Confluence of the Impact Approach and Stakeholder Theory of CSR

[By Digvijay Ravindar Singh]

The author is a student at the National Law School of India University, Bangalore.

The concept of CSR differs between developing countries and developed countries with respect to its definition as well as implementation. Additionally, there is no comprehensive, “one size fits all” global corporate governance or CSR system based on western codes and regulations that can be implemented in emerging markets. As per several writers, the rationale behind the concept of CSR also varies in developed and developing countries. In this paper, the researcher shall dissect the rationale/theory behind CSR in India, compare it with another theory called the “Stakeholder Theory”, and subsequently, suggest a confluence between both these theories using which certain reforms can be brought about in the Companies Act [“the Act”]to ensure maximum social benefit. The thesis of the paper is that amending the Companies Act through the introduction of a confluence of two different theories of CSR will result in maximum social impact.

Trend of “impact approach” in India

In the present time, the COVID-19 pandemic has depleted the finances of the Government. The Government anticipated such costs, and consequently:-

  1. Declared, through the Ministry of Corporate Affairs (MCA), that the funds spent on COVID-19 management would be treated as eligible CSR activity. The order stated that the CSR funds can now be used for promoting preventive care healthcare infrastructure and disaster management. The MCA notified that the items under Schedule VII will be broadly and liberally interpreted in the wake of the crisis.
  2. Amended the CSR norms to include research and development (R&D) spending on new vaccines and drugs related to COVID-19. The caveat being that such research and developmental activities should be carried out in collaboration with any of the institutions mentioned in item (ix) of Schedule VII of the Act.

The reason behind such directions and amendments was solely to redirect the CSR funds for COVID-19 relief. It can, therefore, be seen that the Government is trying to direct CSR funds to sectors that can translate it to a greater impact on society in the present time.

Mitra has observed that in a developing country like India, it is in the best interest of both the stakeholders (the Government and the governed) that the Government and the Corporations work together to develop the human capital of the country to bring about a glorious future. This is the rationale behind the development of CSR in developing countries. It is to aid the Government in funding sectors where it cannot invest due to budgetary constraints. Various authors state that CSR should be used for benefiting society in a form of a shared social responsibility as this maximizes social welfare and reduces the negative externality in the largest amount. This approach can therefore be termed as the Impact Approach. With the COVID-19 pandemic ravaging the country, resulting in loss of life and livelihood, it will not be a wrong assumption to make that the Government is following the Impact Approach of CSR usage, by opening up avenues for companies to invest their CSR allocations for COVID-19 eradication efforts to maximize social welfare.

Offsetting of negative externality

Another approach to CSR is ‘offsetting of negative externality’ or the Stakeholder Theory which differs from the ‘Impact Approach’.The term ‘Negative Externality’ has been defined as the harm that the business transaction of a corporation does to a third party. ‘Offsetting of Negative Externality’ is, therefore, the lessening or the removal of the harms caused to stakeholders of a corporation due to its actions. This approach is governed by the idea that while corporations should invest their CSR for social welfare, at the basic level they are still accountable to their stakeholders first. Hence, the CSR amount should be invested such that the stakeholders, which consist of parties directly and indirectly affected from the working of the company, are benefited.

Proposal for the maximum benefit to stakeholders

It is proposed that, for the maximum benefit to the stakeholders of a corporation, there must be a confluence between the two principles of impact approach and offsetting of negative externality such that the offsetting of the negative externalities of a corporation can take place with the maximum impact. This resultantly means that a corporation must identify its most negative externality and then, using the impact approach, the company should use the CSR amount where the society can have the greatest welfare. For instance, the most negative externality of a tobacco company would probably be the number of deaths that its product causes by oral cancer. By using the confluence between the Impact Approach and the Stakeholder Theory at this stage, the possible sectors for investment will be considered and the sector where social welfare will be maximized will be invested in. In this case, it will probably be the investment of the CSR amount in an oral cancer institute. The confluence between the two principles will, therefore, help achieve the maximum social welfare while offsetting the corporation’s greatest negative externality.

 My proposal for the confluence of the two principles mentioned above is:-

  1. There must be an independent impact assessment firm that evaluates the business transactions of a corporation and traces its most negative externality.
  2. The corporation must be incentivized to invest in offsetting its most negative externality such that the rationale behind the CSR concept can be realized and the corporation can cause maximal positive impact to the interests of its stakeholders.

Proposal for incentivizing corporations and its effect on criminality

As mentioned in the previous section, corporations need to be incentivized for investing to offset their greatest negative externality. This can be achieved through the following ways-

  1. Double CSR credit (the amount invested will be counted as double for the CSR requirement) should be provided for incentivizing the investment of the corporation to offset its most negative externality. A detailed report regarding the same must be attached to the company’s annual report as prepared by an independent impact assessment firm each year. The cost for hiring the services of such a firm must be included in the amount to be invested as CSR.
  2. A CSR index for all companies which comply with it must be maintained such that companies get more incentivized to invest greater CSR amounts

The proposal to count the amount invested in offsetting the most negative externality of a company as double the CSR amount will result in the corporation not meeting the 2% rule of CSR investment hence, having an effect on the criminality as overall the corporation ends up investing a lesser amount than 2% of its net profit. However, having a balanced approach to this rule will result in greater social welfare.

In conclusion, the suggested amendment of the Companies Act with respect to the CSR amount can result in the greatest social welfare by offsetting the greatest negative externality of a company. It will result in a situation where companies can ‘get away’ with paying less than 2% of the CSR amount but they will be doing so after investing to offset their greatest negative externality which will ensure that social welfare is maximized and stakeholders of the company are benefited.


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