Market mechanisms, not government, should enforce CSR initiatives

Friday, October 05, 2007 Vincent Lingga, The Jakarta Post

Good reputation in the community is a company's best defense against business risks and its strongest competitive advantage to gain market share and increase corporate value for shareholders and stockholders.

That is the most outstanding message conveyed by business and civil-society leaders from more than 25 countries who shared their managerial successes and mistakes at the sixth annual Asian Forum on Corporate Social Responsibility (CSR) in Ho Chi Minh City last week.

They asserted that merely abiding by the laws is no longer sufficient to secure smooth business operations as firms are now required to expand their social responsibility and do more to protect the environment and empower the communities around their operational areas.

However, the CSR concept is not about philanthropy, which will only create a sense of artificial prosperity. Nor is about throwing money around or simply writing a check for a foundation which is not sustainable in the long term.

The core of CSR is the process of empowering the local community through programs that gradually transfer business, technical and social competence.

Highly profitable companies are not automatically great or admired by the public. Cases of successful businesses presented here testify that businesses, which have fulfilled their social obligations and care much about the natural environments are the most admired companies.

The mainstream thinking on CSR is converging on two basic issues: The ethical conduct of business and the contribution of business to sustainable development involving all stakeholders. Sustainable development itself is regarded as another term for the triple bottom line -- social, environmental and economic lines.

For example, honoring human rights, meeting labor, occupational health standards and fulfilling environmental regulations are simply good corporate governance practices. That is obeying the laws not CSR in its broadest sense.

CSR requires companies to share a portion of their profits for programs to empower the people or at least the local communities around their areas of operations.

Accounting investments or spending in CSR programs as part of production or operation costs (hence tax deductible), as Indonesia's Limited Company Law No.40/2007 stipulates, will reduce the meaning of the concept.

Certainly, companies must abide by regulations in any country where they operate, but implementing CSR should not depend on a specific law. It should be inspired by the strong commitment of the shareholders and management to create sustainable development. Making CSR mandatory may shift the focus of attention to the amount of spending, not the outcome.
No wonder, there have been many international initiatives launched to promote standards of business conduct which are all designed to create sustainable development.

The United Nations Global Compact, which was formed in 2000, brings companies together with UN agencies and civil society groups to promote universal principles on human rights, labor, the environment and fighting corruption.

Then there is the World Business Council for Sustainable Development and the Dow Jones Sustainability Index. Other well-known initiatives include the Business Charter for Sustainable Development drawn up by the International Chamber of Commerce, the Charter for Good Corporate Behavior drawn up by Keidanren in Japan and the Consumer Charter for Global Business developed by Consumers International, which links 200 consumer groups in more than 80 countries.

Memberships in these organizations are mostly based on invitations, meaning that only companies which have good records in CSR or honor their principles or codes of business conduct they are entitled to join.

However, the implementation of the business codes of the organizations is voluntary, not legally binding. But even though voluntary in nature, the business codes have made positive impact because companies which join the CSR organizations impose the codes and standards on their business partners within their respective supply-chain management.

Such a kind of arrangements, though without law enforcement mechanism, has unleashed market pressures to force companies to implement the business codes or CSR principles pursued by the various organizations oriented to the promotion of CSR.

The emphasis of the CSR principle certainly differs from one company to another, depending on their areas of operations. Environmental concerns, for example, are the top priority for businesses engaged in the extraction of natural resources. But labor rights are the main concerns for such labor intensive industries as shoes and garments.

However, enforcing CSR principles through legislation as Indonesia did with its new corporate law in July could be counter-productive and even cause a new source of uncertainty in the business world.

The stipulation of mandatory CSR for natural resource-based businesses in the 74th article of the Limited Liability Company Law simply reflected the muddled thinking about CSR among the politicians at the parliament.

Making CSR mandatory only makes doing business in Indonesia unnecessarily more complicated, especially if regional governments join the fray and come up with their own standards or guidelines of CSR.

There are already too many laws governing the conduct of business and fulfilling these laws alone is already an uphill challenge for most companies. And in so far as Indonesia is concerned, these numerous laws, instead of strengthening the legal frameworks and law certainty, have often incited conflict, caused bribery due to acutely inadequate enforcement, caused either by technical incompetence or high venality among officials.

How is then to contain the damage already done by the 74th article of the company law?.
Simply by not issuing regulations on its enforcement. This particular article stipulates its implementation shall be governed by a specific regulation. Hence without the desired specific implementation regulation, the specific article will not be effective.

Let the market mechanisms -- pressures from shareholders and stockholders such as suppliers, consumers, civil society organizations -- work to enforce the CSR principles.