exists, rendering the law unenforceable. In April 2009 the law was challenged in the Indonesian Constitutional Court but the law was upheld: “Environmental damage in Indonesia has reached a critical level… It’s time for the state, along with society and businesses, to be responsible for the negative impacts of the damage,” said presiding judge M. Mahfud M.D.

Last week it was reported in Indonesia that the planned regulation on CSR is “likely to side with businesses, with the government’s earlier intention to cap minimum CSR funding and manage its implementation being wiped from the draft.”

Maria Radyati, a lecturer from Trisakti University who is also a member of a team drafting an implementing regulation for Article 74 of the 2007 Corporate Law, said “there would not be a cap on the minimum corporate social responsibility (CSR) allocations of companies since this would be disastrous.”

There is, however, still a large question mark over what the CSR law actually means in practice. Recent reports in the Jakarta Post seem to confuse CSR with a philanthropy tax and local community investment projects rather than the holistic approach of how you run your business. However it seems as though the government has dropped its original intention of requiring companies to spend five percent of their profits on CSR programs and that this spending should be administrated by the local administration, a suggestion quite rightly strongly rejected by business.

India is in the process of reviewing Company Law and recent media articles have suggested a variety of approaches to incorporate CSR within the revised law. Corporate Affairs Minister, Salman Khurshid, responsible for the amendments stated in a recent interview that “I think we have to give CSR a quantifiable formula and link it to some incentive. You cannot keep talking to people that CSR activities are good for mankind and it can be a voluntary thing. Beyond a point, it may be difficult to get the kind of fusion that we want, which is CSR. And there must be a way of quantifying it and making it available for traders or an exchange dealing in CSR credits.”

In August 2009 Philippines House of Representatives member and son of the President, Rep. Diosdado “Dato” M. Arroyo, filed House Bill 6414 or the “Corporate Social Responsibility Act of 2009″ mandating corporations to observe its corporate social responsibility or the obligation to consider the interests of society by taking responsibility for the impact of their activities on customers, employees, shareholders, communities and the environment in all aspects of their operations. It is to be seen if, when and how this Bill will proceed.

It seems clear that governments in Asia are expecting companies to be involved in ‘CSR’ and that the approach needs to go beyond compliance with specific laws. But if companies do not demonstrate a voluntary commitment then they are going to find themselves faced with unclear laws that are likely to cost them money. So as a start companies should be able articulate how they are currently practising CSR and look at building in CSR to the future – beginning with stakeholder dialogue rather than waiting for the law

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