Making Corporate Social Responsibility mandatory
Government funding cannot alone contain the fallout, economic and otherwise, from the pandemic. Private sector contribution is imperative towards strengthening our health-care infrastructure and to mitigate the economic impact of COVID-19. So far it has been encouraging to see big companies like Unilever and Grameenphone, and umpteen banks contribute to the Prime Minister's Relief Fund from their Corporate Social Responsibility ("CSR") funds for this purpose. Besides, we have seen coordination of CSR activities across businesses and Non-Governmental Organisations ("NGOs"). However, neither the laws applicable to companies or banking companies nor the Code of Corporate Governance issued by Bangladesh Securities and Exchange Commission ("BSEC") nor any direction issued by the Bangladesh Bank make CSR contributions mandatory for companies, banks and financial institutions in Bangladesh. Question arises as to whether, we, as a nation, would be better served, especially at a time like this, if CSR is made mandatory.
While academics continue to debate whether the basis of CSR should be voluntary or mandatory, we see a political will gathering momentum globally towards mandating CSR. For over a decade now countries have been incorporating provisions on mandatory CSR reporting in their corporate governance instruments. A number of countries have gone further to impose positive CSR obligations either directly in their company Laws or indirectly by requiring directors to have regard to social and environmental concerns when discharging their duties. These developments signal a reformulation of political expectations for businesses to engage beyond the economic domain and increase their commitment to social and environmental issues.
Some notable developments include CSR regulations introduced in China in 2006, the corporate and investment laws regulating social and environmental responsibilities in Indonesia since 2007, the 2% CSR mandate introduced in Mauritius in 2009, and Denmark's National Action Plans for CSR in 2008 and 2012. In the UK, CSR is a part of Corporate Governance. The Companies Act 2006 requires directors to have regard to community and environmental issues when considering their duty to promote the success of their company and imposes disclosure obligations to be included in the Business Review. In 2014 Spain's National Security Market Commission introduced CSR principles in its new Good Governance Code for listed companies. The Business Roundtable's Statement of 'Purpose of a Corporation' from August 2019, signed by 181 US CEOs is in line with this global trend.
Right next-door, the Indian government has taken progressive steps since 2009 to formalise CSR obligations of companies, ﬁrst with the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business and then by introducing the Companies Act 2013 and subsequent amendments. Through the Act, India became the first country in the world to statutorily require companies to undertake CSR. Section 135 of the Act stipulates that all firms with a "net worth of rupees 500 crore or more, or turnover of rupees 1000 crore or more or a net profit of rupees 5 crore or more during any financial year" must establish an independent board level CSR committee. The committee must ensure that "the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy". The committee is expected to formulate and recommend CSR policy, oversee its implementation, ensure that CSR activities "give preference to the local area and areas around it where it operates". If the company fails to spend the 2% of its profits, the company will be fined for non-compliance and its officers may face imprisonment. All unspent money would be transferred to a special account, to be spent on CSR activities. Schedule VII of the Act provides an extensive list of CSR activities that companies may engage in including contribution to the Prime Minister's Fund or any other fund set up for socio-economic development and relief and welfare of the backward sections of society. Following the Act, the Companies (Corporate Social Responsibility Policy) Rules, 2014 was framed.
In the wake of the declaration of COVID-19 as a pandemic, the Indian Government treated this as notified disaster. Their Ministry of Corporate Affairs issued circulars clarifying that spending of CSR funds to address COVID-19 fallout is eligible CSR activity under the Act taking advantage of the broad classification of eligible CSR activity under the Act. These collectively paved the way for releasing and mobilising CSR funding from the private sector to fight the effects of COVID-19. Even otherwise, since CSR became mandatory in India, donations from corporations to charities, increased, from $490m in 2013 to approximately $3.6bn in 2016.
COVID-19 and especially its after effects (economic and otherwise) are not disappearing anytime soon. Our Government needs a steady stream of CSR contributions from the private sector in the coming months and years into the right programmes and initiatives. The best way of doing that immediately may be to mandate CSR in line with the global trend.
In the short term, CSR may be mandated by BSEC for public listed companies in exercise of its powers under Section 2CC of the Securities and Exchange Ordinance 1969 to impose conditions on consent already accorded to issuers for issue of capital. In mandating CSR, BSEC needs to define CSR, ask companies to form CSR Committees, describe their function, specify CSR obligations of companies and companies to which these obligations apply, and enumerate eligible CSR activities. This list should specifically include supply of PPE, building new or strengthening existing health-care infrastructure and such other programmes or initiatives immediately required to contain the effects of COVID-19.
With regard to mandating CSR for banks and financial institutions, the Bangladesh Bank has been empowered by Section 7A (f) of the Bangladesh Bank Order 1972 to regulate and supervise banking companies and financial institutions and Section 45(1)(a) of the Banking Companies Act 1991 to issue directions on banking companies in the public interest. In 2008, Bangladesh Bank had issued guidelines and circulars on CSR. However, these expressly stated that adoption of CSR practices were voluntary and not mandatory. The Bangladesh Bank may now issue directions adopting the CSR guidelines, stipulating a quantum for CSR obligations and mandating CSR.
Additionally, in all such cases, a robust monitoring mechanism must be put in place to monitor compliance, and penal consequences should be provided for non-compliance.
In the long term, CSR may be mandated for both private and public companies, banks and financial institutions through primary legislation by amending the Companies Act 1994, as has been done in India and the Banking Companies Act 1991 respectively.
The need of the hour demands immediate mobilization of CSR funding from the private sector to contain the effects of COVID-19 and cushion the inevitable economic blow. Dispersed and discretionary contributions of the nature we have seen in the last few months are not only inadequate in this regard, but also nothing compared to the quantum of funding from the private sector that can be or should be made available.
Therefore, the Government should immediately instrumentalise the success of the private sector by casting a wide legal net through mandating CSR for all profit-making companies, banks and financial institutions.
The writer is an Oxford Scholar, an Advocate of the Supreme Court of Bangladesh and the Managing Partner of Akhtar Imam & Associates.