23 July 2007

Corporate Social Responsibility

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 play. The Bill itself has been on the National Legislation Program since 2005 and was originally submitted to the House of Representatives (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 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.

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. This 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.

The provision only requires that the companies allocate a part of their income to a CSR fund. 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.

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 be 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. Even where the money is placed in a savings or term deposit or some other account it is earning interest but it is not going to be making any contribution to the development of the core business activities of the relevant company.

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.

However, what is clear from the Bill is that the CSR provisions are not intended to create a rainy day fund to cover future accidents, mishaps, or negligence, but rather the purpose of the funds are to provide for community development initiatives that promote and support the surrounding communities close to the relevant business. There is little doubt that the CSR fund is to be a source of community development capital.

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.

1 comment:

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