24 July 2007

Corporate Social Responsibility - An Updated Analysis

The recent enactment of the Company Law Bill has brought to an end a long and tortuous history of getting an updated and more relevant Company Law into the legislation field of play. The Bill itself has been on the National Legislation Program (Program Legislasi Nasional / Prolegnas) since 2005 and was originally submitted to the House of Representatives (Dewan Perwakilan Rakyat / DPR) in October 2005. The almost 2 years it has taken to pass the DPR may surprise some but if one is to consider the Inventory List of Problems (Daftar Inventarisasi Masalah / DIM) on this Bill extended to some 813 problems, then it is not at all surprising that it has taken this long to plough through the list in order to secure passage of the Bill.

The Bill has not been without an element of controversy and this is particularly so with the insertion of Corporate Social Responsibility (CSR) provisions (Chapter V, Article 74). What is interesting about this particular provision is that it applies only to companies that are involved in the exploitation of Indonesia's natural resources. However, this is not entirely true as the Elucidation to the Article implies that the provision applies to any company that undertakes business activities that may impact on the environment. Therefore, it is a bit of a misnomer to state that the Article refers only to CSR as it in fact also includes an element of environmental responsibility. And it is this grouping of CSR and environmental responsibility into one Article that gives rise to the confusion.

In essence there is a clear distinction between CSR and any corporate liability that may arise as a result of environmental damage. The intent of the CSR provisions is not to regulate corporate liability with regard to the environment as this is already regulated elsewhere.

Nevertheless, the apparent focus on just the natural resources sector is clearly going to create a double standard as it is not only companies in the natural resources sector that run the risk of doing damage to the environment or being the source of other accidents or mishaps that might fall within the gambit of CSR which the Bill seems so eager to promote and mandate. However, if CSR is really not about liability and is about community development then it would make sense for the provision to be all encompassing rather than restrictive like it currently is. For example, a hospital which is producing dangerous waste that has the potential to harm the environment and therefore is within the purported scope of the Bill at least in terms of the environmental elements of Article 74.

In terms of any CSR obligation the mere fact that the hospital is located where it is located ensures that local residents have access to health services, perhaps employment, and other benefits that did not previously exist. This would lead to an argument from the hospital owners that they have in fact already fulfilled their CSR requirements without making any additional contribution to a CSR fund.

In terms of legal drafting it may have been better to regulate CSR and corporate environmental responsibilities in different and distinct Articles in order to remove any possible confusion. Nevertheless, the fact that the provisions are not all encompassing means that they remain somewhat discriminatory even though it seems that the only companies likely to be able to avoid CSR contributions are in the financial services sector.

The provision only requires that the companies allocate a part of their income to a CSR fund. However, the language of the Bill does not suggest that this is a rainy day fund to cover any costs associated with any future accident or mishap that damages the environment but rather it is a fund that is to be spent on activities or development that gives back to the communities where the businesses are located. The purpose of the CSR fund is directed much more towards community development than it is to a less-productive rainy day fund. Another concern is that the CSR fund may be subject to abuse by poiticians and other interests looking to get cash to fund their activities under the guise of companies fulfilling their CSR obligations. This sort of abuse of discretionary funds is not unheard of in Indonesia.

There is little doubt that companies must be responsible for their actions and that they must be able to cover the costs of any damage that they may do to the environment. However, where a company does harm this has traditionally been rectified through the court system with compensation awards where negligence has been proven.

Yet, as the Lapindo case highlights the Government is seeking to avoid court based litigation in favor of regulating responsibility in other legislation instruments such as Presidential Regulations. In the Lapindo case a Presidential Regulation was used to determine guilt and the amount of compensation payable, including the mechanism for paying. It has been argued that this is the Government’s way of enforcing CSR where a company tries to avoid or renege on any responsibility for negligence.

The real question is whether or not there is any distinction between the CSR obligation and the setting aside of funds for community development. If the CSR is to become a fund set aside to cover future costs of yet to occur accidents or mishaps then this will have a significant impact on the bottom line of businesses as at least some of their income is not being returned to the fold for development or expansion of the business. In contrast if the fund is designed to be a source of expenditure on community development then this is much more likely to have longer lasting positive impacts on the community.

There have been suggestions that the Bill once it becomes Law will be subject to a judicial review application at the Constitutional Court. However, it remains to be seen what provisions of the 1945 Constitution that the concept of CSR breaches. Because it only applies to certain companies there might be a sustainable argument for discrimination.

It would be interesting to see whether the Constitutional Court would adopt a strict legal interpretation which would appear to suggest that there is an element of discrimination or would the court give greater emphasis to the intent of the provision to protect and provide for the rights of the wider community where they might suffer harm at the hands of a negligent company or to ensure that companies put back into the communities from which they so willingly and eagerly take.

What is certain is that the debate of CSR is far from over as there is still subsidiary legislation in the form of Government Regulations to be issued to facilitate the implementation of the CSR provisions.

Finally, the regulation of CSR is likely to have an unintended impact on businesses; the reduction of innovation and creativity in CSR. Once CSR is regulated then businesses will only have sufficient incentive to do the bare minimum as required by the law. An interesting argument against CSR is that companies already fulfill a significant CSR role through the provision of employment, goods and services, and the creation of local wealth. Furthermore, it is argued by the opponents of CSR that the emphasis on CSR runs counter to the idea of free enterprise. Yet, in spite of these concerns CSR has been generally accepted as being good for business because whatever is good for the community is ultimately going to be good for business.

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