Globalisation of CSR and Its Impact On Corporate Governance '18

Jean
J. du Plessis · Umakanth Varottil
Jeroen Veldman Editors
Globalisation of
Corporate Social
Responsibility and its
Impact on Corporate
Governance
Globalisation of Corporate Social Responsibility
and its Impact on Corporate Governance
Jean J. du Plessis • Umakanth Varottil •
Jeroen Veldman
Editors
Globalisation of Corporate
Social Responsibility
and its Impact on Corporate
Governance
Editors
Jean J. du Plessis Umakanth Varottil
Geelong Waurn Ponds Campus Faculty of Law
Deakin University National University of Singapore
Waurn Ponds, VIC, Australia Singapore, Singapore
Jeroen Veldman
Cass Business School
City, University London
London, United Kingdom
ISBN 978-3-319-69127-5 ISBN 978-3-319-69128-2 (eBook)

https://doi.org/10.1007/978-3-319-69128-2
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Contents
Part I Introductory Overview

The Significance of Moving Beyond Corporate Social Responsibility
(CSR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Jean J. du Plessis, Umakanth Varottil, and Jeroen Veldman
Part II Corporate Social Responsibility: Conceptual Frameworks

and Stakeholders
Well Governed, Sustainable and Socially Responsible Financial
Corporations: Remote or Real Expectations? . . . . . . . . . . . . . . . . . . . . 27
Gill North
The Role of Employee Voice in Promoting Corporate Social
Responsibility in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Cindy A. Schipani, Terry Morehead Dworkin, and Junhai Liu
Responsibility and the Modern Corporation . . . . . . . . . . . . . . . . . . . . . 77
Jeroen Veldman
Part III Board Structure and Accountability

Corporate Social Responsibility and the Corporate Board:
Assessing the Indian Experiment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Afra Afsharipour
Regulation of Corporate Social Responsibility Through the Lens
of Board Accountability and the Case of China . . . . . . . . . . . . . . . . . . . 121
Jingchen Zhao
v
vi Contents
Part IV Corporate Social Responsibility Legislation and

Implementation: Evidence and Experience
Corporate Social Responsibility in European Union Law:
Foundations, Developments, Enforcement . . . . . . . . . . . . . . . . . . . . . . . 157
Patrick C. Leyens
From Transparency to Due Diligence Laws? Variations in Stringency
of CSR Regulation in Global Supply Chains in the ‘Home State’
Of Multinational Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Andreas Rühmkorf
Soft Law Requirements with Hard Law Effects? The Influence
of CSR on Corporate Law from a German Perspective . . . . . . . . . . . . . 203
Alexander Scheuch
Analysing the CSR Spending Requirements Under Indian
Company Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
Umakanth Varottil
About the Editors
Jean Jacques du Plessis Career, memberships and achievements: Admitted as

Advocate of the High Court of South Africa (1986). Senior Lecturer and Associate
Professor at the University of the Orange Free State, South Africa (UOVS,
1986–1991). Professor of Mercantile Law at the Rand Afrikaans University (Johan-
nesburg, 1991–1999). Alexander-von-Humboldt Scholar (1995, 2003, 2010). Visiting
Professor at Deakin University (Australia, 1998); after migrating to Australia, Asso-
ciate Professor (1999) and Professor of Law at Deakin University (2000–present);
Head of the Deakin School of Law (2000–2002). President of the Corporate Law
Teacher Association (CLTA, 2007–2008); Member of the Australian Institute of
Company Directors (AICD). Recipient of the Anneliese Maier Research Award
from the Alexander von Humboldt Foundation (2003–2018).
Research interests: World trends in corporate governance, company directors’
duties, responsibilities and liabilities, and employee participation at board level
(co-determination). Selected papers available at www.ssrn.com/author¼2424823
Teaching: Corporate Governance, Corporations Law, Business Law
Umakanth Varottil Career, memberships and achievements: Co-authored two

books on Singapore law and practice and published chapters and articles in inter-
national journals. Founded the Indian Corporate Law Blog (http://indiacorplaw.in).
Taught on a visiting basis at law schools in Australia, India, Italy, New Zealand and
the United States. Prior to joining academia, was a partner at a pre-eminent law firm
in India, and at the time ranked as a leading corporate/mergers and acquisitions
lawyer in India by the Chambers Global Guide.
Research interests: Corporate law and governance, mergers and acquisitions and
cross-border investments. While generally comparative, focuses particularly on
India and Singapore
Teaching: Company Law, Mergers and Acquisitions, Indian Business Law
vii
viii About the Editors
Jeroen Veldman Career, memberships and achievements: Has held appointments

at Cardiff Business School, the Utrecht School of Governance, Utrecht University
and a visiting professorship at UPMF, Grenoble. Engaged in a research project
(with Hugh Willmott) on corporate governance (see http://themoderncorporation.
wordpress.com/). Also engaged in organising a series of International Roundtables
on corporate governance. Published in Human Relations, British Journal of Man-
agement, and Critical Perspectives on Accounting.
Research interests: Historical development of the public limited liability corpo-
rate form and its current status in and between organisation studies, management,
company law, economics, finance, accounting, politics, and corporate governance.
Selected papers available at https://www.researchgate.net/profile/Jeroen_Veldman
Part I
Introductory Overview
The Significance of Moving Beyond Corporate
Social Responsibility (CSR)
Jean J. du Plessis, Umakanth Varottil, and Jeroen Veldman
1 Introduction
Corporate Social Responsibility (CSR) has been widely studied for a long time by,
for example, management studies and political sciences (Carroll et al. 2012;
Scherer and Palazzo 2011), but has for a long time only played a minor role in
law and legal scholarship. One of the main reasons for this was that CSR was
traditionally considered to be ‘above and beyond’ what companies are required to
do by law. Characterised by a soft law approach voluntary CSR standards were
typically developed by corporations, by NGOs and by international organisations.
However, recurrent reports about human rights violations in global supply chains
and the actions of companies in the wake of the global financial and economic crisis
have questioned the soft law approach to CSR and has put a ‘hard law’ law
approach on the agenda.
J.J. du Plessis (*)

Deakin University, Waurn Ponds, VIC, Australia
Deakin Law School, Deakin University, Geelong, VIC, Australia
e-mail: jean.duplessis@deakin.edu.au; http://www.deakin.edu.au/about-deakin/people/jean-
du-plessis
U. Varottil
Faculty of Law, National University of Singapore, Singapore, Singapore
e-mail: v.umakanth@nus.edu.sg; http://law.nus.edu.sg/about_us/faculty/staff/profileview.asp?
UserID¼lawuv
J. Veldman
CASS Business School, City University, University of London, London, UK
e-mail: jeroenveldman@cass.city.ac.uk; http://www.cassknowledge.com/research/author/
jeroen-veldman
© Springer International Publishing AG 2018 3

J.J. du Plessis et al. (eds.), Globalisation of Corporate Social Responsibility and its
Impact on Corporate Governance, https://doi.org/10.1007/978-3-319-69128-2_1
4 J.J. du Plessis et al.
This book addresses the increasing overlap between CSR and law with a
particular focus on company law and corporate governance. What is the impact
of CSR on company law and corporate governance and, vice versa. How do these
systems impact on CSR? Do they enable, require or prevent the socially responsible
conduct of companies, for example, through corporate theory, directors’ duties or
disclosure laws? What is the role of financial actors in the promotion of the interests
and goals covered by CSR approaches?
In this first Part of the book, we provide summaries and basic overviews of all the
chapters, organized in three sections. The first section looks at the conceptual
frameworks with regard to CSR and stakeholders, the second section looks at the
relation of these conceptual frameworks to board structure and accountability,
while the last section takes a look at the evidence and experience that surrounds
the legislation and implementation of these models.
2 Part II: Corporate Social Responsibility: Conceptual

Frameworks and Stakeholders
2.1 Well Governed, Sustainable and Socially Responsible

Financial Corporations: Remote or Real Expectations?:
Gill North
Gill North’s chapter is an exploration of the scope and effectiveness of legal reform
across the finance sector since the 2007–08 major financial crisis (FC). She dis-
cusses the changes across the key areas of (1) capital management standards;
(2) responsible lending standards (with a special focus on mortgage lending under-
writing and origination practices); and (3) the frameworks governing systemically
important financial institutions (SIFIs). She discusses the benefits, limitations, and
associated risks of these policy frameworks and regulatory instruments. She warns
that an inability to holistically evaluate and address these areas in scoping legal
reform increases the possibility, if not inevitability, of future financial crises,
potentially worse than the FC.
North explores how changes to capital management standards have been the
primary tool of global and national finance supervisors to maintain financial
stability and reduce systemic risks since the FC. Management of the capital of the
finance sector by the Bank for International Settlements (BIS), most notably via the
Basel Committee on Banking Supervision (Basel Committee), has become increas-
ingly mired in complex technical detail making recommendations hard to
operationalise. North highlights the limitations of these reforms in the face of the
uncertain capacity of national capital frameworks during extreme conditions, and
their limited impact if they do achieve their stated aims. Citing a report by the Joint
Forum on credit risk management (Joint Forum report) she suggests that financial
corporations have improved their management of credit risk but that problems with
The Significance of Moving Beyond Corporate Social Responsibility (CSR) 5
widely used internal capital models suggest that these financial corporations may
have lost sight of the broader goals of the frameworks.
North asserts that the systemic risks identified by the European Central Bank
(ECB) and others are exacerbated by a large number of factors. Record low interest
rates and continued access to cheap credit in many countries further undermine
residential mortgages underwriting and origination standards, and the quality of
other types of lending. She argues that under these conditions, current levels of
private and public indebtedness are unsustainable and will profoundly challenge the
resilience of governments and populations in coming decades, especially during
crisis periods.
In North’s second area in focus, the drive towards establishing more responsible
lending standards, she highlights the problem of persistent boom-bust housing
cycles. North also explores how, as the regulatory framework around residential
lending became a key focus of global leaders and regulators following the FC, a
range of international bodies reviewed the underwriting and origination of residen-
tial mortgages and related consumer protection. In January 2010 the Basel Com-
mittee on Banking Supervision Joint Forum (Joint Forum) recommended improved
oversight of the residential mortgage market, including greater consistency in
underwriting standards across different types of originators. It suggested that the
Financial Stability Board (FSB) establish a process to determine and monitor sound
underwriting practices for the future.
Discussing a review by the FSB of these issues, North finds that many interna-
tional bodies and national supervisors are indeed developing means to increase the
soundness and responsibility of mortgage underwriting and lending practices,
including regulatory measures such as capital surcharges, limits on loan to valua-
tion ratios (LVRs), and caps on debt repayments-to-income ratios and loan-to-
income ratios. North points out that, despite criticisms, these measures are in fact
reasonable attempts to mitigate the risks of excessive leverage in residential
property markets. She reminds us that risks associated with property investment
and leverage are not limited to residential housing. A sizeable share of bank losses
in past financial crises has involved loans to the commercial property sector. For
instance, large-scale construction market collapses and associated defaults severely
stressed the domestic financial systems in Ireland and Spain during the FC. The
respective governments bailed out many of their major banks using taxpayer funds
and additional credit from external bodies, and this significantly restricts their
ongoing capacity to provide public services.
The management of capital and associated risks within banks has always been
challenging because of an inherent mismatch between funding sources (which are
often short term in nature) and longer term lending, particularly when long duration
mortgages are a significant lending asset on the balance sheet. However, these
management complexities and risks have compounded over the last 30 years, as
legal and market developments have prompted financial institutions to increasingly
leverage their businesses, and to structure their services and products in ways that
fail to curtail conflicts of interests and that enhance systemic risks, especially in
large financial conglomerates.
North then turns her attention to attempts to reconfigure the framework around
systemically important financial institutions. The FSB introduced a principles-
based framework for these institutions, including banks, insurance companies and
other financial institutions, defining systemically important financial institutions
(SIFIs) as ‘financial institutions whose distress or disorderly failure, because of
their size, complexity and systemic interconnectedness, would cause significant
disruption to the wider financial system and economic activity.’1 North discusses
the measures employed to address systemic risks associated with these SIFIs and
the implicit public subsidies related to too-big-to-fail (TBTF) financial institutions
that routinely expect governments to provide financial support and liquidity if their
survival is threatened.
North contends that the measures adopted since the FC to mitigate the explicit
and implicit costs of TBTF and the broader systemic risks that arise from contagion,
are limited, categorising these attempts as ‘the placement of sandbags to mitigate
the impact of a tidal wave’. In addition, systemic risks, housing busts and financial
crises can arise (and have historically arisen) from outside the largest financial
institutions. Hence, North calls for policy makers and others to consider the nature
and scale of systemic risk more holistically.
Part of this holistic approach is to explore the high levels of interconnections and
integration between finance and economic activities that were significant risk
factors largely unforeseen or underestimated pre-FC. She explains how the impact
of loan defaults spread like a contagious virus, impacting on the financial systems of
the home nation and, ultimately, the global financial system. It was these intercon-
nections and linkages, North argues, that brought the adverse financial, economic
and social consequences that continue today.
North concludes that the policies introduced since the FC to promote financial
stability are failing to prevent an accumulation of systemic risks and the world is
ill-prepared for further financial crises and external shocks. Despite mounting
evidence of the harm (and lost opportunities) when finance becomes too large or
dominant in an economy, however, policy measures to limit the expansion and
dominance of the finance sector have been minimal. In a best-case scenario, the
reforms discussed in this chapter may enhance the survival prospects of finance
entities and the continued functioning of financial systems during extreme events,
without support from public sources—which is positive. Yet, failure to implement
further reforms that engage more holistically with the overall system, could have
devastating economic and social consequences—resulting in drops in the value of
household wealth, significant contractions in household income, restricted access to
consumer credit, increased unemployment, personal insolvencies, and foreclosures.
North calls for a better alignment between financial behaviour and outcomes
with the economic and social goals of individual nations and the global community
to reconnect financial and economic activity, and provide structural changes that
can prevent or mitigate continued sector concentration and financial activity growth
1
Financial Stability Board (2011), p. 1.
that is non-productive, wasteful and damaging. The ‘bold action’ and considerable
political, participant and community goodwill and support is impeded by the
financial and political power of the sector (especially its largest participants) and
the dominance and influence of finance in the everyday lives of global citizens.
2.2 The Role of Employee Voice in Promoting Corporate

Social Responsibility in China: Cindy A. Schipani, Terry
Morehead Dworkin and Junhai Liu
The title of Schipani and her co-authors’ chapter is a clear summation of their topic
for discussion—to examine the role of employee voice in promoting CSR with a
lens on China.
By setting forth the economic and social justifications in support of CSR, their
chapter aims to stimulate further growth of Chinese CSR culture. To this end, they
introduce the topic of CSR and employee voice (where they define employee voice
as both a subset and a goal of CSR). They then describe the consequences of not
having a robust corporate culture of CSR and employee voice by examining real
examples of corporate failures where CSR is likely to have been beneficial in
curtailing or even preventing such failures. This is followed by a discussion of
the barriers to CSR and voice in China.
Next, Schipani et al. look at whistleblowing laws and practices in China. They
note that in a Confucian cultural context, hierarchy is assumed to be ‘natural and
good’, so long as both the superior and subordinate recognise and respect their
mutual obligations toward the other. This relationship is assumed to be implicit.
Due to this dynamic, which today permeates every facet of Chinese society, it has
been noted that the Chinese government faces a significant dilemma in its fight
against corruption and promotion of whistleblowing.
Schipani et al. point out that the Chinese government recognises the danger
corruption poses to its legitimacy and to Chinese society, but it is constrained by the
reputational damage of the necessary publicity. They note that private companies
face a similar challenge when considering the issue of worker voice, whether in
term of whistleblowing or otherwise. Although encouraging worker voice may
bring benefits to the company and to society in general, it is felt that permitting
such voice will challenge the hierarchies that underlie the stability of the Chinese
company (and society). Specifically, guanxi is considered a central concept for the
development of relationships in the Chinese business sphere. Although bribes and
other corrupt practices are often not condoned, gifts are often seen as an important
practice in building trust and long-lasting relationships. Therefore, Schipani et al.
contend that it is critical to comprehend the Confucian nature of the employment
relationship and of guanxi to understand the dynamics of the engagement with
worker voice and whistleblowing by the government and by companies in contem-
porary China.
Schipani et al. suggest that by increasing levels of publicity and access to reliable
data regarding Chinese companies’ CSR activities, the general public’s urge
towards more sustainable business operations can drive enterprises to incorporate
CSR into their operations. They point to evidence that already indicates that
increased publicity often associated with whistleblowing could increase CSR levels
in China. Schipani et al. cite studies that illustrate the Chinese business sectors that
are most subject to public scrutiny, such as the banking and financial sectors. It has
been reported that they have higher levels of CSR. Other studies show that social
media is a strong force for advancing CSR in China.
Beyond the purely business benefits of CSR and employee voice and consistent
with the Confucian underpinnings of Chinese culture, Schipani and her co-authors
contend that Chinese businesses should also consider the impact of these initiatives
on the health and wellbeing of their employees. They point out that the global
marketplace is increasingly demanding of companies to focus on CSR. Also,
employees will increasingly have a voice because of technologies that allow this.
They conclude with the prediction that those countries who successfully adapt to
the changing landscape of business, and accept these changes, are likely to become
global leaders.
2.3 Responsibility and the Modern Corporation: Jeroen

Veldman
In this chapter, Jeroen Veldman explores how historically contingent views of the
modern corporation and corporate architecture relate to attributions of responsibil-
ity to the modern corporation and to corporate groups. Veldman argues that the
scope for the adoption of corporate responsibility is tied to the adoption of specific
theories of corporate architecture, and that their adoption is, in turn, related to their
effects in terms of political economy.
Veldman starts his account by looking at how the CSR debate has expanded into
a discussion of political CSR (PCSR). This discussion positively considers the
capacity and willingness of corporations and corporate groups to be agents of
change. This capacity is put forward as a possible way to fill the governance gap
left by declining ‘power, capacity, or willingness’ of states to engage with global
governance issues. However, there is considerable scepticism with respect to the
uptake and effectiveness of PCSR. Even where a positive business case can be
relatively easily established, such as workplace safety, emissions reductions, or
diversity, these issues are not always tackled adequately in companies that have
adopted a strong CSR agenda. Where such issues are not meaningfully addressed,
the bigger issues like human rights, fraud and corruption, tax evasion and inequality
are even less likely to be tackled.
In addition, Veldman points out that the CSR debate tends to rely on rather
underspecified conceptions of the public corporation and of corporate groups.
Taking a closer look at these assumptions he argues that the understanding of
what a public corporation is; how its corporate governance processes are structured
and function; and how it functions in modern political economy is, to a large extent,
determined by the historic concept of the corporation as separate legal entity (SLE).
However, this concept is still evolving and even to-this-day the public corporation
present largely an ‘unsettled’ type of legal construct.
Exploring some of the ways in which the evolving and unsettled status of the SLE
plays out in relation to attributions of responsibility to the modern corporation
Veldman argues that direct attributions of responsibility, accountability, and liability
to the corporation on the basis of its identifications as an integrated ‘subject’ or a
‘citizen’ are problematic, because corporate theory allows for the simultaneous use of
multiple types of identification for the status of the corporation. He then asserts that the
unsettled theoretical status of the corporate group adds another layer of complexity to
such attributions. In relation to these issues, Veldman argues that a lack of engagement
with corporate theory in the PCSR debate may lead to a reinforcement of the position
of corporations and corporate groups in relation to other ‘entities’, such as citizens,
NGOs and states in the transnational domain. This lack of engagement may also lead to
a positive assessment of the uptake of public governance and political activities and the
endorsement of an enabling regulatory model, based on soft law and self-regulation for
what are essentially unsettled types of legal constructs.
Veldman suggests that the debate about corporate (ir-)responsibility in the PCSR
debate can be brought forward by considering how questions of ‘responsibility’ can
be related to historically contingent stabilisations of the public corporation and how
these, in turn, enable or constrain different models of corporate architecture and
corporate governance that provide the conditions for strategic decision-making for
corporate boards. This framing, he contends, allows the debate on corporate
responsibility to engage more directly with the political economy outcomes of
theory production in the field of corporate governance. More broadly, he suggests
that this focus allows for dealing with the declining capacity for public corporations
to produce long-term sustainable value for constituencies other than shareholders
and executives.
3 Part III: Board Structure and Accountability

3.1 Corporate Social Responsibility and the Corporate
Board: Assessing the Indian Experiment: Afra
Afsharipour
Afra Ahsharipour explores the legal framework around CSR in India. India has
ostensibly shifted in the past decade from a shareholder-centric model to a more
stakeholder-oriented model, culminating in the passage of the Companies Act 2013.

The key feature of this Act, she explains, is the requirement for companies to
develop a CSR policy via the board of directors, and to aim to spend at least two per
cent of their profits on CSR activities. Public disclosure of corporate CSR activities
is called for within this legal framework.
She contends that this legal framework has helped India to move towards a
greater emphasis on CSR and recognises the valuable role of corporate governance
and directors in ensuring that companies act in a socially responsible manner.
However, she notes that this shift is still in the early stages. She discusses the
shortcomings and possible ways forward, beginning with a broad discussion around
the various and contested nature of definitions of CSR and the alignment of these
definitions to principles of sustainable development. She then examines the differ-
ent rationales (business and moral/ethical) that have been offered by commentators
as to why CSR should be incorporated into business practices, and how this may be
achieved. By extension, she examines the embedding of CSR within corporate
governance, and specifically the role of boards of directors in implementing,
monitoring and disclosing CSR initiatives.
Afsharipour then turns more specifically to India. She explains that prior to
passage of the Companies Act 2013, attention to CSR at various Indian companies
was sporadic. Consistent with other parts of the world, long before any discussion
of CSR as a legal requirement, several of India’s largest companies established
separate philanthropic funds and welfare programs or initiatives as a form of charity
to indicate the virtues of the company or the organisation. However, Afsharipour
suggests, this spirit of philanthropy, while quite strong in some companies, did not
necessarily translate into widespread CSR practices among Indian companies. She
cites several studies that have noted the historic lack of specific CSR practices and
disclosures at Indian firms.
Afsharipour examines the broad view of directors’ duties and responsibilities to
non-shareholder stakeholders in the CSR provisions of India’s Companies Act
2013. She explains that under this Act various provisions regarding board fiduciary
duties and responsibilities make clear that shareholder wealth maximisation should
no longer be the primary lens for decision-making by Indian boards and that the
board is charged with both formulating and overseeing the company’s CSR pol-
icy—and with managing CSR disclosure. For example, the board’s annual report
must include a brief outline of the company’s CSR policy and the policy must also
be published on the company’s official website. Moreover, if a company does not
have adequate profits, or cannot spend the prescribed amount on CSR, directors
must provide disclosure and give appropriate reasons in their annual report about
the failure to spend the required amount.
Afsharipour argues that the Act’s two per cent spending stipulation is limited and
quite a narrow interpretation of the substance of CSR. For instance, boards would
be well within the ambit of the law by claiming that solely spending two per cent of
their profits on a specific project would render the company socially responsible
even if the company does not undertake a sustainability analysis in running its
business. It is therefore improbable, she argues, that even proper compliance with
the Act could have any significant impact on underprivileged people’s lives and/or
prevent actual environmental degradation.
In further analysis of the Act’s shortcomings, Afsharipour turns her attention to a
particularly prevalent feature of Indian companies that profoundly affects the
substance and extent of Indian CSR initiatives and their disclosure. She warns
that the board’s role in CSR is likely to suffer from the same corporate governance
challenges that generally plague corporate India, explaining that boards of Indian
firms often function in the shadow of concentrated shareholding in the hands of a
controlling shareholder (or promoter) that is either a business family or the state.
She asserts that the dominance of concentrated ownership in Indian firms (around
50% of all Indian companies) has meant that directors often view their position with
an allegiance to controlling shareholders who often directly manage the day to day
activities of the firm.
Afsharipour points out that the Companies Act places directors in much more of
an oversight and monitoring role. However, she suggests that that promoter dom-
inance may mean that directors will, within their discretion, place a priority on the
interests and views of promoters when designing CSR policies and determining
CSR spending. This approach can, in many cases, ultimately compromise the scope
and effectiveness of a well-integrated approach to CSR in business practices.
Afsharipour cites several studies of early disclosure that find the CSR reporting
done by firms thus far does not provide much specific information to stakeholders.
Some of the companies with the most non-compliant disclosure regarding CSR
spending were public sector undertakings where the Indian government is the
controlling shareholder.
She concludes that given the current conditions in Indian corporate governance,
and given the essentially philanthropic model of CSR adopted in the Companies
Act, there is a significant concern that Indian companies cannot or will not ade-
quately address the social and environmental impact of their businesses. She
reflects on a number of ways in which boards can play a role in ensuring that
Indian companies adopt CSR practices that not only comply with India’s new
Companies Act but that go beyond India’s requirements to the ultimate and pressing
need to achieve global sustainability goals.
One suggestion Afsharipour makes is to call for greater involvement of stake-
holders in monitoring CSR reports, or even the establishment of an independent
agency to review and examine CSR disclosures and spending—given that the
Companies Act provides no mechanism for the auditing of compulsory CSR reports
and evidence that shows significant variability in such reports. She also suggests
that Indian boards might benefit from international guidance on integrating risk
management and CSR initiatives given that India’s CSR regime does not provide a
connection between the board’s risk management function and CSR as a means to
ensure that sustainability is integrated into business policy and strategy. The
challenge for Indian firms, according to Afsharipour, is to design a risk manage-
ment system that encompasses a process capable of being applied in strategy-
setting across the enterprise, and that takes account of sustainability principles in
driving more effective and responsible corporate strategies.
3.2 Regulation of Corporate Social Responsibility in the Lens

of Board Accountability and the Case of China:
Jingchen Zhao
Jingchen Zhao offers a comprehensive critique of CSR, and its adoption in com-
pany law legislation with a primary focus on China. Despite its positive social and
environmental impacts, Zhao points out that the value of CSR and enforcement of
CSR laws have been questioned for many interrelated reasons. He considers and
addresses some of these problems and assesses how enforcement of CSR in
company law in China could be made more effective through the lens of board
accountability, namely wenze system.
Zhao examines the function of board accountability in the arguments in favour
of CSR by investigating the extent to which the notion of board accountability
might be used to enhance CSR, so that companies and board members may be held
accountable for corporate decisions affecting their stakeholders. Zhao asserts that
progress in CSR has been challenged by the 2008 Financial Crisis and its continuing
aftershocks. He points out that while it may seem intuitive to cut back on CSR
initiatives and lay off CSR costs post-financial crisis in this climate, a more prudent
response would be to take this as an opportunity to work even harder to sharpen
CSR related regulations and implement sound CSR principles. Therefore, Zhao
considers his proposal of an ‘upgraded’ CSR notion in the context of company law,
namely corporate social accountability (CSA), as an appropriate way to take this
opportunity for companies to address CSR problems in a more serious and rigorous
manner and possibly give stakeholders a greater voice and a greater range of
remedies through stakeholder communication, scrutiny and participation.
Zhao states his purpose in putting forth this notion of CSA is in hope of
facilitating companies to contribute to social development, environmental protec-
tion and human right advancement by encouraging their engagement with internal
self-governance as part of ‘inclusive development’, rather than being motivated
purely by economic growth. This perspective, Zhao contends, offers an opportunity
to address some current and urgent issues, such as corporate scandals, irreversible
damages of irresponsible behaviors, the lack of effective law enforcement to protect
stakeholder rights, especially in developing countries, and the danger of short-
termism, particularly post-crisis.
Zhao proposes CSA as a system capable of a regulatory environment, and a
rationale and incentives for compliance, while reporting and disclosure are only one
of the initial stages of the mechanism. The notion of CSA, Zhao contends, will be
helpful in elucidating the nature and scope of board accountability, in terms of its
wider roles of addressing social, environmental and human right issues and being
accountable to stakeholders. This is a broad view of board accountability, Zhao
explains, whereby if the purely voluntary efforts of companies in promoting CSR
are not adequate and do not lead to sustainable development of the socio-economic
system and socially accountable corporate behaviours, CSA would give CSR some
teeth by, he suggests, regulating corporate behaviours, compensating wronged
stakeholders, empowering stakeholder groups and rewarding the board members

and companies who perform well in prompting CSR.
Zhao argues that this is particularly important for China—that while CSR has
become a ‘hot topic’ in China, the enforcement of CSR-related legislation is
unsatisfactory. He outlines some of the challenges to public safety related to
China’s rapid economic rise (for instance, risks associated with food production
and processing, public transport and in the construction industry) and asserts that
the role played by corporations in facing these challenges is increasingly recog-
nized as they are encouraged or even required to become more socially responsible.
Zhao explains that the English term ‘board accountability’ is not easily trans-
lated into different languages, and over time there have been several Chinese words
used to translate accountability or board accountability in the corporate governance
literature and reports, and there have been a number of Chinese words translated as
accountability in English language documents. It can be seen from these documents
that in corporate governance codes, government policy papers, CSR reports, cor-
porate governance reports and corporations’ reports, the term ‘board accountability’
has been used to represent a number of different Chinese words or phrases. Zhao
discusses the use of the term wenze at length in this chapter, and concedes that while
it does not exactly reflect all aspects of accountability, it is the Chinese term that
comes closest to the understanding of accountability as it applies in Anglo-
American systems and in international documents such as the G20/OECD’s Prin-
ciples of Corporate Governance.
Zhao moves on to discuss the particular applicability of CSA approach (gongsi
shehui wenze zhi) to state-owned enterprises (SOEs) due to the unique corporate
objectives of SOEs and Chinese corporate governance with administrative charac-
teristics. Alongside SOEs’ massive economic scale and significance in terms of
output, profit and employment, Zhao explains their rising vigour in politics and
governance. China’s gradual push to take a larger role in global affairs over the past
few decades has been in sync with the global increase in SOEs. Therefore, making
CSA law applicable to and tested on SOEs will have a globalised impact on a wide
range of stakeholders including a profound influence on government. While it is
generally alleged that the Chinese government uses SOEs as a tool to pursue social,
industrial and foreign policy objectives, discussions of the shifting roles of SOEs
from the corporate law perspective have been overlooked. He suggests that starting
with SOEs is a good opening for boards to address social issues in a more codified
manner, and consider the balance between societal and profit-making consider-
ations, given that SOEs already have a number of social missions.
Zhao suggests that his CSA approach could fill the gap created by the lack of any
effective regulatory framework for companies, at both national and international
levels, and the inaccessibility and underdevelopment of mechanisms of redress and
company liability regarding social and environmental concerns. CSA, he furthers,
would be a good starting point—a new concept that enables a view of companies as
‘social or quasi-social institutions’. He asserts that CSA would be beneficial in
hardening and ratcheting-up voluntary initiatives for CSR and contends that the
legal framework should be steered by Chinese Company Law through information

disclosure, directors’ duties, stakeholders’ participations and stakeholders’
engagement.
4 Part IV: Corporate Social Responsibility Legislation

and Implementation: Evidence and Experience
4.1 Corporate Social Responsibility in European Union Law:

Foundations, Scenarios of Future Action,
and Enforcement Options: Patrick C. Leyens
Patrick Leyens explores the European Union CSR Directive of 2014 which requires
the corporations of its Member States to report on an array of non-financial aspects
from 2017 onwards (by way of the ‘comply or explain’ disclosure mechanism).
Leyens asserts that the ‘comply or explain’ approach benefits the integration of the
European common market because it facilitates a ‘uniform information channel’
which signals CSR engagement to investors. Leyens argues that the degree to which
such intervention is justified depends on how tightly disclosure duties are formu-
lated. In tracing the developments of corporate governance in general, he suggests it
is likely that the duties will be tightened in the future. Leyens suggests that given
the diversity and path-dependence of existing national CSR arrangements, a form of
disclosure prescribing the specific contents of CSR engagement would be
ill-advised.
Leyens begins by exploring the question whether European Union law can and
should intervene into national perceptions of CSR. He then explores the state of
CSR regulation within the European Union and attempts to predict possible modes
of further action. Finally, Leyens discusses the impact of corporate self-
commitments to CSR policies with a view to enforcement by shareholders, market
mechanisms and third-party verification. From this survey, he concludes that the
‘comply or explain’ approach of the CSR Directive 2014 is a viable, if not the only,
regulatory technique feasible for the European Union. It seems advisable for the
European Union to maintain a balanced approach, he suggests, and to ‘abstain from
over-regulation’.
Leyens sees disclosure as a promising tool for furthering the integration of the
European common market. This led to the choice of the ‘comply or explain’
approach by the CSR Directive. In theory, this approach allows corporations to
individually determine their level of engagement. He suggests that the degree to
which this freedom can be used firmly depends on how tight reporting duties are
formulated. He explores the rise of the CSR movement within the European Union
and argues against the discernible trend in corporate governance—i.e. that soft law
becomes hard law. This trend, Leyens suggests, follows a pattern that might also
determine the future of CSR regulation.
Leyens points out that the operation and impact of a ‘comply or explain’
approach is more difficult to gauge than that of a behaviour prescription through
rules or standards. He explains that the approach stems from the corporate gover-
nance movement, especially in the UK Cadbury Code 1992. As a reporting duty, he
furthers, it provides a uniform information channel with two key features—
enabling corporations to satisfy the demand for information, mainly by share-
holders and outside investors, and strengthening the awareness for specific matters
of those who are responsible for reporting. And, these two features interact, Leyens
explains.
Future action is likely should the policies adopted by individual corporations not
achieve a sufficiently high standard. The most likely approach, Leyens suggests,
relates to a tightening of the ‘comply or explain’ approach. There are two possible
scenarios. Scenario one, Leyens suggests, involves the European Commission
trying to improve the quality of individual CSR policies. Following on from the
approach chosen in 2005 in relation to the role of non-executive directors, it might
issue a recommendation which outlines a supranational comprehension of what
individual goals should amount to (i.e. model goals). In Leyens’ scenario two, the
European Commission might take action parallel to its most recent step in corporate
governance in 2014. In that scenario it would try to trigger improvements of the
quality of CSR statements, targeting statements of non-compliance in particular.
Leyens suggests a possible recommendation could (indirectly) oblige corporations
to explain how the chosen behavior accords to the spirit of CSR goals as formulated
in international guidelines or, under scenario one, by the European Commission
itself.
Under both scenarios, Leyens claims, the corridors for acceptable self-
commitments and individually set CSR goals will narrow, at least gradually. The
effect might not be identical to a prescription of the societal role of corporations,
Leyens suggests, but it comes close. He cites the Brexit referendum in the UK as an
example of a warning against far-reaching law making in areas where Member
States wish to maintain diversity. Therefore, Leyens contends that ‘comply or
explain’ is, no doubt, a possible way forward but it should focus on channeling
information rather than indirectly prescribing specific measures of CSR
engagement.
Leyens states that the impact of a disclosure-based CSR movement firmly
depends upon enforcement. The ‘comply or explain’ approach does not by itself
mandate a specific behavior but it does oblige corporations to commit themselves to
observing modes of behavior and to provide sufficient explanation should they fail
to do so.
Leyens suggests that despite all criticism against the European Commission for
intervening into the competences of national legislators, the ‘comply or explain’
approach can clearly serve market integration and enable European issuers to
enhance their standing internationally. He concedes that the business case for
CSR might be ‘cumbersome’ according to some commentators but, he stresses, it
is clear that possible benefits firmly depend on the availability of a uniform
information channel which provides for comparability of the efforts made by the
individual corporation.
Another area that Leyens focuses on in his discussion of the EU legislation is the
question of whether or not to introduce the verification of non-financial information
by third parties. He explains that European Union law does not currently require
this. The CSR Directive of 2014 follows this approach but allows Member States to
foresee more far-reaching verification requirements. Leyens argues against impos-
ing third-party verification for CSR reporting and the annual corporate governance
statement. He contends that because disclosure duties serve to enable and foster the
dialogue between the corporation and the market, submitting CSR statements to the
statutory audit would shift the organisation of this dialogue in large parts to the
auditing industry. Leyens argues that the auditing industry would then be forced to
define which particular arrangements must be in place for a viable strategy regard-
ing gender quota, age, diversity and so on. The result would be a ‘tick the box’
approach by corporations, Leyens contends, which could be a pitfall for CSR.
Leyens stresses that it will take time until the effects of a newly established
information channel become apparent. He contends that initial criticism against
corporate governance disclosure, for example in Germany and Switzerland, was
partly due to a lack of experience with the ‘comply or explain’ approach and of soft
law regulation in general—and it is now generally considered in a more positive
light. CSR disclosure, Leyens asserts, might follow this path in gaining widespread
acceptance over time. Leyens concludes that the regulatory technique of ‘comply or
explain’ will unfold its effects only over time. He asserts that for the time being,
patience seems more advisable than a tightening of the disclosure duties.
4.2 From Transparency to Due Diligence Laws? Variations

in Stringency of CSR Regulation in Global Supply
Chains in the ‘Home State’ of Multinational: Andreas
R€uhmkorf
Andreas Rühmkorf’s chapter focuses on attempts to address the high prevalence of

non-compliance of CSR standards by multinational enterprises in relation to their
global supply chains. In particular he discusses the role of home states (i.e. where
multinational corporations at the top of the supply chain are incorporated) in ‘filling
the governance gap’ in recent years for CSR in these scenarios. Legislation by home
state on CSR issues makes imminent sense given that there is significant concen-
tration in the incorporation of most large multinational corporations within a
handful of prominent jurisdictions.
Rühmkorf explains that to date the home state legislation of CSR, which affects
how multinational enterprises operate worldwide, has primarily focused on disclo-
sure laws. He therefore frames his discussion as a rigorous critical assessment of the
different forms of transparency legislation on CSR. Rühmkorf believes his
assessment reveals significant differences in the scope, legislative design, strin-

gency and enforcement of the pieces of legislation. He argues that these disclosure
laws can be viewed as being at opposite ends of a continuum—at one end, the UK’s
strategic report and the transparency in supply chains clause in the Modern Slavery
Act 2015 represent ‘softer’ forms which are almost private governance in statutory
form. He envisages the non-financial information statement required by the EU’s
‘CSR Directive’ in the middle of such a continuum and the US Dodd-Frank Act at
the other more stringent or ‘harder’ end. Rühmkorf engages in a detailed analysis of
the utility of each of the above disclosure requirements and the role they play in
engendering greater CSR activity among multinational corporations in relation to
their global supply chains.
Rühmkorf asserts that these disclosure laws might be viewed as ‘regulation of
self-regulation’ which establish a basic expectation—that companies have policies
on the issues listed in the respective pieces of legislation and that companies report
on their approach to them. However, he suggests that there is evidence that the
reporting requirements are often not very stringent, so companies can comply with
the disclosure duty by generally outlining their policies, and that too with some
level of generality or vagueness.
Rühmkorf contends that the present state of the transparency legislation falls
short of sufficiently impacting how multinational enterprises use their bargaining
power in their supply chains in order to genuinely promote CSR. As a result, within
the global value chain (GVC) framework, he feels that these transparency laws are
unlikely to alter the current light-touch approach of companies towards CSR in
global supply chains. He contends that this is the primary reason for repeated
violations of CSR principles.
Instead, Rühmkorf proposes due diligence as a tool to be imposed on companies
by hard law. He explains that such laws can take different forms, ranging from the
model of the UK Bribery Act with its imposition of criminal liability to the
currently debated French devoir de vigilance (that requires companies to establish
preventive mechanisms to avoid causing harm or contributing to it) to the German
proposal on a duty of companies to conduct due diligence. Whatever the exact form
of measures adopted, he believes that the key step for the discussion about promot-
ing CSR in global supply chains is the recognition that home states can have a
significant impact on the way multinational enterprises address CSR in their supply
chain through legal intervention. However, he contends, the subsequent impact on
corporate behaviour will depend on the stringency of the laws—companies are
unlikely to meaningfully change current business practices unless they are forced to
so as more stringent laws would require them to translate the legal duties into their
relationships with their suppliers as part of their supply chain management.
Rühmkorf concludes by noting that given the absence of a binding human rights
framework on companies under international law and the failure of host states to
sufficiently protect workers at supplier factories, the focus must shift to the home
states of multinational enterprises as they play an important role that should in fact
be bolstered.
4.3 Soft Law Requirements with Hard Law Effects? The

Influence of CSR on Corporate Law from a German
Perspective: Alexander Scheuch
Alexander Scheuch’s chapter focuses on German corporate law. He explains that

CSR, a ‘foreign’ concept which is usually referred to by its English name, may have
been overlooked by many German corporate lawyers initially. He suspects this is, at
least in part, due to the fact that in Germany scandals (and he cites Volkswagen’s
infamous ‘dieselgate’ as an example) seem to be contextualised less as CSR issues
than as failures of compliance. However, he contends that CSR has become
virtually impossible to ignore, not least due to the European Union’s Directive
2014/95/EU (the CSR Directive) dealing with the disclosure of non-financial
information by large public-interest undertakings. Scheuch asks whether we are
witnessing a ‘paradigm shift’ or even a ‘revolution’ in corporate law, as suggested
by some commentators. And, he asks, most importantly from a director’s perspec-
tive, is this accompanied by the establishment of new duties?
Scheuch’s chapter explores these questions, using German corporate law as an
example—while citing awareness that the most fundamental legal issues associated
with this topic are likely to present themselves similarly in other jurisdictions.
Scheuch begins with an analysis of the novel duties that arise in connection with
the transposition of the CSR Directive. By extension, he explores whether the CSR
Directive indirectly generates further obligations for company directors to take
CSR issues into account, and attempts to demonstrate that, at least in highly
regulated jurisdictions such as Germany, the area of application for such novel
duties is smaller than one may initially contemplate. Scheuch then turns to some
general concerns about the derivation of corporate obligations in the field of CSR.
Ultimately, he focuses on areas that could potentially serve as entry points for CSR
duties into German corporate and private law, and analyses each point in some
detail.
Scheuch contends that the duties that the CSR Directive directly creates for
corporate directors are limited to correct reporting. In particular, he finds that the
Directive and its transposition into German law do not force directors to create CSR
policies as long as this abstention is explained. In a similar fashion, the influence of
the CSR Directive and CSR frameworks on substantive corporate law is currently
very limited. Taking into account constitutional issues such as democratic legiti-
macy, legal certainty and fundamental rights of enterprises, he claims that it
currently seems impossible to infer directors’ duties in connection with CSR from
the Directive or frameworks and guidelines. Also, he claims that the CSR Directive,
if interpreted correctly, does not impact the German debate on the corporate
objective.
Nonetheless, Scheuch asserts that this does not demonstrate a lack of emphasis
on CSR in corporate practice. As has been demonstrated, in highly regulated
jurisdictions most relevant CSR issues are covered through compliance duties.
Secondly, he claims that it does not seem completely impossible that certain
practices that exploit low legal standards in foreign countries and/or the lack of
attribution within supply chains could be judged by courts to constitute unfair
commercial practices. He suggests they could consequently be challenged by
competitors, although good counter-arguments exist at least in the context of
German law. He also points out that potential CSR duties may indirectly work as
a self-fulfilling prophecy—directors themselves could, by adjusting their behaviour
to meet certain non-binding CSR standards when fearing liability and facing the
factual pressure of reporting requirements, re-define what is viewed as the usual
standard of care to be expected of a conscientious manager.
Scheuch concludes that the ‘paradigm shift’ he mentioned in his introduction
may be slowly on its way but has not ‘happened’ as yet. He cites predictions by a
range of commentators that the reporting rules introduced by the CSR Directive will
at some point be followed by the implementation of further CSR obligations. He
notes that in fact new hard law rules on CSR are already demanded by many and a
trend away from pure private governance has been detected. For instance, com-
mentators suggest that a possible next step could involve liability for entire supply
chains unless sufficient due diligence measures are in place. Scheuch points out that
resorting to hard law could solve the problem of democratic legitimacy, but could
meet problems in terms of fundamental rights of enterprises and shareholders. He
also warns that the psychological effects of creating hard law CSR duties should be
thoroughly investigated before attempting legislation in this area. He concludes by
noting that the EU commission’s review of the CSR Directive’s effects, due to be
published by 6 December 2018, as well as the German government’s report (due
31 December 2021) should provide interesting stimuli for the ongoing CSR debate.
4.4 Analysing the CSR Spending Requirements under Indian

Company Law: Umakanth Varottil
Umakanth Varottil’s chapter focuses on Indian company law and the impact of the
Companies Act 2013 that specifically legislates on CSR matters. A large portion of
CSR in India is concerned with companies contributing a minimum amount of
money towards social activities, thereby equating CSR with corporate philanthropy.
Due to certain legislative compromises, a hybrid approach was adopted to regulate
CSR activities in Indian companies: while there is no obligation to mandatorily
spend the stipulated two per cent of average profits of the previous three years
towards CSR, there is a requirement for companies not fulfilling the same to explain
the reasons for non-fulfillment. In that sense, while spending is not entirely man-
datory, disclosure is.
Varottil outlines the evolution of CSR norms in India, the underlying rationale
for their introduction, and details of their implementation. Varottil offers a critique
of the Indian approach and makes suggestions for the future. A reflection on the
pros and cons of imposing CSR obligations through mandatory measures or
regulation as opposed to ‘softer’ voluntary mechanisms to seek compliance forms

part of his critique.
Varottil draws on existing empirical studies relating to CSR spending in India
before and after the enactment of the Companies Act 2013. He also draws on ‘hand-
collected data’ involving CSR reporting by companies in the Nifty 100 index
maintained by the National Stock Exchange of India. This data containing CSR
reporting covers 2014–15 and 2015–16, the first two financial years of implemen-
tation of the new CSR provisions in Indian company law.
Varottil contends that such studies indicate that CSR expenditure by Indian
companies has gradually increased over this time. He notes that CSR expenditure
spiked in the years after the CSR provisions were implemented, which he feels is
indicative that the provisions have had a positive impact on companies incurring
CSR spending. At the same time, however, he notes that companies have in general
not complied with the two per cent minimum spending requirement, with several
not incurring any spending at all towards CSR activities. He finds that this is
understandable given the nature of the hybrid approach adopted by the Companies
Act 2013. But, what strikes Varottil in particular is the vague and dismissive
boilerplate statements lodged by non-compliant companies in their disclosures of
non-compliance, when they lodge them at all.
Varottil’s qualitative assessment of the reasons for non-compliance suggest that
the ‘comply or explain’ rules have not operated in the manner the hybrid approach
may have intended. He contends that unless the disclosure norms are backed by
measures such as stipulating more detail in the disclosures required, robust enforce-
ment of disclosure requirements, and through other measures such as third party
verification, the CSR spending requirements are unlikely to be effective. Overall,
Varottil finds that while the CSR spending requirements have engendered a wider
culture of corporate philanthropy in India in comparison with the period prior to the
enactment of the Companies Act 2013, they have arguably failed to achieve the
goals set by the legislation.
He does concede that the two-year period of his assessment may be too short to
adequately determine the efficacy of the legislation, but he points out that analysing
initial trends may encourage ‘course-correction’ at an early stage to assist with
achieving the goals of the legislation.
Varottil points out that the disclosure requirements themselves are a big part of
the problem. He notes that there are no clear criteria prescribed by which to judge
the adequacy and appropriateness of the disclosures made. For instance, the gen-
erality of the formats prescribed allow for companies to provide overbroad disclo-
sures. More importantly, he argues further, there is no formal mechanism for a
review of the disclosures either by the government or by the regulator.
Even in developed markets, Varottil notes, the ‘comply or explain’ approach is
problematic. For example, in the context of corporate governance in the UK, it has
been found that although the trend is increasing for compliance with applicable
corporate governance norms, it is accompanied by the frequent use of standard
explanations in cases of non-compliance. Varottil’s point is that if the ‘comply or
explain’ approach proves difficult in a country like the UK, this is exacerbated in
the context of India, a jurisdiction ‘riddled with enforcement problems’. Moreover,

Varottil draws on the prognostication of other commentators (e.g. Dharmapala and
Khanna 2016) who point out that the CSR mandate may be conducive to corrupt or
fraudulent forms of spending, for instance where the firm directs funds towards a
fraudulent organisation that then returns most of the money. Anecdotal evidence, he
claims, suggests the existence of such conduct already.
Given these issues, Varottil proposes a rethink of the implementation of the
legislation. He claims there is a strong case not only for greater enforcement of the
disclosure provisions by the government and the regulators, but also for the Rules to
provide stricter guidelines and formats for disclosures that would significantly
reduce the possibility of broad, meaningless, boilerplate statements. At the same
time, Varottil warns, it might be imprudent to rely so extensively on the govern-
ment’s enforcement of the CSR spending disclosures given the tremendous burden
it may impose on regulatory authorities in India that are already overstretched.
Hence, Varottil suggests the alternative of third party verification of CSR
disclosures to ensure the completeness and enhance the credibility of the disclo-
sures. In such a model, an external auditor (appointed and paid for by the company)
would verify the CSR disclosures to ensure compliance with the regulatory norms,
both in form and substance. Such third party verifiers would generally be private
entities that are registered with, or accredited by, the relevant regulatory authorities.
Varottil points out that such a method has been used in jurisdictions such as the US
to enforce laws such as environmental, labour standard and food safety legislation.
According to Varottil, this sustainability legislation requirement would translate
well to the more specific situation of CSR compliance and disclosures in India—
and in other jurisdictions.
5 Some Concluding Remarks Regarding Corporations’

Wider Responsibilities
The three sections in this book provide a rich overview of conceptual frameworks
with regard to CSR and stakeholders, with regard to the relation of these conceptual
frameworks to board structure and accountability, and with regard to the evidence
and experience that surrounds its legislation and implementation. Together, the
contributions present state of the art ideas on global and trans-jurisdictional legal
and social aspects of CSR and their relation to law.
Still, it should be realised that CSR is just one of many approaches to deal with
the ‘responsibilities’ of corporations. There is a growing trend to let the spotlight
shine on the purpose of the corporation.2 Other ways to ensure that corporations
behave more like responsible social actors include pressure on companies to
disclose and report on non-financial matters. Such pressures include both
2
See Veldman et al. (2016); and <http://www.purposeofcorporation.org/en>.
information to investors to ensure they invest in responsible corporations and that

their investments have positive impacts (‘impact investment’).3 Broader disclosure
may also include environmentally unfriendly practices; avoidance of the disregard
of basic human rights, exploitation of employees; or the exploitation of natural
resources. Increasing pressure is also brought to bear on corporations to set their
strategic goals in accordance with planetary boundaries, for instance by institu-
tional investors with explicit social impact investment goals.
Such approaches are setting the scene for a shift in the direction of corporate
strategy and help direct corporate strategizing in the direction of the goals set by the
CSR agenda. This collection has brought together contributions that provide a rich
source to identify and explore how this broad agenda can be further explored and
progressed in law.
Acknowledgements We would like to thank Jacqui O’Leary (Email: joleary@netspace.net.au),

freelance editor and writer, for not only assisting us with the initial editing of all the chapters, but
also for extracting the core aspects from each chapter that enabled us to complete this introductory
part of this book.
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a global roundtable series. Frank Bold and Cass Business School, Brussels and London
3
See, for instance, Charlton et al. (2013).
Jean J. du Plessis Career, memberships and achievements: Admitted as Advocate of the High
Court of South Africa (1986). Senior Lecturer and Associate Professor at the University of the
Orange Free State, South Africa (UOVS, 1986–1991). Professor of Mercantile Law at the Rand
Afrikaans University (Johannesburg, 1991–1999). Alexander-von-Humboldt Scholar (1995, 2003,
2010). Visiting Professor at Deakin University (Australia, 1998); after migrating to Australia,
Associate Professor (1999) and Professor of Law at Deakin University (2000–present); Head of the
Deakin School of Law (2000–2002). President of the Corporate Law Teacher Association (CLTA,
2007–2008); Member of the Australian Institute of Company Directors (AICD). Recipient of the
Anneliese Maier Research Award from the Alexander von Humboldt Foundation (2003–2018).
Research interests: World trends in corporate governance, company directors’ duties, responsi-
bilities and liabilities, and employee participation at board level (co-determination). Selected
papers available at www.ssrn.com/author=2424823. Teaching: Corporate Governance, Corpora-
tions Law, Business Law.
Umakanth Varottil Career, memberships and achievements: Co-authored two books on Sin-
gapore law and practice and published chapters and articles in international journals. Founded the
Indian Corporate Law Blog (http://indiacorplaw.in). Taught on a visiting basis at law schools in
Australia, India, Italy, New Zealand and the United States. Prior to joining academia, was a partner
at a pre-eminent law firm in India, and at the time ranked as a leading corporate/mergers and
acquisitions lawyer in India by the Chambers Global Guide.
Research interests: Corporate law and governance, mergers and acquisitions and cross-border
investments. While generally comparative, focuses particularly on India and Singapore.
Teaching: Company Law, Mergers and Acquisitions, Indian Business Law.
Jeroen Veldman Career, memberships and achievements: Has held appointments at Cardiff
Business School, the Utrecht School of Governance, Utrecht University and a visiting professor-
ship at UPMF, Grenoble. Engaged in a research project (with Hugh Willmott) on corporate
governance (see http://themoderncorporation.wordpress.com/). Also engaged in organising a
series of International Roundtables on corporate governance. Published in Human Relations,
British Journal of Management, Cambridge Journal of Economics and Critical Perspectives on
Accounting.
Research interests: Historical development of the public limited liability corporate form and its
current status in and between organisation studies, management, company law, economics,
finance, accounting, politics, and corporate governance. Selected papers available at https://
www.researchgate.net/profile/Jeroen_Veldman.
Part II
Corporate Social Responsibility:
Conceptual Frameworks and Stakeholders
Well Governed, Sustainable and Socially
Responsible Financial Corporations: Remote
or Real Expectations?
Gill North
We in China have learnt a great deal from the West about how competition and a market
economy support industrialisation and create higher living standards. But I don’t think
you’ve quite got the hang of money and banking yet.1
1 Introduction
This chapter explores the extent and efficacy of legal change across the finance
sector since the major financial crisis in 2008 (FC).2 It finds that finance policy
makers and supervisors have focused on three key areas over the last decade,
namely: (1) capital management standards; (2) responsible lending standards,
with a particular focus on mortgage lending underwriting and origination practices;
and (3) the establishment of an incremental framework governing systemically
important financial institutions (SIFIs). It discusses the benefits, limitations, and
associated risks of these policy frameworks and regulatory settings on a standalone
basis. It also considers these frameworks and settings more holistically, including
the possible consequences should they prove inadequate in future crisis
environments.
The primary goal of policymakers, monetary authorities and supervisors since
the FC has been financial stability, and this is reflected in the number and
1
King (2016), pp. 2–3 citing a senior Chinese central banker.
2
King (2016), p. 40.
G. North (*)
Deakin Law School, Deakin University, Burwood, VIC, Australia
Deakin Law School, Deakin University, Geelong, VIC, Australia
Law School, University of Western Australia, Perth, WA, Australia
e-mail: g.north@deakin.edu.au; http://www.deakin.edu.au/about-deakin/people/gillian-north

28 G. North
prominence of national and international bodies that monitor and assess financial
stability risks, including the Financial Stability Board (FSB), the International
Monetary Fund (IMF), and the European Central Bank (ECB). The FSB was
established in April 2009 and is an international body that monitors and makes
recommendations about the global financial system.3 It seeks to identify systemic
risk in the financial sector, develop financial sector policy actions that can address
these risks, and oversee implementation of the responses by member states. While
its recommendations do not have legal standing, it sets ‘internationally agreed
policies and minimum standards that its members commit to implement at a
national level.’4 Financial stability has been defined as a ‘state whereby the build-
up of systemic risk is prevented’5 and systemic risk as a ‘risk of disruption to
financial services that is caused by an impairment of all or parts of the financial
system and that has the potential to have serious negative consequences for the real
economy’.6 Systemic risk derives from many sources, including cumulative finan-
cial imbalances, large external shocks, and contagion effects across markets,
intermediaries and infrastructure.7
The primary tool wielded by global and national finance supervisors since the
FC to maintain financial stability and reduce systemic risks has been capital
management and the setting of minimum capital requirements for financial institu-
tions. International management of the capital of the finance sector is led and
framed by the Bank for International Settlements (BIS), with the aim to strengthen
the regulation, supervision and practices of banks worldwide and to enhance
financial stability.8 The BIS operates through a series of committees9 and
3
Financial Stability Board (2017a).
4
Financial Stability Board (2017b).
5
European Central Bank (2016), p. 3. See also Schinasi (2004). Schinasi notes that financial
stability is a broad concept that encompasses private and public participants and the financial
infrastructure, including the legal system and regulatory frameworks for financial regulation,
supervision and surveillance. He suggests that financial stability entails preventative and remedial
dimensions and arises along a continuum. He limits the concept to potential consequences for the
real economy and notes that policies aimed at financial stability often involve a trade-off between
resilience and efficiency. For example, higher capital requirements reduce the risk of a bank failure
but also result in higher capitals costs and foregone investment opportunities.
6
European Central Bank (2016), p. 3. See also International Monetary Fund, Financial Stability
Board and Bank for International Settlements (2016), p. 4. This multibody document defines
systemic risk as ‘the risk of widespread disruption to the provision of financial services that is
caused by an impairment of all or parts of the financial systems, and which can cause serious
negative consequences for the real economy.’
7
European Central Bank (2016), p. 3.
8
Bank for International Settlements, https://www.bis.org/bcbs/about.htm?m¼3%7C14%7C573.
9
These committees include the Basel Committee on Banking Supervision, the Committee on the
Global Financial System, the Committee on Payments and Market Infrastructures, the Markets
Committee, the Central Bank Governance Forum, and the Irving Fisher Committee on Central
Bank Statistics.
Well Governed, Sustainable and Socially Responsible Financial. . . 29
independent organisations that have their secretariats at the bank in Basel Switzer-
land.10 Of the committees, the Basel Committee on Banking Supervision (Basel
Committee) is the most renowned because it is the primary global standard-setter
for the prudential regulation of banks and is a forum for cooperation on banking
supervisory matters.11 Once established, the standards set by the Basel Committee
are negotiated and enacted nationally by countries within the G20.12
This chapter supports the stability aims of the BIS and Basel Committee, but
notes that these capital standards are becoming increasingly mired in complex
technical details, making them difficult to operationalise and assess internationally.
It also highlights the limitations of these reforms, including the uncertain capacity
of the national capital frameworks during extreme conditions, and their limited
impact assuming they achieve their stated aims. It argues that the systemic risks
identified by the ECB and others are exacerbated by the following factors: fragility
of the current financial and economic environments, the high levels of indebtedness
of public and private sector participants in many countries, greater interconnections
between finance and economic activities worldwide, a continuing concentration of
assets, liabilities and risks across the finance sector, and increasing levels of
financial activity relative to the real economy. The chapter highlights the record
low interest rates internationally and suggests that continued access to cheap credit
in many countries is undermining residential mortgages underwriting and origina-
tion standards and the quality of other forms of lending. It argues that this is
resulting in levels of private and public indebtedness that are unsustainable over
the long term and that will significantly exacerbate the resilience of governments
and populations in coming decades, including during crisis periods.
The chapter ultimately concludes that the policies introduced since the FC to
promote financial stability are failing to prevent an accumulation of systemic risks
and the world is ill-prepared for further financial crises and adverse economic
shocks. It suggests that in a best-case scenario, the Basel capital standards and
associated rules in member countries, the FSB mortgage lending principles (and
broader responsible lending rules in member nations), and the FSB SIFI framework
(and supporting domestic SIFI frameworks) will enhance the survival prospects of
finance entities and the continued functioning of financial systems during extreme
10
These independent organisations include the Financial Stability Board, the International Asso-
ciation of Insurance Supervisors, and the International Association of Deposit Insurers.
11
Membership of the Basel Committee is comprised of the central bank governors and national
bank regulators of G20 countries. For an outline of transnational coordination of private law
governing international finance, see Brummer (2011), p. 257.
12
The G20 (or Group of Twenty) is an international forum for the governments and central bank
governors from 20 major economies. The members include 19 individual countries—Argentina,
Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea,
Mexico, Russia, Saudi Arabia, South Africa, Turkey, United Kingdom and United States, as well
as the European Union (EU). The primary aim of the G20 is to promote international financial
stability.
30 G. North
events, without support from public sources.13 These enhancements would be

positive and significant achievements. Yet these reforms, without more, are
unlikely to prevent or mitigate many of the most devastating economic and social
costs of financial crises and deep recessions on society, including large and
sustained drops in the value of household wealth, significant contractions in house-
hold income, restricted access to consumer credit, increased unemployment, per-
sonal insolvencies, and foreclosures.
The chapter is organised in four sections. Section 1 provides a summary over-
view of the Basel capital framework. Section 2 considers the sustainability of banks
through the lens of bank lending standards and practices because many of the most
damaging financial crises (including the FC) have been associated with irresponsi-
ble property-related lending. Section 3 provides an overview of the systemic risks
within the global financial environment, including significant macroeconomic and
sector contagion risks. The final section concludes.
2 The Basel Capital Framework
Cohen, the Secretary-General of the Basel Committee, indicates that the Basel
capital standards are designed to promote long term resilience and financial sound-
ness.14 These capital standards set tiered risk weightings that effectively adjust the
cost of capital and commercial return for each asset class.15 It is not possible within
the scope of this chapter to fully discuss the Basel capital standards. However, in
simplified terms, the Basel Capital Accord was agreed in 1998 and sought to
strengthen the soundness and stability of international banking systems by
establishing minimum capital to asset ratios. Basel I classified capital into two
tiers and risk weighted asset classes at 0, 10, 20, 50 or 100%. Basel II was published
in 2004 and sought to provide a more comprehensive and risk sensitive framework,
and Basel 2.5 enhanced the measurement of risks relating to securitisation and
trading book exposures. Basel III, which is yet to be finalised, sets higher capital
requirement levels and introduces new liquidity and procyclicality buffer require-
ments. As discussed in Sect. 3, Basel III also establishes higher capital standards for
systemically important financial institutions (both global and domestic).16
Many of the direct and indirect losses that resulted from the FC were funded by
national taxpayers and the global community in the form of bail-outs,
nationalisation of financial entities, liquidity and funding support, restricted credit,
13
Of course, the full efficacy of these established standards and rules will only be tested when
extreme events or conditions arise and the financial survival of specific corporations are at stake.
14
Corderoy (2016). For an update on the implementation of the Basel standards, see Bank for
International Settlements (2016).
15
See e.g., The Joint Forum (2015), p. 11.
16
For an outline of the Basel III standards, see Keefe and Pfleiderer (2013).
and reduced economic activity. As King notes, when ‘push came to shove, the very
sector that had espoused the merits of market discipline was allowed to carry on
only by dint of taxpayer support.’17 In the wake of the FC, the minimum levels of
capital that finance institutions are required to hold under Basel III have increased
significantly. This additional capital is intended to provide a larger funding buffer to
strengthen the viability threshold of a financial institution, to prevent large entities
in the finance sectors from adopting risky strategies and retaining profits during
boom times while expecting implicit ongoing subsidies and significant support
from the public purse during bust periods, and to enable individual finance entities
or groups to wind down in an orderly manner in bankruptcy conditions when
commercial survival options have been exhausted.18 Accordingly, the main purpose
of the Basel standards is to ensure that the capital of a financial entity is highly
correlated with the overall risk inherent in its activities, while the broader policy
aims are to mitigate moral hazard issues19 and reduce the likelihood of future bail-
outs of finance entities using public money.
The aims of the Basel standards are laudable, but the increasing complexity of
these standards and associated rules may undermine their effectiveness. The capital
standards and the implementation processes are still developing, but are already
highly detailed and difficult to implement and assess. A report by the Joint Forum
on credit risk management (Joint Forum report) suggests that financial corporations
have improved their management of credit risk,20 but also highlights the wide-
spread use of internal capital models21 and problems with these models.22 Hence a
great deal of time and effort is being spent on the technical details of capital
frameworks, but these endeavours may have lost sight of the broader goals of
these frameworks.23 The ECB explains that the Basel Committee is undertaking a
strategic review of the capital framework to tackle the excessive and unwarranted
variability in risk weighted assets, reduce the complexity of the regulatory frame-
work, and improve the comparability of a bank’s capital ratio. It suggests that
simplifying the framework and increasing its transparency is a crucial step to
preserve confidence in the risk weighted approach and the associated risk-capital
ratios. These comments from the ECB are important, as the risk-based capital
requirements are only as good as the measures of risk adopted, the quality of the
capital standards implemented in individual countries, the levels of compliance
17
King (2016), p. 4.
18
European Central Bank (2016), p. 15.
19
Moral hazard exists in banking when bankers are not adequately incentivised to guard against
risk because they are protected from the consequences of their actions. Some commentators
suggest that moral hazard concerns remain because deposit insurance coverage has generally
increased since the crisis. See e.g., Cihak and Demirguc-Kunt (2013), p. 8.
20
The Joint Forum (2015), pp. 1–2.
21
22
The Joint Forum (2015), p. 7.
23
Byres (2015), pp. 2–3; Caprio (2013), pp. 2–3, 8–13.
32 G. North
with relevant national rules, and ultimately, the extent to which the capital held by
individual financial institutions appropriately reflects their actual risks.
The Joint Forum report highlights a heavy reliance on stress testing.24 The IMF
and World Bank conduct individual country assessments and publish country
specific reports.25 Finance sector participants and supervisors in most countries
also conduct regular stress tests to assess the likely impact of possible adverse
scenarios on capital levels.26 For example, the ‘severely adverse’ scenario tested by
the Federal Reserve in the United States (US) assumes a severe global recession,
accompanied by a 5% rise in unemployment, a heightened period of financial stress,
and negative yields for short-term government securities.27 These stress test pro-
grams are an important monitoring and supervisory tool and the review processes
enhance the levels of transparency, accountability, and knowledge of the finance
sector. However, as Allen et al. point out, stress tests on their own would not have
captured most of the risks prior to the FC because the mortgage-related structures
were intentionally designed to be opaque and escape detection.28 Moreover, the key
risk factors that are most difficult to simulate are those arising from the intercon-
nectedness of modern financial institutions, capital markets and financial infrastruc-
ture, and the associated potential for losses in one institution or area to rapidly
spread to others, with direct and indirect spillover effects.29
Finally, and most importantly, the Joint Forum report highlights differing levels
of conservatism across the sector and an increasing risk tolerance by some financial
institutions in a ‘search for yield’ in the current low interest rate environment.30
This finding aligns with historical patterns and is a critical red flag for market
supervisors of pending issues. When asset prices such as housing and equities are
rising quickly in a low interest environment, and finance companies are competing
for business in increasingly riskier environments, banks tend to lower their lending
standards and raise their risk profile (consciously or unconsciously) to satisfy
consumer demand. And when housing and equity markets are strong, momentum
can build in a self-fulfilling spiral, with prices becoming increasingly disconnected
from underlying economic fundamentals, creating unsustainable market conditions
that collapse at some point (often referred to as boom-bust cycles).31
24
25
See Clark and Drage (2000), pp. 164–165.
26
See, e.g., European Banking Authority (2016).
27
Federal Reserve (2016), p. 1.
28
See Allen et al. (2014), pp. 14–15.
29
See, e.g., Commonwealth of Australia, Financial System Inquiry (2014), p. 47.
30
The Joint Forum (2015), pp. 2, 7. See also European Central Bank (2016), p. 136.
31
See e.g., Dell’Ariccia et al. (2016), p. 1093.
3 Responsible Lending Standards and Rules
Boom-bust housing cycles are common and the consequences are often severe. One
study found there were 85 housing booms during the period 1970–2012 across a
sample of 53 advanced and developing nations.32 Another study found that housing
cycles are often linked to mortgage lending cycles33 and financial crises34
and that economic recessions accompanied by housing crashes result in around
three times more severe output contractions than those without housing busts, and
last approximately 40% longer.35 Importantly, a study commissioned by the Inter-
national Monetary Fund (IMF) concluded that the most important dimension
determining the vulnerability of a country to negative contraction in GDP following
a housing crash is the ease with which households can access mortgage credit, and
this impact is accelerated when households can exploit increases in the collateral
values of the property.36
The adverse consequences of housing market collapses and financial crises
typically include immediate harmful impacts on lenders and borrowers and even
costlier longer term effects on financial systems, the real economy and society.37
When house prices decline sharply and significantly, banks and their customers
often require an extended period to adjust. The most notable example of these
effects was the FC in 2007–09 when the scale of ensuing damage was unprece-
dented.38 Borrower defaults on home mortgages and payments to investors in
securitised products linked to housing finance were the initial triggers of the crisis
in the US.39 When house prices declined sharply, the capital and confidence of the
lending banks were severely undermined, reducing their capacity and willingness to
provide further credit, and causing severe contractions and price rises across the
credit spectrum. The housing downturn negatively impacted business and consumer
confidence and demand, resulting in further pressures on the banks and the real
economy. Similar patterns occurred around the same time or later in many parts of
32
Cerutti et al. (2012), pp. 12, 15. See also Lim and Minne (2014), pp. 2, 8 citing Reinhart and
Rogoff (2009), which documents 2678 domestic financial crises (measured on a yearly basis) in
the 47 countries for which data was available between 1800 and 2005. Of these events, 919 were
currency crises, 155 were domestic debt crises, 532 were banking crises, and 1072 were stock
market crashes.
33
Reserve Bank of New Zealand (2016).
34
See Crowe et al. (2011).
35
Reserve Bank of New Zealand (2016), p. 5. See also Igan and Loungaini (2012).
36
Igan and Loungaini (2012).
37
Aizenman and Pinto (2011), p. 24. Aizenman and Pinto note that the economic output and social
costs associated with financial crisis are estimated to average more than 10% of GDP.
38
See, e.g., International Monetary Fund (2012), pp. 14–15.
39
International Monetary Fund (2008), p. 6. See also The Financial Crisis Inquiry Commission
(2011), pp. xvii–xx; International Monetary Fund Staff Discussion Note (2012), p. 9. The issuance
and sale of securitised products across the globe, particularly those linked to subprime mortgages,
grew at exponential levels during the 1990s and 2000s.
34 G. North
Europe, causing spillover effects in the rest of the world, although the specific
circumstances and responses of each country varied. Hence, financial systems and
real economies were exposed to a spiraling cycle of losses during the FC that
followed a series of connected events, including:
• a significant decline in property prices, initially in the US and later in other
countries
• rapid declines in the value of securitised assets on the balance sheets of financial
institutions
• increasingly high levels of direct and indirect leverage of financial entities
• major issues with access to, and the cost of, intermediated and market-based
credit40
• financial system liquidity injections by monetary authorities
• monetary stimulus, including interest rate reductions
• Government stimulus, including public work programs
• various forms of public support for financial institutions in distress
• significant and sustained falls in economic output and widespread associated
damage.41
The inherent interconnections between finance entities and the high levels of
integration between finance and economic activities were significant risk factors
that were largely unforeseen or underestimated by most participants. This
compounding and amplification of negative impacts across financial institutions,
financial systems and real economies is commonly referred to as contagion risk.42
That is, the impact of loan defaults spreads like a contagious virus, with the
accumulating capital losses eventually reaching a point where the operations of
the financial systems of the home nation become dysfunctional. When these lending
institutions operate globally, or the defaults occur in other parts of the world, or the
interconnections between financial systems are strong, the financial dysfunction can
quickly become global. These interconnections and linkages contributed to the
collapsing house of cards during the FC and the adverse financial, economic and
social consequences that continue today.43
The nature and scale of the impact of housing downturns and financial crises on a
population depend greatly on the levels and distribution of private debt in a
country.44 Empirical studies suggest that borrowers with the highest loan to
40
International Monetary Fund (2011), pp. 4–7.
41
The Financial Crisis Inquiry Commission (2011).
42
Financial contagion can be defined as ‘a price movement in one market resulting from a shock in
another market’: Kodres and Pritsker (2002), p. 772.
43
International Monetary Fund (2016), pp. 61–62. This report notes that legacy economic and
financial issues remain today.
44
Reserve Bank of New Zealand (2016), p. 9 citing Floden (2014) and Cecchetti et al. (2011).
Floden found that countries with higher levels of aggregate household debt to income in 2007
suffered larger consumption reductions controlling for other factors. Ceccchetti examined the
relationship between debt and economic growth in 18 advanced countries since 1980 and found
valuation ratios (LVR) and those with the highest debt to income ratios are the most
likely to default on their mortgage payments.45 For example, studies in the US
suggest that when property valuations declined sharply, households in
neighbourhoods with high LVR mortgages reduced their spending levels more
significantly than households in neighbourhoods with lower LVR mortgages.46
Similarly, consumption levels fell sharply in the United Kingdom (UK) and
Denmark post the FC,47 and in Japan following its financial crisis in the 1990s.48
There is also some evidence suggesting that people who acquire residential properties for
investment purposes are more likely to default than owner occupiers, so countries
with higher levels of investment related property lending may be more vulnerable
to the negative impacts of significant housing downturns.49 Residential real estate
and mortgage debt typically represent the largest asset and liability respectively on
most household balance sheets.50 So it is unsurprising that studies confirm that
households with minimal equity in their residential properties, large housing loans,
and other debt commitments are the most vulnerable to significant external shocks,
especially those with high loan to income ratios and or those with investment
related mortgages. It is also unsurprising that studies find that these highly indebted
households often take considerable time to return to stable financial positions and
prior consumption levels following significant market downturns, particularly those
on low incomes.51 Their reduced consumption patterns typically reflect a range of
factors, including loss of confidence, lower expectations of future income, and
reduced credit access and availability.
The regulatory framework around residential lending became a key focus of
global leaders and regulators following the FC and a range of international bodies
reviewed the underwriting and origination of residential mortgages and related
consumer protection. For example, in its January 2010 Review of the Differentiated
Nature and Scope of Financial Regulation,52 the Basel Committee on Banking
Supervision Joint Forum (Joint Forum) recommended improved oversight of the
that high levels of public and corporate debt adversely affected economic growth and there was a
negative relationship between high levels of household debt (above 85% of GDP) and future
economic growth.
45
Igan and Loungaini (2012), Reserve Bank of New Zealand (2016), p. 7 citing Amronin and
Paulson (2009) and Demyanyk and Van Hemert (2011).
46
See Mian and Sufi (2009) and Dynan (2012).
47
Bunn and Rostom (2014), pp. 304–315; Anderson et al. (2014). The Bunn study estimates that
the high levels of household debt in the UK resulted in a fall in private consumption of around 2%
between 2007 and 2012. The Anderson et al. study found that households with LVRs of 100%
reduced their consumption between 2007 and 2011 significantly more than households with LVRs
of 60%.
48
Ogawa and Wan (2007).
49
Reserve Bank of New Zealand (2016) citing Kelly (2011).
50
See North (2015). See also Igan and Loungaini (2012).
51
See Benes et al. (2016).
52
The Joint Forum (2010).
36 G. North
residential mortgage market, including greater consistency in underwriting stan-

dards across different types of originators. It suggested that the FSB establish a
process to determine and monitor sound underwriting practices for the future. In
response, the FSB initiated a peer review that compared residential mortgage
underwriting and origination practices across the FSB membership, including
actions taken by national authorities to promote sound practices.
In March 2011, the FSB published a thematic review of residential mortgage
underwriting and origination practices,53 and subsequently developed an interna-
tional principles-based framework for sound underwriting practices.54 The
principles-based framework encourages member jurisdictions to establish mini-
mum underwriting standards and applies to loans issued to individuals secured by
a residential property. Its purposes are to help strengthen residential mortgage
underwriting practices, and to enable supervisors to more effectively monitor and
detect any deterioration in underwriting standards, particularly when housing
markets are booming. The FSB notes that ‘a robust and effective assessment of
individual affordability has to underpin any sustainable lending model’.55 It calls
for national frameworks governing the provision of residential mortgages to
include:
• effective verification of income and other financial information
• reasonable debt service coverage
• appropriate LVRs
• effective collateral management
• prudent use of mortgage insurance
• a multidimensional implementation framework
• effective supervisory tools and powers.56
Many international bodies and national supervisors stress the importance of
maintaining sound mortgage underwriting and responsible lending practices, and
the risks of boom-bust housing cycles. An increasing number of countries are using
macroprudential regulation to limit the adverse consequences of these cycles on
lenders, borrowers and the broader community.57 Regulatory measures that have
been implemented include capital surcharges, limits on LVRs, and caps on debt
repayments-to-income ratios and loan-to-income ratios.58 While the efficacy of
these measures over full economic cycles is still contested, these are reasonable
attempts by policymakers and regulators to mitigate the risks of excessive leverage
53
Financial Stability Board (2011a, b, c). Mortgage underwriting concerns the processes lenders
use to evaluate loan applications, including the risks of offering a mortgage loan to a borrower.
54
Financial Stability Board (2011a, b, c).
55
Financial Stability Board (2011a, b, c).
56
Financial Stability Board (2011a, b, c), pp. 2–9.
57
European Central Bank (2016), pp. 100–101 and International Monetary Fund, Financial
Stability Board and Bank for International Settlements (2016).
58
Aizenman and Pinto (2011), p. 25.
in residential property markets and the adverse impacts on many households when
housing markets crash.59
Risks associated with property investment and leverage are not limited to
residential housing though. A sizeable share of bank losses in past financial crises
has involved loans to the commercial property sector.60 For instance, large scale
construction market collapses and associated defaults severely stressed the domes-
tic financial systems in Ireland and Spain during the FC. The respective govern-
ments bailed out many of their major banks using taxpayer funds and additional
credit from external bodies, and this restricts their ongoing capacity to provide
public services.61
Thus, studies that examine the impact of financial crises consistently highlight
the severity of the consequences on populations when the lending of finance
institutions becomes irresponsible or imprudent lending. In addition, policy reviews
of the causes of financial crises confirm that when the irresponsible lending centres
around a residential property boom and enables easy access to mortgage credit, this
results in especially damaging and long lasting adverse economic and social
impacts.62 Responsible lending standards (in relation to property and other forms
of lending to businesses and consumers) therefore must remain at the heart of sound
governance and sustainability frameworks for banks and other lending
institutions.63
A bank’s lending standards are closely linked to the quality of its capital
management because losses resulting from loan defaults reduce its capital base,
and in severe conditions can deplete its capital entirely. The management of capital
and associated risks within banks has always been challenging because of an
inherent mismatch between funding sources (which are often short term in nature)
and longer term lending, particularly when long duration mortgages are a signifi-
cant lending asset on the balance sheet.64 However, these management
59
See Benes et al. (2016), Dell’Ariccia et al. (2016) and Lim et al. (2015). Dell’Ariccia et al. found
that macroprudential tools can reduce the incidences of credit booms and decrease the probability
that booms end badly. Lim et al. found that macroprudential tools such as loan-to-valuation and
debt-to-income caps, ceilings on credit growth, reserve requirements and dynamic provisioning
rules can mitigate the procyclicality of credit.
60
Kragh-Sorenson and Solheim (2014).
61
Reserve Bank of New Zealand (2016).
62
See, e.g., The Financial Crisis Inquiry Commission (2011).
63
Many countries now have responsible lending rules. For example, in the United States, Title XIV
of the Dodd–Frank Wall Street Reform and Consumer Protection Act (2010) (the Mortgage
Reform and Anti-Predatory Lending Act) imposes new mortgage underwriting standards, pro-
hibits or restricts specified mortgage lending practices and regulates payments to mortgage loan
officers and brokers. Lenders are banned from steering consumers into high cost, unaffordable
loans: § 1403, 124 Stat 1376, 2140. Lenders must also verify a borrower’s ability to repay the
mortgage in its entirety, including consideration and documentation of specified factors such as the
borrower’s credit history, employment status, income and debt-to-income ratio: § 1411(a)(2),
124 Stat 1376, 2142–3.
64
Caprio (2013), p. 14.
38 G. North
complexities and risks have compounded over the last 30 years, as legal and market
developments have prompted financial institutions to increasingly leverage their
businesses, structure their services and products in ways that fail to fully mitigate
conflicts of interests and that exacerbate systemic risks, especially in large financial
conglomerates.
4 Framework Around Systemically Important Financial

Institutions
In the wake of the crisis, leaders from the G20 asked the FSB to develop policy
frameworks to address important systemic risks, especially those associated with
the largest financial institutions. In response, the FSB introduced a principles-based
framework that applies to financial institutions that it deems to be systemically
important, including banks, insurance companies and other financial institutions.
The FSB categorises systemically important financial institutions (SIFIs) as ‘finan-
cial institutions whose distress or disorderly failure, because of their size, complex-
ity and systemic interconnectedness, would cause significant disruption to the wider
financial system and economic activity.’65 The measures to address risks associated
with SIFIs include (1) a requirement for them to hold loss absorbency capital in
addition to the capital required under the Basel framework; (2) requirements for
resolution planning and ongoing resolvability assessments66; and (3) higher super-
visory expectations relating to risk management frameworks, risk data capabilities,
risk governance, and internal controls.67 These combined measures are intended to
mitigate systemic risks and the implicit public subsidies underpinning large finan-
cial institutions when they believe they are too-big-to-fail (TBTF) and routinely
expect governments to provide financial support and liquidity when their survival is
threatened. In 2016, the FSB classified 30 banks as global systemically important
(G-SIBs) and placed them into three capital maintenance tiers.68 The home nations
of the G-SIBs are widely dispersed. Eight of them have their headquarters in the
US, four are based in China, France and the UK respectively, three are based in
Japan, two in Switzerland, and one in each of the nations of Germany, Sweden,
Romania, the Netherlands and Spain.
65
Financial Stability Board (2011a, b, c), p. 1.
66
Resolution plans are intended to allow systemically important financial institutions to continue
or to wind down in an orderly manner, while still protecting depositors, and without the use of
taxpayer funds.
67
See Financial Stability Board (2016). See also Peihani (2014) and Walker (2014).
68
Financial Stability Board (2015). The additional capital requirements range from 1 to 3.5% of
risk-weighted assets. The higher loss absorbency requirements (along with capital conservation
and countercyclical buffers) will become fully effective on 1 January 2019.
The aims of the incremental measures applying to SIFIs appear to be largely

uncontentious. But this lack of contestability arguably arises because the measures
adopted since the FC to mitigate the explicit and implicit costs of TBTF and the
broader systemic risks that arise from contagion are limited.69 One might even
characterise these attempts as the placement of sandbags to mitigate the impact of a
tidal wave. As a former US Treasury Secretary and a professor of economics at
Harvard University notes, ‘based on virtually all of our measures, (the largest
financial) firms have become more risky in the post-crisis epoch’.70 In any event,
systemic risks, housing busts and financial crises can arise (and have historically
arisen) from outside of the largest financial institutions.71 Consequently, it is vital
that policy makers and others consider the nature and scale of systemic risk more
holistically.
Current systemic risks are compounded by the fragility of the macro and micro
economic environments. The economic settings today are very different from those
that existed in 2007. Indeed, the world is operating in uncharted waters. Monetary
tools to mitigate the adverse effects of future financial crises are now limited. First,
interest rates across many parts of the world are still close to record lows, leaving
minimal capacity for further reductions. While some commentators may view a
world with positive and rising interest rates as remote, interest rate settings close to
zero across major developed nations are unsustainable over the long term.72 The
low interest rates have encouraged high levels of investment on a leveraged basis,
69
See, e.g., Lagarde (2014) Lagarde, the managing director of IMF, concludes that the too-big-to-
fail problem has not been solved because the largest financial institutions still pose a major source
of systemic risk and their implicit subsidies continue. She suggests the behaviour of the financial
sector has not changed sufficiently since the financial crisis because the industry ‘still prizes short-
term profit over long-term prudence [and] today’s bonus over tomorrow’s relationship.’ See also
Dallas (2013).
70
Sarin and Summers (2016), p. 13. The authors note [at 33] that ‘we have no doubt that but for
Dodd Frank and regulatory actions, the financial system today would be much more fragile.’
However, they suggest [at 34] that their results do not go as far as to support heavier regulation of
large banks. They conclude that consideration needs to be given to market prices as indicators of
asset values. The paper highlights a substantial decline in the price-book ratio for the largest
financial institutions and suggests this is consistent with a dramatic decline in franchise value,
caused at least in part by new regulations. The present author is an experienced analyst of the
finance sector and has reservations concerning the paper’s focus on price to book ratios and the
hypothesised linkages between the fall in these ratios and the conclusion that further regulation is
not required. She suggests it is not surprising that the price to book ratios are well below pre-crisis
levels, given the much higher levels of capital included in the book values of financial institutions.
She notes that the valuation of a financial entity reflects a wide range of financial indicators of the
institution and the broader environment in which it operates, and as this paper highlights, the
prospective earnings potential and health of these environments is fragile.
71
See Allen et al. (2014), pp. 4–5.
72
Financial Stability Oversight Council (2016), p. 120; International Monetary Fund (2016),
p. xiii. See also King and Low (2014). The author acknowledges that interest rates in the United
States have risen from historically low levels over the last year, but other countries have not
followed.
40 G. North
and this has contributed to likely boom conditions across a range of asset classes
(property, equities and bonds) in many jurisdictions, and an increasingly desperate
search for yield by investors.73
Despite the record low interest rates, low oil prices, and continued monetary
stimulus by central banks,74 major countries are yet to fully recover from the FC
and global economic growth has been slower than expected.75 During the period
2010–2014, the GDP of advanced economies grew only 1.8 percent per annum, and
the economic recoveries in the US, UK, Europe and Japan are still weak or stagnant
and growth in China is slowing.76 Moreover, future global economic and social
progress are hindered markedly by stagnant wage growth, weak productivity trends,
and growing income and wealth inequality in many parts of the world.77 Most
policymakers, economists and scholars rely on continued growth in China to
support their global economic expectations, but China faces some of the same
financial and transitional issues as the rest of the world. Investment within China is
largely funded by domestic finance entities, and these entities have supported high
levels of investment in commercial property that may result in future losses and
defaults and broader pressures on financial systems. If so, the Chinese leadership
may have to manage its economic and social plans and programs in coming
decades, while simultaneously responding to significant financial stresses and
issues.78
The housing boom conditions in leading jurisdictions leaves many of the banks
in these locations heavily exposed to residential and commercial property markets
and vulnerable to pricing crashes, especially when the fall in property prices is
immediate and sharp.79 These exposures, and a lack of profitable low risk lending
opportunities, are making it difficult for some to fully deal with non-performing
loans, particularly in parts of Europe.80 Further, lenders to entities that operate in
the resource sector are coming under pressure as their client borrowers grapple with
volatile global oil and commodity prices.81
73
See King (2016). King describes this as a savings glut. See also Dell’Ariccia et al. (2016).
Dell’Ariccia et al. note that both stock and real estate prices surge during credit booms and lose
traction at the end of a boom creating balance sheet vulnerabilities for the financial and
nonfinancial sectors and repercussions for the broader economy.
74
King (2016), p. 43.
75
European Central Bank (2016), pp. 9–11, 32–33, 59, 67; International Monetary Fund (2016),
pp. viii–x.
76
European Central Bank (2016), pp. 4, 16–23, 33, 61; Financial Stability Oversight Council
(2016), p. 3; International Monetary Fund (2016), p. viii.
77
International Monetary Fund (2016), p. xiii; Organisation for Economic Co-operation and
Development (2014).
78
King (2016), pp. 362–363; Yu and Wu (2016), Scott (2016) and McKay (2016). See also Huang
(2015), Liu (2015) and Schwarcz (2016).
79
Das (2016).
80
European Central Bank (2016), pp. 4, 16–23, 33, 61; Financial Stability Oversight Council
(2016), p. 3; International Monetary Fund (2016), p. viii.
81
International Monetary Fund (2016), p. 1.
The low interest rate cycles have allowed governments, corporates and or
households to take on very high levels of debt in some countries, limiting future
credit expansion and increasing the risks and costs of future financial crises.82
These high levels of indebtedness will have intergenerational consequences,
because when credit is used to bring forward demand, this creates gaps in future
demand, and when credit is used for non-productive purposes to satisfy the short
term goals of lenders, borrowers and political parties, this shifts the debt burden to
future generations and often makes it harder to achieve longer term goals.83
The present levels of systemic risk are amplified by concerns relating to the scale
and transitory nature of capital flows. Cross border capital flows have grown rapidly
over the last 30 years, including escalating financial market activity levels, with a
high proportion of these trades initiated by algorithms and ultra-short term
traders,84 and most of these trades executed in the form of derivative instruments.85
The volumes of financial capital amassed in savings, pensions and retirement funds
worldwide are immense, and investment of this capital is highly competitive and
often short term focused.86 These combined trends have led to highly integrated and
open financial (and trade) markets that pose real and significant risks for many
nations (as well as economic benefits), particularly during financial crises when
capital movements are often especially large and rapid.87
Global systemic risks are also rising due to continued growth in finance activity
levels and the overall size of the finance sector well above economic activity levels,
particularly in the US and UK.88 The Report of the Commission of Experts of the
President of the United Nations General Assembly on Reforms of the International
Monetary and Financial System (Commission of Experts) indicated that the:
measure of success of financial policy should not be the rate of growth or the size of the
financial sector as a share of GDP. Indeed, an excessively large financial sector relative to
the GDP of a medium to large economy should be a cause of concern to those interested in
long-term economic growth because financial crises are often associated with unsustainable
growth of the financial sector.89
82
European Central Bank (2016), pp. 11–12, 24–25, 28–30; Financial Stability Oversight Council
(2016), p. 34; International Monetary Fund (2016), p. x; Gourinchas and Obstfeld (2012).
Gourinchas et al. found that domestic credit expansion and real currency appreciation were the
most robust and significant predictors of financial crises during the period from 1973 to 2010.
83
King (2016), p. 46.
84
See North and Buckley (2012).
85
North and Buckley (2012); Brummer (2011), p. 265; Aizenman and Pinto (2011), p. 24; Lothian
(2012), p. 416. Lothian suggests that the primary aim of regulation should be to ‘ensure the
predominance of financial deepening over financial hypertrophy’.
86
Financial Stability Oversight Council (2016), p. 6; European Central Bank (2016), pp. 54–56;
Bank for International Settlements (2015), p. 23.
87
Yergin and Stanislaw (2002), pp. 394–395, 415.
88
See, e.g., Milan and Sufi (2016), p. 35. The authors note that since 1960 there has been an
unprecedented surge in the scale and scope of financial activities in advanced economies. At
present, New York and the City of London are the two largest financial centres.
89
Commission of Experts of the President of the UN General Assembly on Reform of the
International Monetary and Financial System (2009), p. 47.
42 G. North
Lord Turner, a prior Chair of the Financial Services Agency in the UK, also stated
that the City of London had grown ‘beyond a reasonable size’ and described much of
the current market trading as ‘socially useless activity’.90 He suggested that:
[P]arts of the financial services industries need to reflect deeply on their role in the
economy, and to recommit to a focus on their essential and economic functions . . . not
all financial innovation is valuable, not all trading plays a useful role, and . . . a bigger
financial system is not necessarily a better one . . . parts of the financial services industry
have a unique ability to attract to themselves unnecessarily high returns and create
instability which harms the rest of society . . .91
These comments by the Commission of Experts and Lord Turner have been the
subject of subsequent research. One global study found that market discipline on
systemically large banks is largely ineffective.92 Another global cross country study
found that financial development is good only up to a point, after which it hinders
growth.93 Yet despite mounting evidence of the harm (and lost opportunities) when
finance becomes too large or dominant in an economy,94 policy measures to
mitigate the expansion and dominance of the finance sector have been minimal.
Under the Dodd–Frank Wall Street Reform and Consumer Protection Act (2010),
mergers, acquisitions and other business combinations are prohibited if the
resulting enlarged company would hold more than 10% of the total consolidated
liabilities of all banks and supervised non-bank financial companies.95 However, as
90
Monaghan (2009).
91
Turner (2009).
92
Demirguc-Kunt and Huizinga (2011). This study found that systemically large banks achieved
lower profitability and operated with higher risk than other banks and concludes that it is not in the
shareholders’ interest for a bank to become large relative to its national economy. They
hypothesise that inadequate corporate governance structures at these banks enabled managers to
pursue risky high growth strategies at the expense of shareholders.
93
Cecchetti and Kharroubi (2012). This study found that a fast-growing financial sector is
detrimental to aggregate real growth.
94
See also Cecchetti and Kharroubi (2015). This study found that financial growth disproportion-
ately harms financially dependent and research and development intensive industries; Phillippon
(2015) and Tankersley (2014).
95
See s 121(a) of the Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)
(Dodd-Frank) allows the Financial Stability Oversight Council (FSOC) to:
(1) limit the ability of the company to merge with, acquire, consolidate with, or otherwise become
affiliated with another company
(2) restrict the ability of the company to offer a financial product or products
(3) require the company to terminate one or more activities
(4) impose conditions on the manner in which the company conducts one or more activities; or
(5) If the Board of Governors determines that the actions described in paragraphs (1) through
(4) are inadequate to mitigate a threat to the financial stability of the United States in its
recommendation, require the company to sell or otherwise transfer assets or off-balance-sheet
items to unaffiliated entities.
The Trump administration has indicated that it wishes to roll back some of the Dodd-Frank
reforms, but it is not clear whether this will include the removal of s 121(a).
the Financial Stability Oversight Council has noted, this concentration limit is
likely to impact only four financial institutions—the Bank of America Corporation,
JP Morgan Chase & Company, Citigroup Inc., and Wells Fargo & Company.96
Friedman, a professor of political economy at Harvard University, recently
described the financial system in the US as ‘not only too risky, it’s too big and
too costly.’97 A review of the events leading up to and post the FC, and forensic
analysis of the present economic and finance environments, makes it hard to
disagree. While one cannot credibly predict the timing of future crises or the
specific factors that will give rise to major crash events, one can confidently point
to the record debt and asset prices in critical countries and highlight the associated
risks and significant potential harm when external events take a turn for the worse.
5 Conclusion
Policy makers, supervisors and scholars have expended considerable time and
effort assessing the causes of the FC and the appropriate rules and measures to
prevent a costly reoccurrence. In the wake of the crisis, many commentators
highlighted the limitations of market disciplines to effectively encourage efficient
allocation of financial resources and credit, while also preventing excessively risky
financial activity. Legal reforms since the FC have generally centred on three key
areas; higher minimum capital levels, the introduction or strengthening of respon-
sible lending rules (especially of residential mortgage underwriting and origina-
tion), and incremental supervision of financial institutions deemed to be
systemically important. The chapter does not contest the broad focus of these
reforms. Sound governance, sustainability, and social responsibility frameworks
for the finance sector should encompass and prioritise conservative capital man-
agement and prudent lending as central limbs. These frameworks should also,
where possible, prevent or mitigate the most severe economic and social conse-
quences of asset boom bust cycles and financial crises on populations, particularly
on the most vulnerable communities.
Nonetheless, the chapter questions the scope and efficacy of these reform strands
and their holistic impact on future economic and social outcomes. Increases in the
capital holdings of financial institutions over the last decade are likely to have
improved their resilience and prevented or reduced some of the accumulating
systemic risks.98 But as Cohen concedes, when ‘it comes to safe, resilient banks
and banking systems, strong capital is only one factor [and] exclusive focus on
96
Financial Stability Oversight Council (2011).
97
Creighton (2016), quoting Friedman.
98
Anginer and Demirguc-Kunt (2014). A study of 12,000 publicly traded banks in more than
45 countries over the period 1998–2012 found that macroprudential regulation that emphasised
capital measures reduced systemic risk.
44 G. North
capital is too narrow and misses the big picture’.99 Similarly, the emphasis by
international and domestic supervisors on residential property mortgages under-
writing and origination standards and rules since the FC has been appropriate, given
the well documented links between poor lending standards, rapid bank capital
depletion, high levels of household debt, economic recessions, and severe adverse
impacts on communities. However, the quality of supervision and the longer term
effectiveness of these standards and rules are open to question, especially given the
proclivities of participants (including policy makers, regulators, national monetary
authorities, financial institutions, and consumers of financial products and services)
to opt for policy and business solutions and activity that provide short term benefits.
Today, many lenders around the world are continuing to provide low cost easy
credit to consumers because the record low interest rates, capital rules, commercial
incentives and market forces encourage it. Moreover, many households are con-
tinuing to invest in housing (and other asset classes), including on a leveraged basis,
with tax incentives to do so, and a dearth of other savings opportunities that provide
a reasonable return.
Cohen describes the likelihood of future FCs as statistically certain.100 Similarly,
others indicate that it is a matter of when, and not if, future financial crisis will
occur.101 Yet parts of the world have not yet entirely recovered from the FC, global
economic growth is weak and stagnating, interest rates are close to zero across
many parts of the world, the levels of private and public sector debt in leading
nations are high, and asset booms appear to be emerging across many classes and
jurisdictions. At the same time, the levels of financial interconnectedness and
integration, the concentration of capital, assets, wealth and power within the largest
SIFIs, and the size of the finance sector relative to the real economy all continue to
grow. Hence the build-up of global systemic risk within financial systems appears
to be escalating, and in the face of these risks, the SIFI framework seems inade-
quate, the combined extant reforms appear minimal, and the broader policy goal of
sustained financial stability during decades to come seems doomed. This chapter
concludes that the global community is ill-prepared for major external shocks and
economic headwinds, and it posits that the adverse impacts of the next crisis are
likely to be more severe than the FC.
Rapid growth in financial activity levels since the 1980s has changed the
structure, risks and conduct of finance corporations and financial markets in ways
99
Eyers and Grey (2016).
100
Corderoy (2016).
101
Corderoy (2016). See also World Economic Forum (2017), preface; Goldcare (2016). Klaus
Schwab, the Founder and Executive Chairman of the World Economic Forum, indicates that
‘continued slow growth combined with high debt and demographic change creates an environment
that favours financial crises and growing inequality.’ The Goldcare article reports that Japan
pressed G7 leaders to note that ‘the risk of the global economy exceeding the normal economic
cycle and falling into a crisis if we do not take appropriate policy responses in a timely manner’. It
highlights an increase in global debt of $57 trillion since 2007 and suggests there is a risk of debt
crises in China, the United States, the Eurozone and the United Kingdom.
that are difficult for policy makers and scholars to fully comprehend. Reconnections
between financial and economic activity are necessary, including structural changes
to prevent or mitigate continued sector concentration and financial activity growth
that is non-productive, wasteful and damaging.102 A reassertion of national and
community interests as a primary driver of business strategy and decision making is
also needed to restore public trust in finance corporations and finance matters more
generally. However, to install financial architecture that better aligns financial
behaviour and outcomes with the economic and social goals of individual nations
and the global community will require bold action and considerable political,
participant and community goodwill and support. The financial and political
power of the sector (especially its largest participants) is deeply entrenched and
the dominance and influence of finance in the everyday lives of global citizens
continues to increase.
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University Press, Princeton, New Jersey
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Economic Activity Conference Draft
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Gill North Career, memberships and achievements: Has a doctorate in law and is a chartered
accountant and experienced financial analyst. Prior to joining academia, worked at multinational
corporations and investment banks in the world’s major financial centres (London, Tokyo,
New York and Sydney). Roles included senior executive positions across the areas of corporate
strategy, corporate finance, mergers and acquisitions and funds management. Has taught at several
Australian universities. Treasurer of the Corporate Law Teachers Association and an active
member of the Banking and Financial Services Law Association. Has published in highly ranked
journals across North America, Europe and Australasia and has written two monographs on
corporate disclosure law and practice, including Effective Company Disclosure in the Digital
Age (Kluwer Law, 2015).
Research interests: Corporate governance, corporate sustainability, company disclosure law,
financial services regulation, finance law and investment law.
Teaching: Corporations Law, Corporate Governance, Banking Law, Finance Law, Commercial
Transactions, Corporate Finance and Securities Regulation.
The Role of Employee Voice in Promoting
Corporate Social Responsibility in China
Cindy A. Schipani, Terry Morehead Dworkin, and Junhai Liu
1 Introduction
As the already vast Chinese economy continues to outpace much of the world,1 the
importance of establishing and promoting cultures of Corporate Social Responsi-
bility (CSR)2 and active employee voice within businesses that operate in China is
becoming essential; both for sustaining economic growth and promoting the
wellbeing of Chinese workers. History shows that the costs of not maintaining a
CSR culture can be substantial, on both an economic and social level. By setting
forth the economic and social justifications in support of CSR, this chapter aims to
motivate businesses to further grow their CSR culture. To this end, this chapter first
introduces the topic of CSR and employee voice. It then describes the costs of
lacking CSR and voice by examining examples of corporate failures where CSR
could have been beneficial. This is followed by a discussion of the barriers to CSR
and voice in China. Next, we address whistleblowing laws and practices in China,
followed by our conclusions and a discussion of suggestions for stimulating CSR
and employee voice culture.
1
World Bank (2016): stating that China’s economy has grown at an average of 10% since 1978, the
fastest sustained expansion by a major economy in history.
2
The studies regarding CSR have not been uniform. See Hansen et al. (2011), p. 30.
C.A. Schipani (*)

University of Michigan, Stephen M. Ross School of Business, Ann Arbor, MI, USA
e-mail: schipani@umich.edu; https://michiganross.umich.edu/faculty-research/faculty/cindy-
schipani
T.M. Dworkin
Seattle University School of Law, Seattle, WA, USA
J. Liu
Renmin University of China, Law School, Beijing, China
http://www.law.ruc.edu.cn/eng/show.asp?No¼192

52 C.A. Schipani et al.
2 CSR and Employee Voice
A number of platforms are available for organisations to report their socially

responsible activities to the public.3 A recent Price Waterhouse Coopers survey
found that 69% of CEOs focused on a broad societal constituent base when
determining their organisation’s purpose.4 These actions are motivated not just by
a profit motive, but also by an incentive to conform to society’s moral expectations
of corporate behaviour.5 Although this phenomenon is known by many names such
as corporate citizenship, business ethics, stakeholder management and sustainabil-
ity, the dominating term is Corporate Social Responsibility (CSR).6 CSR has been
defined as ‘[a] voluntary commitment for (prima facie) non-economic goals going
beyond legal requirements . . .’7 fulfilling the economic, legal, ethical and philan-
thropic expectations of society.8 Common justifications for CSR include: (1) bene-
fits to a business’s long term self-interest; (2) warding off government regulation;
and (3) public support.9
Employee voice has been described as ‘a constructive response to dissatisfaction
and alienation in the workplace’10 and ‘an other-oriented behavior intended to
promote the effective functioning of the organization.’11 It can be seen as both a
subset of CSR and a goal in itself. Employees exercise their voice in the workplace
in an effort to affect change (or at least feel that they are affecting change).12 The
motivation to exercise voice may come from self-interest, such as dissatisfaction or
alienation; or be pro-socially motivated, for instance, driven by a desire to bring
about change that will benefit the organisation or other stakeholders.13
A prominent subset of employee voice that can have a negative connotation is
whistleblowing. Whistleblowing is the expression of a dissident opinion against an
organisation,14 quite often for activities that could impose negative externalities on
society. It can be both internal, within the organisation, and external, outside of the
organisation.15
3
Sweeney and Coughlan (2008), p. 113.
4
PwC (2016), p. 15.
5
Lindgreen and Swaen (2010), p. 2.
6
Carrol and Shabana (2010), p. 89.
7
Schmitz and Schrader (2015), p. 27.
8
9
10
Schipani et al. (forthcoming 2017), p. 3, describing Albert Hirschman’s work Exit, voice, and
loyalty.
11
Schipani et al. (forthcoming 2017), citing Hsiung (2012), p. 350.
12
Schipani et al. (forthcoming 2017), p. 4.
13
Schipani et al. (forthcoming 2017), pp. 3–5.
14
Near and Miceli (1985), p. 1.
15
See Mansbach and Bachner (2010).
The Role of Employee Voice in Promoting Corporate Social Responsibility in China 53
CSR, employee voice and whistleblowing all elevate the position of the general
employee beyond traditional perceptions into that of a team member capable of
contributing to the organisation above what is required by their position. These
unique contributions can help solve problems generally faced by businesses.
2.1 The Costs of Lacking CSR and Employee Voice
In 2008, an estimated 300,000 babies in China became sick and six died from
contaminated milk produced in China.16 In what has been called a ‘public secret’
milk station operators, suppliers of raw milk to milk-product producers such as
Sanlu Group, often added the industrial chemical melamine (a chemical often used
in plastic production) to fool company testing.17
In 2013, Caterpillar took a $580 million write-down in the value of its invest-
ment in Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing
Co. Ltd., 86% of the value of the deal it had only closed months before.18
Caterpillar, after conducting a physical audit, found that Siwei overstated its
inventory levels.19 This discovery quickly led to the uncovering of other accounting
irregularities, including overstatements of earnings, in what was referred to as
‘deliberate, multiyear coordinated accounting misconduct.’20 In the aftermath,
both a senior executive21 and the CEO22 of Caterpillar stepped down. While
commentators have offered numerous explanations as to how US investors may
have detected these fraudulent practices,23 it seems clear that such pervasive fraud
was widely known throughout Siwei.
The list of scandals that CSR and employee voice may have avoided, or at least
mitigated, is extensive. For instance, Deloitte audit discovered that Longtop Finan-
cial Technologies, in collusion with local bank branches, had understated debt, and
overstated cash balances.24 Over half the firm’s market capitalisation was erased
before the NYSE halted trading in the stock.25 Sino-Forest went from $6 billion in
market value to filing for bankruptcy within months of the discovery that much of
16
Huang (2014).
17
Fu (2009), pp. 6–8.
18
Baldwin and Ruwitch (2013).
19
Fontevecchia (2013).
20
Montlake (2013). The fraud was uncovered after Caterpillar did a physical inventory just a few
months after closing.
21
Montlake (2013).
22
Bochove (2016) stating that the Siwei scandal, along with other factors led to the CEO
stepping down.
23
Montlake (2013).
24
Norris (2011).
25
Norris (2011).
the timber assets of the company did not exist in what was called an ‘established
institutional fraud.’26 Daqing Lianyi was a petrochemical plant that forged listing
documents, misused assets, engaged in bribery,27 overstated profits for years and
made misrepresentations in prospectuses.28 Fines were imposed, 39 government
officials were punished, two CPAs lost their license to conduct securities audits and
two defendants were found personally liable for RMB 12 million.29 In a scandal
stretching across multiple levels of the supply chain and through several pharma-
ceutical companies, dozens were arrested in March of 2016 for selling improperly
sold vaccines valued at over $90 million.30
By increasing their dedication to CSR and the exercise of employee voice,
companies may be able to minimise the frequency of instances such as these in
the future. For example, some business people welcome the whistleblower to
supervise the quality of product, as the manufacturers will be forced to improve
the product quality and improve their competitiveness. According to a manager of a
glassmaking company in the Sichuan province, ‘[w]histle blowers who target fake
and shoddy products should be protected. Fake products are so common and the
government lacks an effective supervision system.’31
2.2 Economic Costs and Benefits of CSR
Although studies are not uniform,32 there is support in the academic literature for
the contention that CSR activities add economic value. CSR is believed to:
(1) defend brand reputation; (2) offer competitive advantages to adopters; (3) reduce
risks and operational costs; and (4) synergistically create value through a virtuous
cycle of benefits to all stakeholders.33 Scholars offer empirical evidence that, in
emerging markets, CSR is a driver of global competitiveness.34 With evidence of
human capital being an important competitive advantage and employee retention
rates diminishing, increased employee retention through employee voice may result
in unique advantages to businesses.35 Further, Total Quality Management (TQM), a
management philosophy centered on practices such as process redesign, increased
26
Austen (2012).
27
Chen et al. (2011), pp. 168–172.
28
Xi (2006), p. 494.
29
Chen et al. (2011), p. 169.
30
Wang and Burkitt (2016).
31
China Daily.com (8-15-2016b).
32
Hansen et al. (2011), p. 30.
33
34
Lagoarde-Segot (2011), p. 38.
35
Royer et al. (2008), p. 234. A recent PwC survey found that 51% of CEOs believed that
employees had a high or very high impact on their firm’s strategy. PwC (2016), p. 12.
employee involvement and teamwork, has repeatedly been shown to produce value
for companies.36 Specifically, the value producing agents in TQM scholarship are
executive commitment, an open organisation and employee empowerment37; all of
which are elements of employee voice. According to the TQM literature, creating a
culture where enhanced operational reforms such as process improvement and
benchmarking can thrive is more important than the implementation of the reforms
themselves.38
In addition, consumers tend to demand CSR from the brands they frequent.39
With exports accounting for approximately 30% of Chinese GDP,40 satisfying the
desires of global consumers is a necessity for Chinese businesses. A survey found
that over half of American consumers are influenced by social reputation in
purchasing decisions, and 70% of UK consumers stated they would be willing to
pay more for ethically superior products.41 Another survey found that 55% of
online global consumers from 60 countries were willing to pay more to companies
that are committed to CSR-related activities; this statistic reaching 64% for Asia-
Pacific countries surveyed.42 Brands such as TOMS, a shoe company that donates
one pair for every pair sold,43 can succeed by charging above market prices because
of its reputation for CSR. Unilever’s ‘Sustainable Living’ brands comprise half the
company’s total growth.44 There are now nine ‘sustainable’ brands that generate
over at least a billion dollars in annual revenue.45 The importance of CSR to
consumers means that competition on price alone is no longer enough.
We also see evidence of the importance of CSR in Chinese export activities. For
example, Chinese export-focused businesses are considered to have more devel-
oped CSR practices than other Chinese industries at least due in part, to sustain-
ability requirements imposed by their international customers.46 Walmart makes
use of a ‘Responsible Sourcing’ program that requires suppliers to be open to
Responsible Sourcing audits, to designate compliance professionals within the
organisation and to provide employee helplines to promote safety and wellbeing.47
Automotive manufacturers often require Chinese suppliers to comply with ISO
standards.48 It seems that a pre-requisite for Chinese industries to find growth in
overseas markets is a view toward CSR.
36
Powell (1995), p. 17.
37
Powell (1995), p. 29.
38
Powell (1995), p. 30.
39
Hansen et al. (2011), p. 30.
40
World Bank (2015).
41
Kitzmueller and Shimshack (2012), p. 52.
42
Nielsen (2014).
43
Toms (2016).
44
PwC (2016), p. 14.
45
PwC (2016), p. 14.
46
Embassy of Sweden, Beijing (2014), p. 14.
47
Walmart (2016).
48
Sarkis et al. (2011).
2.3 Economic Costs and Benefits of Employee Voice
Employee voice has also been shown to offer businesses important benefits. Not
only does employee voice serve to advance the CSR initiatives of businesses, it also
aids companies in streamlining operations, lowering costs and catching public
relations concerns before they grow into external problems.
Productivity in the US was a slow crawl of 1.7% annual growth from 1973 until
1995.49 It then increased to approximately 3% for the broader non-financial econ-
omy and 4.4% for manufacturers.50 This upturn in growth has been at least
somewhat attributed to employee voice activities, specifically increases in
non-managerial employees’ involvement in problem solving and identifying oppor-
tunities for improvement.51 Not only do lower level employees often have ideas,
information and opinions for improvements, when employees are heard by super-
visors they are more likely to be better motivated toward their work.52
Increased employee voice opportunities may also increase the chances of poten-
tial scandals being brought to the attention of management before they grow too far
and become public. Preemptive action to social problems may be more practical
and less costly than the reaction after they come to the forefront.53 Multiple Wells
Fargo employees blew the whistle on fraudulent account opening practices as early
as 2008, long before the practices became public in the summer of 2016. The public
disclosure caused the bank to lose its reputation, numerous customers, and incur
huge fines.54 Sherron Watkins, an Enron accountant, notified executives of the
accounting irregularities before the firm’s disastrous collapse.55 Employees often
have information of great value to both society and management; effective
whistleblowing procedures give employees avenues to accelerate this information
to the decision makers in situations where ordinary channels may prove inadequate.
2.4 Significance to Chinese Businesses
Focusing on the unique position of Chinese business as a global leader in growth, to

increase exports of Chinese products, increase foreign investment in China and
create more efficient and healthy markets, it is important that the Chinese market-
place be viewed by the international community as transparent and fair. Differences
in legal systems, accounting standards and cultures already make the international
49
Black and Lynch (2001), p. 2.
50
Black and Lynch (2001), p. 2.
51
Black and Lynch (2001), pp. 5–6.
52
Van Dyne et al. (2003).
53
54
CBS News (2016), Lynch (2016) and Corkery (2017).
55
Associated Press (2006).
investor’s decisions difficult. Concerns about the transparency, fairness and com-
petition of the Chinese market need to be addressed. Adding to this uncertainty,
accounting scandals in China have led to massive loss of investments and a
questioning of the reliability of any information coming from Chinese companies.
In 2011 and 2012, the NYSE delisted or suspended more than 100 Chinese com-
panies for fraud or accounting scandals; destroying over $40 billion in value.56
Making matters more difficult, many Chinese firms publicly listed in the US
became so not through IPOs, but through reverse mergers; avoiding the high cost
and scrutiny an IPO brings.57 Further, costly and uncommon investigative diligence
that is sometimes undertaken by large investors has been shown to be less than
foolproof in the past.58
Although the Chinese government has taken numerous steps to crack down on
business to business and business to government bribery, it has not been eradi-
cated.59 A 2015 study found that 35% of companies in China pay bribes or give gifts
to officials.60 In 2016, GlaxoSmithKline, Nu Skin Enterprises, AstraZeneca, Las
Vegas Sands, Novartis and SciClone Pharmaceuticals all paid settlements to the US
Securities and Exchange Commission under Foreign Corrupt Practices Act actions
involving Chinese bribery investigations.61
Potential product liability and brand damage from unsound manufacturing and
production practices has resulted in many would-be customers for Chinese products
choosing other markets. McDonalds62 and Yum Brands63 terminated agreements
with Chinese suppliers after it was discovered that expired meat had been sold to the
companies. Petco no longer sells treats made in China after the FDA had received
thousands of complaints of pet illnesses and deaths from Chinese made products.64
Headlines from the ‘Consumer Safety and China’ section of the New York Times
illustrate the risks that importers face; these headlines include: ‘100,000 Tons of
Smuggled Meat, Some From the 1970s, Seized Across China,’ ‘China Product
Recalled in Australia After Hepatitis Outbreak,’ ‘Ivanka Trump’s Chinese-Made
Scarves Are Recalled.’65 Even though product liability insurance is available, the
56
Cogman and Orr (2013).
57
Lang and McGowan (2013), p. 179.
58
Cogman (2013).
59
Some steps the Chinese government has taken to combat bribery are the enacting of the Anti-
Unfair Competition Law, including bribery in portions of the Criminal Law, the Corporate Social
Responsibility Clause of Article 5 of the Corporate Law, and the Basic Internal Control Norms for
Enterprise Article 43. Enforcement actions have also been brought. GlaxoSmithKline was fined
almost $500 million in connection with the Country’s anti-corruption campaign, Bradsher and
Buckley (2014).
60
Charney and Qazi (2015), p. 1.
61
Securities Exchange Commission (2016). See Schipani et al. (2015) for an analysis of the
GlaxoSmithKline bribery scandal in China.
62
Zhang (2015), p. 93.
63
Waldmeir (2014).
64
Associated Press (2014).
65
New York Times (2016).
brand damage from scandals such as these can be irreparable. Following the
discovery of unsafe levels of chromium in gelatin pill capsules, 87% of respondents
in a Caijing Magazine poll stated they ‘would never purchase drugs again from the
scandal-tainted companies.’66 CSR initiatives can increase consumer trust in
brands, resulting in transaction and relational business returns67 as well as
preventing reputational damage and repairing past damage when possible.
Unchecked, profit-driven and socially irresponsible actions of Chinese busi-
nesses have effects on much more than those who engage in such activities. The
economy of China as a whole is negatively affected when purchasers cannot be
certain that products are made to a safe standard. Even after an advisory firm found
no evidence of wrongdoing in Orient Paper’s accounting practices, the stock
remained down 60% after it was accused of fraud.68 In Sanlu’s baby formula
scandal, although the Chinese government established the China Food and Drug
Administration,69 passed the Food Safety Law,70 jailed Sanlu’s chief executive for
life71 and executed two men connected to the scandal72 consumer confidence in
Chinese dairy products plummeted and the industry went through a period of
consolidation.73 Imports of dairy products grew 117% in 2009 and 27% in
2010.74 Parents continue to demand imported baby formula even to this day.
Chinese sales of foreign baby formula (the world’s largest importing market)
grew 42% from 2014 to 2015 and 25% in the first half of 2016.75 There is even a
thriving arbitrage market of shipping retail-purchased baby formula from Australia
to China to resell at a markup (as well as numerous other products also
manufactured in China).76
2.5 Social and Human Costs and Benefits
The negative effects of a lack of CSR and employee voice culture do not stop with
shareholders.77 Although Caterpillar continues to operate Siwei,78 half of Siwei’s
66
Shao (2012).
67
Du et al. (2007), p. 687.
68
Yousuf (2012).
69
Shao (2012).
70
North Dakota State University (2016).
71
Moore (2009).
72
BBC (2009).
73
Huang (2014).
74
Turkish Industry & Business Association (2013).
75
Craymer (2016).
76
Odysseus (2016).
77
For an exploration of the social and human costs of lacking employee voice in the workplace, see
Schipani et al. (forthcoming 2017).
78
See Caterpillar (2016).
workforce was fired or furloughed in 2013 and for most of the year the company had
no new orders.79 Daqing Lianyi Petro-Chemical used funds that were supposed to
be used to buy five million shares on behalf of employees to buy the shares for the
company and pay bribes.80 Besides the 300,000 sick and six dead children, tariffs
imposed by the Chinese government in an effort to bolster the dairy market crippled
by scandals like Sanlu’s have made Chinese parents resort to the black market to get
safe formula for their babies.81 In 2010, there were 18 suicide attempts at Foxconn
in China, 14 of these resulting in death.82 Foxconn’s disregard for employees’
mental and physical health are pointed to as largely to blame.83
Although changes from both employers and the Chinese government have been
made in an attempt to better acknowledge and support employees’ needs,84 increased
CSR and employee voice could be valuable tools in furthering this goal. The existence
of opportunities for employees to exercise their voice has been shown to be positively
correlated with the psychological wellbeing of employees.85 Studies show that
employees positively react to CSR activities of their employers and are less likely to
leave the company and more likely to exercise organisational citizenship behaviour.86
Trust in the organisation plays an important role in this interaction.87
Exercising employee voice may result in improved perceptions of justice, better
employee attitudes, increased job satisfaction and improved relationships with
supervisors.88 Employees who engage in voice activities also often view procedures
and outcomes in the workplace as more fair.89 Further, lack of voice opportunities
can create stress for employees.90 CSR initiatives can increase overall job satisfac-
tion, the employees’ feeling of connectedness to their employers, employees’ sense
of pride in their work and commitment to their responsibilities.91
Beyond benefits to employees, CSR and employee voice benefit society as a
whole by challenging firms to internalise what were once externalities as well as by
increasing the effectiveness of regulatory regimes and public sentiment influencing
79
Baldwin and Ruwitch (2013).
80
Chen et al. (2011), p. 169.
81
Craymer (2016).
82
Chan (2013), p. 85.
83
Chan (2013).
84
Chan (2013).
85
See Bies and Shapiro (1988) p. 676, Bashshur and Oc (2014) p. 1531, Schipani et al. (forth-
coming 2017).
86
Hansen et al. (2011), p. 40.
87
Hansen et al. (2011), p. 40.
88
See Schipani et al. (forthcoming 2017), p. 7.
89
See Bashshur and Oc (2014), p 1531, Schipani et al. (forthcoming 2017), p. 5.
90
Morrison and Milliken (2000), p. 721, Schipani et al. (forthcoming 2017), p. 7.
91
See Arenas and Rodrigo (2008), p. 271 (finding that employees often view CSR initiatives as
changing their place of employment from somewhere they simply work to an institution that shares
their own social views).
business decisions. The goal of CSR, as the ‘duty of every corporate body to protect
the interest of the society at large,’92 is to simply take actions that benefit society.
Xerox’s Caring for Communities program has facilitated over 500,000 employee’s
involvement with community-focused projects since its inception.93
Whistleblowing, as one form of employee voice, offers the unique opportunity
for those with the most accurate, constant and comprehensive information regard-
ing a business’s activities, the employees, to shine light on improper actions taken
by a business. For example, a Thompson Ramo Wooldridge employee blew the
whistle on faulty electronic components sold by the satellite manufacturer, resulting
in a $325 million settlement by TRW’s successor.94
3 Whistleblowing in China
Legal protections for whistleblowers in China are relatively new, with concrete
protections only put in place less than a decade ago. The first semblance of such
protections can be found in the PRC’s Constitution of 1982 (currently in force),
which includes various clauses that could be interpreted as whistleblower pro-
tections.95 Specifically, Article 41 states:
Citizens of the People’s Republic of China have the right to criticize and make suggestions
to any state organ or functionary. Citizens have the right to make to relevant state organs
complaints and charges against, or exposures of, violation of the law or dereliction of duty
by any state organ or functionary; but fabrication or distortion of facts with the intention of
libel or frame-up is prohibited. In case of complaints, charges or exposures made by
citizens, the state organ concerned must deal with them in a responsible manner after
ascertaining the facts. No one may suppress such complaints, charges and exposures, or
retaliate against the citizens making them.96
This clause has proven inadequate in practice, however. First, it is designed with
state corruption or ineptness in mind, rather than private enterprises. The vagueness
or high level of the wording should also be noted: although it outlines a general
‘right’ to file complaints without retaliation to the ‘relevant state organs,’ the
specific detail necessary to apply this clause are absent.
In recent years China has enacted further legislation to protect whistleblowers.
Evolution of these protections can be divided into two categories: those regulating
whistleblowing within companies and those addressing whistleblowing to govern-
ment agencies. Chinese law simultaneously requires some companies to maintain
their own internal whistleblowing structures while also establishing avenues for
92
Brisman and South (2015), p. 127 [quoting Holme and Watts (1999)].
93
Xerox (2014).
94
Phillips and Cohen (2009).
95
G20 Anti-corruption Working Group (2011), p. 18.
96
Constitution of the People’s Republic of China, Art. 41 (2004 Amendment).
whistleblowers to contact the appropriate state organ should these internal struc-
tures prove inadequate.
In 2008, China released the Basic Standard for Enterprise Internal Control, a law
that included, among other things, a requirement that certain Chinese firms estab-
lish internal whistleblowing channels.97 This law was followed with a series of
documents collectively known as the Implementation Guidelines, which provide
details of what is expected from certain firms.98 These rules are applicable to only
some firms, namely all mainland-based companies listed on domestic and foreign
exchanges (rules applicable at the start of 2011), all China’s state-owned enterprises
(SOEs)99 and all firms listed on the Shanghai or Shenzhen stock exchanges (rules
applicable at the start of 2012). This limitation has been criticised for doing little for
workers in the Chinese economy, as under the listing rules many employers are
exempt from complying (though all are officially encouraged to take part).100 To
date it is the only requirement companies in China face for creating internal
whistleblowing channels.
Laws protecting and empowering whistleblowers outside of internal networks
are not much older than the internal regulations. The first specific rules protecting
whistleblowers were clauses added to the criminal code in 1996, which established
limited protections for whistleblowers in a general criminal context.101 These rules
were further specified in the Regulation on Labor Security Supervision, passed
early on under Hu Jintao’s tenure as Chairman of the Party. Article 9 of the
regulation states:
Any organization or individual shall have the right to report to the labor security admin-
istration any act of violating labor security laws, regulations or rules. Where a laborer
considers that the employing entity infringes upon his lawful rights and interests of labor
security, he shall have the right to make complaint to the labor security administration. A
labor security administration shall keep confidential for the reporters and complainants, and
shall award those whose report is true and who have provided important clues or evidence
for investigating major acts of violating labor security laws, regulations or rules.102
Although this law covers similar issues as the constitutional clauses discussed
above, it contains some additional specifics, namely the identity of the relevant
state organ overseeing the rules, a promise of anonymity for those reporting
wrongdoings, and guarantees of rewards for truthful and useful information. The
article is furthermore embedded within a larger law which establishes the infra-
structure for the supervising bodies, establishing the state infrastructure through
97
HKTDC Research (2009).
98
HKTDC Research (2010).
99
Notice of the state-owned assets supervision and administration commission of the state council
and the ministry of finance on accelerating the establishment of the internal control system of the
central enterprises evaluation (2012). Considering that China’s 150,000 SOEs employ half the
nation’s workforce, this is an important factor to keep in mind. Chee and Wang (2012).
100
Ligorner (2016).
101
School of International Service (2015), p. 16.
102
Regulation on Labor Security Supervision, Art. 9 (2004).
which whistleblowing could be facilitated. The law is an improvement from the

abstract constitutional clauses of 1982. Yet, prior to the most recent anti-corruption
efforts, whistleblowing efforts could be quite easily hampered by local officials not
tied to the anti-corruption authority, leaving many with no choice but to take their
grievances straight to Beijing103 (a process recently outlawed with the rise of more
comprehensive whistleblowing legislation).
In the face of these problems and an ever-accelerating anti-corruption drive
(most prominently under the current Chairman, Xi Jinping), whistleblower pro-
tections have been significantly expanded and major changes implemented in the
procedures used to elicit and process whistleblowing complaints. This was largely
due to the recognition of the importance of whistleblowers to combatting corruption
and illegal labor practices: worldwide, a plurality of uncovered fraud is due to
anonymous tips.104 Existing rules were amended in 2009 to address perceived
flaws, but the most dramatic changes have occurred in the last few years, under
Mr. Xi Jinping. Whistleblower protections were significantly expanded in 2009
with the creation of an official website to facilitate whistleblowing.105 They were
amended again in 2014 with the aim to clarify the rights of whistleblowers,106 and
again in 2015 to include the launch of an official whistleblowing app.107 Further
amendments were made in March 2016,108 resulting in the modern framework
discussed in the next section.
3.1 Legal Regulations and Protections
The latest updates to Chinese whistleblowing regulations in 2016 added several

important details to the law,109 such as expansion of confidentiality protections, a
broader definition of retaliation and greater protection of whistleblowers extending
to their assets and job security.110
103
Japan Times (2014).
104
Association of Certified Fraud Examiners (2016).
105
Wee (2014).
106
Wee (2014).
107
Wan (2015).
108
van de Pol et al. (2016).
109
van de Pol et al. (2016); Several Provisions of the Supreme People’s Procuratorate, the Ministry
of Public Security and the Ministry of Finance on Protecting and Rewarding Whistleblowers of
Occupational Crimes, Supreme People’s Procuratorate, Ministry of Public Security, Ministry of
Finance (2016).
110
Also enacted in 2016 were the Measures for Rewarding the Reporting of Violations of Laws
and Regulations on Payment and Settlement (People’s Bank of China); a set of whistleblower
regulations similar to the broader 2016 regulations but specifically targeted at the banking and
finance sector and carried out by the Payment and Clearing Association of China.
Whistleblowers can earn up to RMB 500,000 (~$80,000) US in reward money,

with the upper cap removed in the case of ‘extraordinarily significant contributions’
and reduced to an upper cap of only RMB 80,000 (~$8000) US in the case of
economic crimes like commercial bribery or the flaunting of labour regulations.111
Private retaliation against whistleblowers is a much more serious crime, with those
convicted facing up to 7 years of imprisonment. In the case of retaliatory termina-
tion, the relevant labour bureaus have the right to enforce rectification,112 including
reinstatement, provision of back pay and further punitive penalties. Retaliation also
includes malicious demotion or denial of promotion (both of the whistleblower and
of family members) as well as damaging of assets or threatening the safety of the
whistleblower and their family.113
Additionally, new guidelines for processing complaints have been included to
ensure anonymity and promote efficiency in the system. The newest regulations
require that complaints be heard only by specified officials and digital
whistleblowing reports be securely stored and only identifiable information be
made available to investigators after specific approval by the procuratorate, along
with limiting complaints to official hotlines and websites to minimise the risk of
identification.114 Enforcement of these regulations is assigned to prosecuting
authorities, assisted by police when necessary.115 It should be noted, however,
that many of these protections only extend to whistleblowers working through
official channels (which include the official website and hotlines as well as a
government contact on WeChat, a popular Chinese texting app)116; whistleblowers
posting accusations on social media, a common occurrence, receive much weaker
protections.117
Finally, the implementation guidelines released in 2010 specify a number of
parameters for the internal channels for whistleblowing in listed firms in China.
Article 46 of the original Basic Standard states118:
[Companies must] set up an exposing and complaining system and a whistleblower
protection system, set up a special telephone line for exposing offenses, set down the
111
Measures for Rewarding the Reporting of Violations of Laws and Regulations on Payment and
Settlement, People’s Bank of China (2016) Article 16; van de Pol et al. (2016).
112
Ligorner (2016).
113
van de Pol et al. (2016).
114
China Daily (4-8-2016a); Several Provisions of the Supreme People’s Procuratorate, the
Ministry of Public Security and the Ministry of Finance on Protecting and Rewarding
Whistleblowers of Occupational Crimes Article 5, Supreme People’s Procuratorate, Ministry of
Public Security, Ministry of Finance (2016).
115
Several Provisions of the Supreme People’s Procuratorate, the Ministry of Public Security and
the Ministry of Finance on Protecting and Rewarding Whistleblowers of Occupational Crimes,
Article 13 Supreme People’s Procuratorate, Ministry of Public Security, Ministry of Finance
(2016).
116
China Daily (2015).
117
BBC (2014).
118
Wolfe et al. (2014), p. 32.
procedures, time limit and requirements for handling reported offenses and complaints, and
ensure that exposure and complaining are an important channel for the enterprise to
efficiently get information. All staff shall be informed of the exposing and complaining
system and the whistleblower protection system [in a timely manner].
3.2 Whistleblowing in Practice
Recent developments in whistleblowing law and practice primarily target the public
sphere, specifically corruption among public officials.119 Hence, whistleblowing
policy is primarily targeted at the public sphere rather than malfeasance within the
economic sphere. There is some overlap, given the dominance of state-owned
enterprises (SOEs) in the Chinese economy (China’s ten largest firms by revenue
are almost all state-owned).120 Yet, the current target of Chinese whistleblowing
policy is first and foremost corruption in the civil service.
China’s anti-corruption drive, largely driven by whistleblowers, has been a
major success. In 2015 alone, the government claims to have netted some
300,000 convictions against public officials.121 The government’s main anti-
corruption body claims to have received a daily average of 300 complaints122
after the whistleblowing website launch in 2009, which went up significantly
after the release of an official app (complete with photo capabilities for
documenting corrupt practices) in 2015. The same body also has released figures
indicating that some 300,000 whistleblowing reports were received online between
2008 and 2012.123 Considering that Mr. Xi Jinping has referred to corruption as a
problem of such severity that ‘it could threaten the survival of the ruling Commu-
nist Party,’124 this is understandable.
As noted above, these legal protections are not applied to whistleblowers
operating outside of official channels, which has led to issues in the past: a number
of whistleblowers publicly documenting their findings on popular microblogs have
seen their sites shut down125; and at least one Chinese investigative journalist has
been jailed for defamation and bribery following criticisms of a state-owned
construction supplier.126 One prominent whistleblower has reported multiple
attempts at intimidation, including a stabbing by unknown assailants, as a result
of his allegations.127
119
China Daily (4-8-2016a).
120
Agarwal (2016).
121
BBC (2016).
122
Indest (2016).
123
Yates (2016).
124
Wee (2014).
125
Yates (2016).
126
Wee (2014).
127
Wee (2014).
Overall, however, results have been relatively positive. Global Integrity, an anti-
corruption NGO, recently gave China a relatively solid score of 83/100 on its
whistleblowing protections, noting generous allocation of government resources
to the promotion and protection of whistleblowing and prima facie legal commit-
ment to whistleblower protections while acknowledging some underdevelopment
in the capacity of the system in place, as well as incomplete protections against
retaliation.128 Another report, commissioned by a free speech advocacy group in
conjunction with Transparency International, ranked China 7th in public sector
whistleblower protections and 6th in private sector whistleblower protections of the
G20 nations. This report notes the abstract level of Chinese whistleblowing laws
along with limitations on what is classified as ‘wrongdoing’ and the ability to
consistently enforce whistleblowing protections.129
4 Worker Voice in the Chinese System
Although the literature on worker voice in China is limited, much has been written
on political relations in China historically and today, specifically on the relationship
between ruler and ruled and the role of the latter’s voice in influencing the former.
Unlike the West, which strictly separates its public and private spheres, each with
quite different conventions in how hierarchical relations are managed, within China
the dominant political paradigm is applicable to the business sphere.
4.1 The Political Connection
There has been much discussion in business literature regarding the importance of
face in Chinese business society, or the concept of losing face. Entire guides have
been written for Westerners to help them navigate the concept,130 and it has been
pointed out that face and the related concept of guanxi are at the core of modern
Chinese business relationships131—concepts which are, in turn, deeply rooted in
Chinese culture and central to the nation’s political philosophy. As one author put
it, ‘the modern business person should go back to Taoism and Confucius for an
explanation of contemporary business practices.’132
128
Global Integrity (2011).
129
Wolfe et al. (2014), p. 32.
130
See for example: https://list.juwai.com/news/2015/04/china-face-culture-and-how-it-impacts-
your-business.
131
132
Boettcher (2007), p. 275.
To put it simply, face refers to the prestige one holds in social situations. One
could gain face, for example, by being publicly praised by some authority or being
shown deference by colleagues, and one could lose face by being made to look
foolish in front of subordinates, or to take what is interpreted as a subordinate
position in some social interaction. Guanxi is a similar concept which refers to the
development of what Western sociologists and anthropologists have, in various
contexts, termed ‘reciprocal economic relations’ or ‘social exchange’133: it refers to
creation of mutual obligation and high trust between two individuals or groups,
giving rise to a situation where business and mutual dependence can thrive without
the need for strictly defined contracts and a singularly competitive mindset between
parties. In China, this system harkens back to a time when much of Chinese social
and economic life was organised within clans,134 and remains a powerful force to
this day. Much like the Chinese state’s relationship with its nation,135 both concepts
are rooted in the maintenance of hierarchies with mutual obligations between ruler
and ruled (or manager and managed), where the concept of guanxi guides the
structures and face, as an expression of social prestige, and maintains them in
their ‘proper’ order. Loss of face is thus equivalent to a weakening of trust and a
decline in status within the social hierarchy: a deterioration of one’s guanxi. These
concepts function together to create a non-democratic source of legitimacy for the
Chinese state, one that never fully developed in liberal Western thought.
As it is with the state, so it is with businesses in China. When Confucius first
formulated his theories of political harmony, he discussed several sets of what he
considered ‘healthy’ relationships within society: ‘ruler/subject, parent/child, older/
younger brothers, husband/wife, and friends’.136 Today, this has been extended into
the business world, where managerial hierarchy takes on similar privileges (and
duties) and these more traditional hierarchical relationships. Employees are
expected to have a similar degree of familial loyalty and child-like subservience
to their company as the subject is to have to his (Confucius hopes, benevolent) ruler.
In a Confucian cultural context, hierarchy is assumed to be natural and good, so
long as both the superior and subordinate recognise and respect their mutual
obligations toward the other. This relationship is assumed to be implicit137: mutual
obligations should be naturally understood as the practical result of virtuousness
without any need for communication of grievances between parties. Additionally,
face must be preserved by both sides if the relationship is to be successful,
something which excessive voice calls into question. A subordinate calling out a
superior for improper conduct, whether that person is a parent, a manager or a
government official, causes the target to lose face by suggesting that he is not
adhering to his end of the Confucian bargain, that he is not fulfilling his obligations
133
See for example, Fox (1974).
134
Hwang et al. (2008), p. 507.
135
Borowiecki (2016).
136
Hwang et al. (2008), p. 507.
137
Hwang et al. (2008), p. 507.
to the subordinate as his position requires him to do—in short, that he is not a
virtuous person. This in turn puts into question the legitimacy of his authority over
subordinates, and thus the entire stability of the system is threatened due to an
openly aired grievance.
Due to this dynamic, which today permeates every facet of Chinese society, it
has been noted that the Chinese government faces a significant dilemma in its fight
against corruption and promotion of whistleblowing.138 The government recognises
the grave danger corruption poses to its legitimacy, but is constrained by the
necessary publicity involved in combatting corruption and the reputational damage
that it will have. Private companies face a similar conundrum when considering the
question of worker voice, whether whistleblowing or otherwise. On one hand, there
are many demonstrated benefits to encouraging worker voice for the company as
well as for society more broadly,139 but permitting it would challenge the hierar-
chies that underlie the stability of the Chinese company (and society). Additionally,
due to the importance of guanxi and the development of relationships in the Chinese
business sphere, bribes and other corrupt practices are often not seen as bad
practices, but as a necessary step in building trust and long-lasting relation-
ships—the use of personal power to aid a friend or colleague is, after all, a common
expression of close relations and trust. Yet in a society where even taking an official
out to dinner can end in a corruption conviction, Chinese policy is running increas-
ingly contrary to centuries of learned social practice. Indeed, there is evidence that
precisely these cultural factors lead individuals in East Asia to see bribery as a less
‘bad’ practice than do individuals in the West.140 Hwang, and colleagues simulta-
neously conclude that the need to preserve guanxi and respect mutual social
obligations between employer and employee are the primary barriers to
whistleblowing in China today.141 To understand the dynamics of worker voice
and whistleblowing in China, it is critical to comprehend the Confucian nature of
the employment relationship, which mirrors the millennia-old templates established
by many centuries of imperial governments seeking legitimacy and social harmony.
5 Increasing CSR and Employee Voice in China
Levels of CSR in a culture may be affected by a variety of factors including public

and private regulation and monitoring, institutionalised norms regarding appropri-
ate corporate behaviour, associative behaviour among corporations, and levels of
138
Hwang et al. (2008), p. 508.
139
See for example, Milliken et al. (2015).
140
Cherry (2006).
141
Hwang et al. (2008), p. 520.
dialogue between stakeholders and businesses.142 Levels of employee voice are

primarily affected by fear of reprisal and a sense of futility in voice efforts.143
Because of major differences in societal, political and legal environments as well
as ethical and social norms across Chinese regions, solutions in various regions to
increase employee voice are likely to differ.144 Managers should take public ethical
actions and encourage and embrace subordinate employee’s input. Ethical corporate
cultures have been shown to dictate the ethical behaviour of employees.145 The risks
of exercising employee voice should be lowered through both internal and govern-
mental protections from employee discharge and demotion. These protections should
be applied uniformly, constantly and liberally. Employees should also be incentivised
to report, even if the actions may hurt the financial interest of the company in the short
run. Internally, this could take the form of bonuses, raises, promotions or simple
public recognition for a job well done.146 Externally, and a method used extensively
in the United States,147 the government can offer whistleblowers a portion of the
proceeds recovered in prosecuting illegal business conduct.
By increasing levels of publicity and access to reliable data regarding Chinese
companies’ CSR activities, the general public’s urge toward more sustainable
business operations can drive enterprises to incorporate CSR into their operations.
There is already evidence that the increased publicity often associated with
whistleblowing could increase CSR levels in China. Chinese business sectors
most subject to public scrutiny, such as the banking and financial sectors, have
been reported to have higher levels of CSR.148 Social media has also been identified
as a strong force for advancing CSR in China.149
6 Conclusion
Recent history is full of examples, both within and outside of China, where the
unscrupulous and unethical actions of business managers have both decreased the
profitability of the organisation and imposed negative externalities on society at
large. CSR and employee voice offer a unique solution to this problem.
142
Campbell (2007), p. 946.
143
Milliken et al. (2015), p. 410.
144
Zhang et al. (2008), p. 36.
145
Zhang et al. (2008), p. 36.
146
Schipani et al. (forthcoming 2017), p. 36.
147
One such example is the False Claims Act. Allowing whistleblowers to recover up to 30% of the
funds recovered by the government, the False Claims Act has resulted in billions in recoveries for
the US government and has made millionaires of many whistleblowers. Schipani et al. (forthcom-
ing 2017), pp. 27–30.
148
149
By encouraging an atmosphere where more than short-term profit can be con-

sidered in planning and employees are encouraged to offer their first-hand knowl-
edge outside of normal business operations, CSR and employee voice circumvent
structural and cultural barriers. They increase the accountability of management as
well as offer valuable insight for process and operational improvement. The need
for mechanisms such as these is especially important in China going forward as the
country looks to maintain its bustling growth. With the increasing business impor-
tance of social responsibility, growth through sale to and investment from abroad is
likely to only come about if the global marketplace can truthfully rely on Chinese
businesses as being ethically sound and socially responsible.
Beyond the purely business benefits of CSR and employee voice and consistent
with the Confucian underpinnings of Chinese culture, Chinese businesses should
also consider the impact of these initiatives on the health and wellbeing of their
employees. CSR and employee voice not only bring to the forefront concerns over
working conditions but have also been shown to directly result in health benefits to
employees. As the global marketplace is increasingly demanding CSR and
employee voice from businesses and as technology increases the voice of workers
outside of the workplace, those who adapt to the changing landscape will likely
emerge as leaders in both business, and society.
Acknowledgements The authors gratefully acknowledge the participants of the 2016 Interna-
tional Corporate Law and Governance Forum in Beijing for thoughtful comments. The authors
also thank Zachary James, JD, University of Michigan Law School and Mateusz Borowiecki, BA
Candidate, University of Michigan, for excellent research assistance.
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Cindy A. Schipani Career, memberships and achievements: Merwin H. Waterman Collegiate

Professor of Business Administration and Professor of Business Law. Served as President of the
Academy of Legal Studies in Business (2014–2015), Chair of the Business Law Area of the Ross
School of Business (1996–2013), Visiting Scholar at LUISS University and John Cabot Univer-
sity, Rome (2016), University of Sydney Faculty of Law (2008 & 1994). Has published over
40 journal articles and a book and receives numerous of invitations to present her research
nationally and internationally, including in Beijing, Hong Kong, and throughout Europe. Has
also received awards for her research, including the Academy of Legal Studies in Business
National Award for Excellence and its Holmes-Cardozo Research Award, the Ross School of
Business Contribution to Research Environment Award, and the University of Michigan Sarah
Goddard Power Award and its Outstanding Research Mentor Award.
Research interests: Corporate governance, with a focus on the relationship among directors,
officers, shareholders and other stakeholders. Analysis of directors’ duties utilising tools of
financial economics, consideration of specific issues confronting directors of financial institutions,
analysis of the corporate fiduciary duties of care and loyalty, issues of liability for environmental
violations and ethical links between corporate governance and sustainable peace. Women in
leadership.
Teaching: Corporate Governance, Legal Aspects of Entrepreneurship, Business Law.
Terry Morehead Dworkin Career, memberships and achievements: She is the Wentworth
Professor, emerita of Business Law, Indiana University and Scholar in Residence, Seattle Uni-
versity. Served as President of Academiy of Legal Studies in Business, also served two three-year
terms as chair of the Department of Business Law, four years as co‐director of the Center for
International Business Education and Research, and Dean of the Office for Women’s Affairs at
Indiana University. Has more than 50 law, business and ethics journal articles to her credit, along
with three books. She has won many awards for her research. She teaches and speaks often
overseas, and was a Fulbright Scholar in Australia and at the Institute for Advanced Legal Studies
in London.
Research interests: Whistleblowing, corporate governance, women in leadership, employment
issues.
Junhai Liu Career, memberships and achievements: Holds adjunct professorships and fellow-
ship at four other universities and colleges. Clerk at the Court of Justice in Huairou District,
Beijing (1989–1990). Well-known for his policy-related research undertaken for the National
People’s Congress, the Supreme People’s Court, securities market regulators, stock exchanges and
other organisations. Selected as one of the ‘Top Ten Excellent Young Jurists’ in China (2006). Has
published numerous books and articles in areas of business law and corporate law, both in Chinese
and in English. Visiting scholar to law schools in the USA, Europe and New Zealand. Serves as the
vice-chairman of China Consumers’ Association and the vice president of China Consumer
Protection Law Society. Also serves as an arbitrator for the China International Economic and
Trade Arbitration Commission and a good number of international arbitration commissions.
Research interests: Corporate law, securities law, commercial and economic law.
Teaching: Business Law, Corporate Law, Securities Law, Financial Law, Investment Funds Law,
Business Ethics and Corporate Social Responsibility.
Responsibility and the Modern Corporation
Jeroen Veldman
1 Introduction
Corporate governance crises as well as human rights issues in global value chains
have pushed notions of Corporate Social Responsibility (CSR), Corporate Citizen-
ship (CC), Triple P (People, Planet, Profit) and sustainable development onto the
agenda of corporations and into the discussion of corporate governance.1 However,
it has been argued that the CSR debate tends to rest on rather underspecified
conceptions of the public corporation and corporate governance.2
CSR has been expanded upon by a discussion of political CSR (PCSR), in which
a generally positive assessment of the capacity and willingness of corporations and
corporate groups to be effective as agents who can provide ‘innovative solutions
and approaches to some of the most pressing issues on today’s public agenda’3 is
seen as a possible means to fill the governance gap left by declining power,
capacity, or willingness of states to engage with global governance issues. The
positive assessment of corporations in terms of PCSR provides support for enhanc-
ing the role played by corporations in developmental activities and in (public)
governance, notably in third-world countries4 and envisages a role for transnational
1
Ireland and Pillay (2010).
2
Ireland and Pillay (2010), Jones and Haigh (2007), Van Oosterhout (2005), Veldman (2011).
3
Crane and Matten (2008), p. 29.
4
Garriga and Mele (2004), Matten and Crane (2005), Néron and Norman (2008), Moon et al.
(2005), Post (2002), Schwartz and Carroll (2008), Scherer et al. (2006), Schwab (2008), Logsdon
and Wood (2005), Wood and Logsdon (2008).
J. Veldman (*)
CASS Business School, City University, University of London, London, UK
e-mail: jeroenveldman@cass.city.ac.uk; http://www.cassknowledge.com/research/author/
jeroen-veldman

78 J. Veldman
corporations (TNCs) in political processes.5 Portraying TNCs as actors with a

legitimate role in public governance functions and processes provides support for
the idea that corporations and TNCs can be regulated by voluntary or quasi-
voluntary means, such as self-regulation, voluntary disclosure, stakeholder com-
munication, and compliance.6
However, many commentators have expressed scepticism about the uptake and
effectiveness of PCSR. Even where a positive business case can be relatively easily
established, such as workplace safety, emissions reductions, or diversity, these
issues are not readily adopted, even in companies that have adopted a CSR agenda.7
Where such issues are not addressed in a meaningful or adequate way, the bigger
issues like human rights, fraud and corruption, tax evasion and inequality are even
less likely to be addressed. Also, because the assumptions behind these positive
assessments relate to rather underspecified conceptions of the public corporation
and of corporate governance, the PCSR debate tends to overlook the following: the
role of corporate theory in establishing the position of corporations and TNCs in
relation to other ‘entities’, such as citizens, NGOs and states, particularly in the
transnational domain8; the role of corporate governance theory in setting the
structural conditions for strategic decisions; and the specific political economy
that the currently dominant theory of corporate governance supports.9 In light of
such critiques, the positive assessment of public governance and political activity
and the endorsement of an enabling regulatory model for TNCs, based on soft law
and self-regulation in the PCSR debate is questionable. To engage with these issues
I take a closer look in this chapter at a range of assumptions about the status of the
modern public corporation and corporate groups.
The understanding of what a public company is, how its corporate governance
processes are structured and function, and how it functions in modern political
economy are largely determined by the separate legal entity (SLE) Veldman and
Willmott (2017). Firstly, I consider the separate legal entity (SLE) as an historically
evolving and to this day largely unsettled10 type of legal construct, which provides
the conceptual basis for the status, structure and governance of the modern public
corporation.
Secondly, I explore some of the ways in which the evolving and unsettled status
of the SLE plays out in relation to attributions of responsibility to the modern
corporation. I will explore how direct attributions of responsibility, accountability,
and liability to the corporation on the basis of its identifications as an integrated
‘subject’ or a ‘citizen’ are problematic, because corporate theory allows for the
simultaneous use of multiple types of identification for the status of this construct in
5
Carroll et al. (2012), p. 405.
6
Abbott and Snidal (2000), Ireland and Pillay (2010), Scherer and Palazzo (2007, 2011), Vogel
(2007), Zadek (2001).
7
See also Deakin and Hobbs (2007).
8
Banerjee (2008), Jones and Haigh (2007), Van Oosterhout (2010), Rajak (2011).
9
Ireland (2016).
10
Veldman (2016).
Responsibility and the Modern Corporation 79
relation to the corporation. The unsettled theoretical status of the corporate group
adds another layer of complexity to such attributions. On the basis of this explora-
tion of the SLE, I argue that an alternative engagement with ‘corporate’ responsi-
bility is possible by examining how notions of corporate architecture constrain and
direct the position and fiduciary duties of executive managers and board members.
In the discussion and conclusions, I argue that the scope for the assumption of
corporate (ir)responsibility is related to the stabilisation of assumptions about the
SLE, and specifically to the role of the SLE in providing the basis for a specific
corporate architecture. This leads me to conclude that the debate about corporate
(ir)responsibility in PCSR can be brought forward by considering the debate on the
historical development of the status of the SLE and the modern corporation; the
debate on corporate architectures and the way they enable and constrain the
conditions for strategic decision-making; and the debate on the connection between
stabilisations of the SLE and political economy.
2 Development of the Modern Corporation
The modern conception of the public corporation only developed its main charac-
teristics from the nineteenth century onwards. At the heart of the characteristics that
define the modern public corporation stands the separate legal entity (SLE) as a
highly specific legal construct. During its initial development, the SLE was broadly
conceived as a legal ‘entity’ that provided specific functions, but was substantially
no more than a placeholder.11 In the placeholder conception the SLE could be
identified as a representation of ‘the corporation’, but only to a very limited extent.
In relation to this placeholder conception the identification of the SLE as a legal
‘subject’, ‘person’, or ‘citizen’ can be understood as no more than a simple
ontological category mistake,12 while attributions of agency and responsibility
typically take place in relation to concrete individuals that make up the corporation,
offering some degree of theoretical consistency with notions like methodological
individualism.13
However, because the theoretical status of the SLE and its relation to the broader
notion of the modern corporation were never adequately settled the SLE could
gradually become conflated with the broader notion of ‘the corporation’ allowing
for the identification of the SLE in relation to multiple referents,14 such as a legal
entity, subject or person, as well as an aggregation of individuals, a group repre-
sentation, or a representation of constituencies. The resulting extended conception
of the corporation provided the basis for the attribution of various qualities and
11
Cohen (1919), Freund (1897), Radin (1932).
12
Lampert (2016).
13
Gindis (2009), Hodgson (2007), Veldman (2016a).
14
Veldman (2016a).
80 J. Veldman
functions, including (contractual) agency, (citizenship) rights, and protections in

relation to this multiplicity of referents.15
By the end of the nineteenth century the extended conception provided the
modern corporation with a theoretical status that is best described as that of a
schizophrenic Cheshire Cat.16 Although the incoherent theoretical status and the
broad economic and political implications of the SLE in the extended conception
provided the basis for ongoing social, political and economic contestation17 the
functions provided by the SLE in the extended conception provided important
outcomes in terms of political economy and were therefore retained for ‘pragmatic’
reasons.18
3 Corporate Responsibility
The theoretical conception of the corporation is particularly relevant to examine the

possibility for the attribution of responsibility and liability. If the placeholder
conception is accepted, the SLE as an entity can be largely ignored and responsi-
bility and liability can be attributed easily to natural persons. The extended con-
ception of the corporation, by contrast, functions on the basis of the reification and
singularisation of the SLE as a legal ‘entity’, ‘subject’ or ‘person’, providing the
basis for the idea that attributions of rights, agency, responsibility, and liability can
be directed at this construct. In addition, the extended conception retains other
referents for the broader concept of the corporation, including the aggregation of
individuals.
Overall, then, corporate theory ostensibly operates on the basis of an extended
conception that creates a highly theoretical notion of the corporation as an inte-
grated ‘subject’, ‘person’, or ‘citizen’,19 while in the background the placeholder
conception continues to relate to the corporation as an aggregation of individuals
and to the SLE as a mere ‘artificial’ construct that is only functionally attributed
with ownership and liabilities.20 Between these positions, agency, rights, liability
and responsibility continue to be functionally attributed to the SLE and to the
corporation, but any direct attribution of responsibility21 or liability toward the
15
Ireland (1999), Veldman (2016a), Veldman and Willmott (2017).
16
Allen (1992), Naffine (2003), Veldman (2016a).
17
Bowman (1996), Hannah (2010 [1967]), Harris (2006), Johnson (2010).
18
Dewey (1926, 1931), Foster (2006), Hallis (1978), Lawson (1957).
19
Dodd (1931), Duménil and Lévy (2001), Ireland and Pillay (2010), p. 6; Kaysen (1957).
20
Blair (2015), Dewey (1926), Freund (1897), Ireland (1999), Lederman (2000), Ireland (2003),
Naffine (2003), Veldman (2016a).
21
Bakan (2005), Chandler and Mazlish (2006), Dan-Cohen (1986), Donaldson (1982), French
(1984), Mason (1959), Moore (1962), Morris (1919), Nader and Green (1977).
SLE or toward ‘the corporation’ as a single and integrated construct is likely to fail
in practice.22
The problematic conceptualisations of the corporation and the SLE are interest-
ing for the development of the debate on ‘corporate responsibility’ for various
reasons. First, the unclear status of these constructs introduces questions about the
mapping of agency, responsibility and liability onto these legal constructs.23
Because the invocation of the term ‘corporate’ provides many opportunities for
this mapping in relation to moral or ethical attributions of ‘responsibility’, but also in
relation to effective attributions of liability,24 the question how the corporation and
the SLE can be stabilised, both separately and in relation to one another, as legal
constructs, becomes the first question to pose in a debate on corporate responsibility.
Second, in the PCSR debate, the analogy of corporations or TNCs to the position
of integrated ‘actors’ and their positioning as ‘subjects’ or ‘citizens’ with a norma-
tive agenda provides a background to project responsibility and ‘citizenly’ qualities
to these constructs.25 As these qualities are projected onto legal constructs with a
problematic conceptual status that is hard to hold liable, the use of analogous
reasoning to argue for the expansion of the role of these legal constructs in (public)
governance tasks in the transnational domain and for inclusion into political
activity, notably in third-world countries26 needs to be rethought.
A more specific reason to rethink this type of analogous reasoning is that the
identification of the corporation as a ‘subject’ or ‘citizen’ with ‘a bundle of
symmetrical responsibilities and rights’ is problematic in relation to the identifica-
tion of the relative status and rights of other kinds of legal constructs operating in
the category of the legal subject, like citizens, NGOs, and states.27
This is particularly true in the context of the transnational corporation (TNC).
TNCs are conceived as groups of separate legal entities, and because subsidiaries
are typically set up according to the law of the jurisdiction in which that ‘entity’ has
been set up and attributed separately with agency, ownership, and rights, TNCs
typically cannot be addressed as an integrated theoretical entity under international
law.28 The TNC, then, presents a construct without formal legal status, but with an
implicitly integrated status and attendant protections and privileges in and between
multiple jurisdictions. Moreover, despite their problematic status, TNCs have
increasingly gained recognition in international legal fora and standard setting
22
Monks and Minow (2009), p. 25; Veldman (2010).
23
See also Lampert (2016).
24
Veldman (2010).
25
Lampert (2016), Veldman (2010).
26
Carroll et al. (2012), p. 405; Garriga and Melé (2004), Matten and Crane (2005), Néron and
Norman (2008), Moon et al. (2005), Post (2002), Schwartz and Carroll (2008), Logsdon and Wood
(2005), Wood and Logsdon (2008), Scherer et al. (2006), Schwab (2008).
27
Van Oosterhout (2005), MacLeod (2008).
28
Macleod and Lewis (2004), MacLeod (2008), Robé (2011).
82 J. Veldman
committees as integrated constructs, leading to a further growth of agency, rights,

and powers, including sovereign powers.29 In contrast, unlike the corporation and
the TNC, citizens, NGOs, and states typically have limited means to evade the
jurisdictional system in which they are constituted and provide a construct with a
clearer type of referent for the attribution of agency, liability and responsibility.30
Specifically in the transnational domain, therefore, the latter type of ‘actors’ is left
to rely on ‘quasi- or non-legal instruments which either lack binding force alto-
gether or whose binding force is noticeably weaker than that usually associated with
‘hard’ law’.31
The identification of corporations and TNCs as ‘actors’, ‘subjects’, ‘persons’, or
‘citizens’ and the strengthening of such an identification through the adoption of
broad notions like ‘responsibility’ and ‘citizenship’ are instrumental in naturalising
the status of these constructs. As such, these identifications obfuscate the problem-
atic theoretical status of the corporation and the TNC as well as the problematic
capacity for the identification of agency, responsibility, and liability to these
constructs. More broadly, such identifications help naturalise the projection of an
interaction between corporations and other types of legal entities as nominally
equal agents. A misrepresentation of the status of different kinds of legal constructs,
in turn, helps obscure the differences between the actual capacity for agency and
redress between different types of legal constructs, particularly in the transnational
domain.32 Ultimately, this helps the continuation of an unequal distribution of
rights and an unequal capacity for redress in the form of effective engagement
between different types of actors or entities.33
For these reasons, the use of notions like ‘responsibility’ and ‘citizenship’ as a
normative background to justify the assumption of governance tasks and active
engagement in the political domain seems problematic, and particularly so in
relation to TNCs that operate as corporate groups in a transnational domain
where nation states are limited in their ability to provide de facto control and
regulation.34 Similarly, the assumptions underlying soft law may be questioned.
Abbott and Snidal argue that: ‘. . . soft law facilitates compromise, and thus
mutually beneficial cooperation, between actors with different interests and values,
different time horizons and discount rates, and different degrees of power’.35 It
seems fair to argue that the acknowledgement of differences in the status of
29
Ireland and Pillay (2010), Morgan (2008), Robé (1997).
30
Veldman (2016b).
31
Ireland and Pillay (2010), p. 15.
32
Blair (2015), Jones and Haigh (2007), Veldman and Parker (2012), Veldman (2013),
Veldman (2013).
33
Jones and Haigh (2007), Ireland and Pillay (2010), Laufer (1996), Morgan (2009), Van
Oosterhout (2005, 2010), Rajak (2011), Villiers (2008).
34
Anker-Sørensen (2016), Mäh€ onen (2016), Robé (1997), Veldman (2013), Wood and Logsdon
(2008), Veldman (2013).
35
Abbott and Snidal (2000, p. 422).
different types of legal constructs, and the provision of a regulatory model that
enables these types of constructs to interact under conditions and rules that allow a
fair engagement and similar means for redress36 would be essential preconditions
before soft law arrangements and self-regulation can be considered.37
4 Corporate Architecture, Responsibility and the Political

Economy of Stabilisations of the SLE
A different way to explore ‘corporate responsibility’ is to look at the ‘architecture’

of public corporations, and more specifically at the role of specific stabilisations of
the corporation and the SLE in providing different conceptions of this architecture.
To do so, I take a quick look at different stabilisations of the theoretical status and
practical outcomes of the modern corporation during the nineteenth and twentieth
Century.
From the mid-nineteenth century, the attribution of the ownership and liabilities
of the corporation to the SLE as an increasingly reified construct provided a new
type of organisational ‘architecture’, in which the position of all corporate constit-
uencies was fundamentally changed.38 Notably, shareholders were able to invest
safely and without the duties and liabilities of oversight or management.39 In this
new set-up, shareholders became a largely external constituency without direct
management or control functions. As ownership and liabilities rested with the
entity, it was the SLE, the corporate ‘entity’, itself, that became the principal,40
while the corporate board was positioned at the heart of corporate strategising.41
The development of the SLE in the placeholder conception thus provided the basis
for an architecture of the modern corporation in which the positions, relations,
rights and responsibilities of all constituent groups and their relations were funda-
mentally changed in comparison with the previously dominant model of the
unlimited liability partnership.42
From the 1930s onwards, the problematic theoretical justification of the
extended conception of the SLE, the role of the modern corporation in providing
a cornerstone for oligopolistic capitalist organisation,43 and the de facto
36
Anker-Sørensen (2016), Gramlich and Wheeler (2003), Palan et al. (2010).
37
Abbott and Snidal (2000), Banerjee (2008), Rajak (2011), Scheuch (this volume), Scherer and
Palazzo (2007, 2011), Tracey et al. (2005), Vogel (2007), Zadek (2001).
38
Johnson (2010), Khurana (2007), Perrow (2002).
39
Veldman and Willmott (2017).
40
Lan and Heracleous (2010).
41
Veldman and Willmott (2017), Millon (2014).
42
Gevurtz (2004), Ireland (1999), Johnson (2010).
43
Davis (2009), Hannah (2010 [1976]), Johnson (2010), Marens (2012), Murphy and
Ackroyd (2013).
84 J. Veldman
diminishing of capacity for shareholder control and a concomitant shift to practical

independence from direct shareholder control for corporate managers,44 provided
the basis for a new view of corporate architecture, in which the board’s fiduciary
duties towards the ‘entity’ as the principal45 were identified as duties toward ‘the
corporation’ as a whole. As a result of this stabilisation the rights, protections, and
proceeds provided by the SLE could be distributed to all corporate constituencies46;
the long-term viability of the corporation and all constituencies’ interests became
central to the boards’ role; and the interests of shareholders could be interpreted as a
by-product of the success of the corporation as a whole.47 Taking this stabilisation
as the basis for corporate governance one could argue that: ‘...corporate social
responsibility is not a goal to be pursued in itself but, rather, an integral part of the
day-to-day operations of a company that focuses on long-term value creation.’48
Since the 1970s, the nexus of contracts (NoC) theory has sharply contested this
understanding of the modern corporation. Conceiving of the corporation as a nexus
of contracts, NoC theory reduces the status of the SLE to a negligible ‘legal fiction’,
sidelining the need for justification and its effects for corporate architecture, and
conceives of the position and role of the board in the public corporation as the
outcome of a direct and ongoing contractual relation between shareholders and
board members.49 The resulting governance model embeds directors’ duties in a
dyadic model that revolves exclusively around executive managers and (particular
types of) shareholders.
The redefinition of the architecture of the public corporation in NoC theory has
had definite effects on political economy.50 Since the 1970s, there has been a
massive increase in the proportion of corporate profits going to dividends and
share buybacks, while the need to keep executive ‘judgment’ reoriented exclusively
to the creation of shareholder value has led to a continuous rise in remuneration for
managerial executives. As these increases on the side of executives and particular
kinds of shareholders51 are typically funded by the uptake of short-term strategies
that come at the expense of the privileges and protections of all other stake-
holders,52 including various types of shareholders with a longer time horizon,53
44
Berle and Means (2007 [1932]).
45
Lan and Heracleous (2010).
46
Khurana (2007), Lan and Heracleous (2010), Millon (2013), Veldman and Willmott (2016).
47
Blair and Stout (2011), Millon (2014).
48
Corporate Governance Code Monitoring Committee (2016), p. 9.
49
Aglietta and Rebérioux (2005), Lan and Heracleous (2010).
50
Dore (2008), Froud et al. (2002), Jacoby (2008, 2011), Ireland (2000, 2005, 2016), Jansson et al.
(2016), Lazonick (2014), Murphy and Willmott (2015), Segrestin and Hatchuel (2011),
Stockhammer (2004), Stout (2012).
51
Millon (2013).
52
Johnson (2012).
53
Strine (2010).
the stabilisation of the SLE in NoC theory shifts risks away from the core corporate
governance constituencies and towards these other constituencies.
The redefinition of the modern corporation in NoC theory shows how ignoring
the problem of the SLE’s status and the corporation can offer a view on corporate
architecture that makes the interests of two constituencies absolute, while structur-
ally relegating the interests and timeframes of all other corporate constituencies and
stakeholders to the status of ‘externalities’.54 Because the precise theoretical under-
standing of the SLE and the corporation remain contested, while the stabilisation of
their status and their relation to corporate architecture remains contingent, the
development of and choice between these understandings is vitally important to
understand the scope of ‘corporate responsibility’.
5 Discussion and Conclusions
To explore notions of corporate responsibility, I have taken a closer look at the

conceptual development of the modern corporation. I have sought to illustrate how
the contingent and conceptually confounded status of the SLE, the corporation, and
the corporate group allows for the use of multiple referents and how this conceptual
status makes the attribution of agency, responsibility, and liability to these con-
structs problematic. Such attributions of agency, and particularly on the basis of the
identification of the status of these constructs as a ‘subject’, ‘person’, or ‘citizen’
has been shown to obscure and naturalise de facto differences in status, power, and
means for redress between different types of legal constructs, such as corporations,
TNCs, citizens, NGOs, and states, and notably so in the supranational domain.55
Considering the problematic status of the public corporation and corporate
groups, and the role of this status in relation to attributions of agency, responsibility
and liability and interactions with other legal constructs, it seems fair to suggest that
the focus on notions like ‘partnerships’, ‘soft law’ and ‘self-regulation’ as
emphasised in the PCSR debate, is a distraction from the provision of effective
‘hard law’ regulations, standards and protections that could enable a level playing
field between legal constructs with a structurally unequal theoretical makeup.
Similarly, in the presence of these conceptual disparities, the use of concepts like
‘responsibility’ and ‘corporate citizenship’ seems mostly to allow corporations and
TNCs to carry on ‘. . . business as usual—including prioritizing maximization of
shareholder value—while claiming to be caring and socially responsible”.56
54
Davis (2009), Horn (2012), Khurana (2007), Johnson (2012, p. 1163); Pye (2001, 2002),
55
Banerjee (2008), Jones and Haigh (2007, p. 52); Murphy (2011), Rajak (2011), Tracey et al.
(2005), Veldman (2013).
56
Ireland and Pillay (2010), p. 14.
86 J. Veldman
To move beyond such assumptions about corporate responsibility, I explored

how evolving corporate ‘architectures’ provide differing backgrounds for the
assumption of ‘responsibility’ and briefly touched on how these architectures relate
to political economy. Between the 1930s and 1970s the problematic justification for
the status of the corporation and the SLE provided the basis for an architecture in
which boards were oriented to a long-term view and the provision of outcomes for a
broad set of constituencies.57 As the significance of the SLE and its effects58 was
summarily dismissed in the view of corporate governance that became dominant
from the 1970s onwards, this architecture was changed to a new one, in which the
core governance relation was limited to a dyadic relation between shareholders and
executive.59 This new architecture allowed broader responsibilities than (short-
term) increases in shareholder value to be relegated to a position external to the
core corporate governance relation and, hence, not within the ambit of directors’
duties.60
Shifting discourses about the status and legitimacy of the corporation and the
SLE thus provide the basis for the stabilisation of different corporate architectures,
which in turn define and delineate the direction of directors’ duties,61 accountabil-
ity,62 transparency, compliance, disclosure63 and materiality in reporting.64
Because the stabilisation of the status of the SLE and a related corporate architec-
ture effectively provide the basis for the division of privileges and protections
inside the corporation; because the conceptual development of these stabilisations
is clearly marked by effects in terms of political economy65; and because these
stabilisations embed a notion of corporate architecture that strengthens or dimin-
ishes the theoretical position and discretionary space for boards to relate to broader
interests66 including the assumption of ‘corporate responsibility’, the historical
development and contingent stabilisation of notions of the SLE and the corporation,
and of attendant corporate architectures, provide interesting points of departure for
the debate on ‘corporate responsibility’.
This focus for ‘corporate responsibility’ allows for a broader research agenda as
it shifts the debate on corporate responsibility away from morals and ethics,67 and
57
Drucker (2006[1946]), Fayol (2013[1949]), Khurana (2007), Moore and Rebérioux (2007), Lan
and Heracleous (2010), Segrestin and Hatchuel (2011).
58
Bratton (1989).
59
Aglietta and Rebérioux (2005).
60
Sjåfjell et al. (2015), Veldman and Willmott (2016).
61
Millon (2013).
62
Keay and Loughrey (2015).
63
64
Eccles and Youmans (2016).
65
Gourevitch and Shinn (2005), p. 3; Ireland and Pillay (2010), Jones and Haigh (2007), Veldman
and Willmott (2016), Zingales (2000).
66
Friedman (1970), Jansson et al. (2016), Veldman and Willmott (2013), Veldman et al. (2016).
67
Levitt (1958).
toward the formation of institutions of corporate governance like company law,

corporate governance codes, accounting rules, listing rules and other financial
regulations that continue to embed particular notions of the modern corporation
and its architecture.68 It also enables a focus on the shifting conceptions of the
modern corporation, corporate architectures, and political economy internationally.
Bowman notes that: ‘the corporate reconstruction of the world political economy in
the late twentieth century ... appears to be modeled on the corporate transformation
of North American society in the early-to-mid-twentieth century.’69 This introduces
the question why the notion of the modern corporation and of corporate gover-
nance, which are problematic to justify and stabilise in theoretical terms, and which
provide increasingly problematic political and economic effects,70 nevertheless
spread rapidly and relatively uniformly across legal and economic systems with
very different historical antecedents and conceptual starting positions on
organisational representation, organisational architecture, and political economy
in largely the same short time frames.71 It also raises the question why there seems
to be such limited explicit theoretical and practical discussion on and competition
between conceptions of the corporation and the TNC, of corporate architecture, and
of different possibilities for regulation and codification in accounting theory, in
executive and investor practice, in the curricula of law and management schools,
and in systems with very different legal and economic orientations, and in public
policy and regulatory decision-making in political systems.72
A focus on historically contingent stabilisations of central concepts underlying
the modern corporation can help frame questions of ‘responsibility’ in terms of
corporate architecture and corporate governance. Doing so, this focus allows the
debate on corporate responsibility to engage more directly with the political
economy outcomes of theory production in the field of corporate governance,
notably the declining capacity for public corporations to produce long-term sus-
tainable value for broader constituencies than just shareholders and executives,73 an
increasingly polarising global division of social wealth74 that is linked to the
creation of political instability in the UK, the US, and Europe,75 and ecological
sustainability.
68
Jansson et al. (2016).
69
Bowman (1996), p. 291.
70
Kay (2015), Reich (2016).
71
Guinnane et al. (2007), Gourevitch and Shinn (2005), Gordon and Roe (2004), Jansson et al.
(2016), Larsson-Olaison (2014).
72
Aglietta and Rebérioux (2005), Clarke (2016), Davis (2009), Horn (2012), Khurana (2007),
Morgan (2009), Pye (2001, 2002), Veldman and Willmott (2016).
73
Keay and Zhao (2015), Tricker (2015), Zumbansen (2012).
74
Ireland (2005), Lazonick (2013, 2014), Piketty (2014).
75
Reich (2016).
88 J. Veldman
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governance, reflexivity, and the limits of ‘soft’ regulation. Hum Relat 69(3):581–603
Veldman J, Willmott H (2017) The corporation in management. In: Baars G, Spicer A (eds)
Critical corporation handbook. CUP, Cambridge
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a global roundtable series. Frank Bold and Cass Business School, Brussels
Villiers C (2008) Corporate law, corporate power and corporate social responsibility. In:
Boeger N, Murray R, Villiers C (eds) Perspectives on corporate social responsibility. Edward
Elgar, Cheltenham, pp 85–112
Vogel D (2007) The market for virtue: the potential and limits of corporate social responsibility.
Brookings Institution Press, Washington
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(01):51–59
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Jeroen Veldman Career, memberships and achievements: Has held appointments at Cardiff
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bridge Journal of Economics and Critical Perspectives on Accounting.
Research interests: Historical development of the public limited liability corporate form and its
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www.researchgate.net/profile/Jeroen_Veldman.
Part III
Board Structure and Accountability
Corporate Social Responsibility and the
Corporate Board: Assessing the Indian
Experiment
Afra Afsharipour
1 Introduction
Corporate social responsibility (CSR) has received significant attention from busi-
nesses, civil society and governments around the world.1 It is widely observed that
corporations must not only behave ethically, but they must ‘contribute to economic
development while improving the quality of life of the workforce and their families
as well as of the local community and society at large.’2 For decades, CSR was
viewed as voluntary practices, articulated in various codes of conduct and princi-
ples, to encourage companies to operate in a responsible manner.3 More recently,
the global CSR movement has begun the transformation from a set of voluntary
good citizenship practices toward a sustainability concept under which companies
integrate the potential social and environmental impact of their business activities
in the core of their decision-making. Within this sustainability model, corporate
governance through the board of directors plays a central role in achieving sustain-
ability goals.4
Perhaps nowhere is the focus on CSR more pronounced than in India. In line
with global trends, there has been a robust debate in India over CSR practices.5
Throughout the first decade of this century, the Indian government sought to
encourage CSR through the introduction of various voluntary guidelines. For
example, in 2009 the government introduced a set of voluntary guidelines to
1
Harper Ho (2013), pp. 377–378; Van Zile (2012), p. 275.
2
World Business Council for Sustainable Development (1999), p. 3.
3
Afsharipour and Rana (2014), pp. 179–180.
4
Clarke (2015), p. 148.
5
Afsharipour and Rana (2014), p. 181.
A. Afsharipour (*)
University of California, Davis, School of Law, Davis, CA, USA
e-mail: aafsharipour@ucdavis.edu; https://law.ucdavis.edu/faculty/afsharipour/

96 A. Afsharipour
encourage firms to engage in socially responsible behaviour.6 The voluntary guide-

lines recognised the sharp discrepancies in India’s uneven economic development
and the shortcomings in societal contributions by Indian firms after a period of rapid
growth and economic liberalisation.7
In a statement included with the guidelines, the then-Minister of Corporate
Affairs stated:
The Indian corporate sector has seen the current decade as a period of high growth and the
emergence of a strong India Inc. having a significant global footprint. . . . However, the
corporate sector is also standing in the midst of a sustainability crisis that poses a threat to
the very existence of business. What we have before us is a cross-road where one path leads
us to inclusive growth and the other may lead to [an] unsustainable future. However, the
first path will require careful nurturing for which all stakeholders need to assume and
discharge their respective responsibilities.
We have seen the business sector generating wealth and value for the shareholders in the
last sixty years, but simultaneously we also have the problems of poverty, unemployment,
illiteracy, malnutrition etc. facing the nation. The corporate growth is sometimes seen as
widening the gap between the India and Bharat through its income-skewing capability. This
gap needs to be bridged. While the Government undertakes extensive developmental
initiatives through a series of sectoral programmes, the business sector also needs to take
the responsibility of exhibiting socially responsible business practices that ensures the
distribution of wealth and well-being of the communities in which the business operates.8
Despite much government fanfare with the introduction of the guidelines, these
voluntary efforts had little effect and CSR activity was uncommon among many
Indian firms.9
After several years of political wrangling and stringent opposition from business
groups, the Indian government transformed Indian corporate law from a
shareholder-centric model to a more stakeholder-oriented model, culminating in
the passage of the Companies Act, 2013 (Companies Act).10 A central feature of the
Companies Act is the requirement for companies to develop a CSR policy, and to
aim to spend at least two per cent of their profits on CSR activities. Moreover, the
legal regime in India now requires robust disclosure on corporate CSR activities.
Under India’s new legal regime, corporate governance and particularly corporate
boards are the vehicle for incorporating CSR activities in Indian firms. Under the
Companies Act, the focal point of any company’s approach to and implementation
of CSR is the board of directors.11 CSR in India is a board function that cannot be
separated from a company’s corporate governance. The board of directors must
form a CSR committee comprised of at least three directors, one of whom must be
an independent director. The board’s CSR committee must frame the company’s
6
MCA, CSR Guidelines (2009a).
7
Van Zile (2012), pp. 271–272.
8
MCA, CSR Guidelines (2009a), p. 5.
9
Afsharipour and Rana (2014), pp. 214–215; Van Zile (2012), pp. 295–296.
10
Afsharipour (2017), p. 467.
11
Corporate Social Responsibility and the Corporate Board: Assessing the. . . 97
CSR policy and determine the amount that the company must spend on CSR
activities. Upon approval by the board, the CSR policy must be disclosed in the
board’s annual report. Moreover, oversight for CSR activities is the responsibility
of the board, which must ensure that the mandatory amount for CSR is spent on the
activities outlined in the policy.
This chapter analyses India’s corporate governance oriented CSR approach.
Section 2 of the chapter explores the various rationales for CSR and how such
rationales factor into the role of the board of directors. Section 3 describes how CSR
is regulated in India and examines the role of directors in the Indian CSR model.
Section 4 then turns to assess challenges to achieving broad-ranging CSR goals
under the Indian model. The prospects for CSR in India depend very much on
effective boards and may face the obstacles that have arisen in board reforms in
India more generally. Section 5 concludes with some reflections on ways in which
boards can play a more valuable role in ensuring that Indian companies adopt CSR
practices that not only comply with India’s new Companies Act but meaningfully
contribute towards India’s sustainability goals.
2 CSR: Definitions, Rationales, and the Role of the Board
2.1 What Is CSR?
Scholars and experts have long struggled with defining CSR.12 While the definition
of CSR remains contested, two core elements of CSR evaluate how the company
conducts its business and how the company manages its relationships with a broad
range of stakeholders, such as employees, local communities, creditors, consumers,
and the environment.13 As experts have noted, however, CSR is also ‘a normative
exercise in setting out what corporations should be responsible for in society, or
even an ideological exercise in describing how the political economy of society
should be organized to restrain corporate power.’14 Some elements of what could be
termed ‘corporate social responsibility’ fall under the rubric of the law, such as
environmental or financial reporting or disclosure requirements, but the concept of
CSR as broadly advocated goes beyond mere compliance with law.15
Over the evolution of the concept of CSR, there has been robust debate on
whether CSR should be voluntary or mandatory.16 Historically, common definitions
12
Crane et al. (2008), p. 3.
13
Harper Ho (2013), p. 400.
14
Crane et al. (2008), p. 4.
15
Harper Ho (2013), p. 384; Millon (2015), p. 40; Zhao (2011), p. 275.
16
Amao (2011), pp. 55–66, provides a comprehensive overview of this debate in both the United
States and Europe. Along with the debate over whether CSR should be mandatory or voluntary,
there is a related debate over how much, and how, voluntary CSR can be re-formulated as
mandatory CSR or mandatory legal requirements. Kerr et al. (2009), pp. 93–104, 471–493.
98 A. Afsharipour
and codes on CSR viewed it as voluntarily adopted practices by firms in assuming

greater responsibility to stakeholders beyond just shareholders.17 In the United
States, for example, CSR has been viewed as a set of voluntary and
non-enforceable standards—principles, pledges, or programs by which companies
seek to operate in a socially responsible manner.18
In more recent articulations, however, CSR transcends voluntary practices.19
Instead, scholars argue that beyond focusing on discretionary business activities
and fragmented CSR efforts, we should advocate for sustainability or sustainable
development where social, environmental and economic agendas play a central role
in corporate decision-making.20 As noted by the Corporate Social Responsibility
Initiative at Harvard’s Kennedy School of Government: ‘Corporate social respon-
sibility encompasses not only what companies do with their profits, but also how
they make them. It goes beyond philanthropy and compliance and addresses how
companies manage their economic, social, and environmental impacts, as well as
their relationships in all key spheres of influence: the workplace, the marketplace,
the supply chain, the community, and the public policy realm.’21
Of course, as with the definition of CSR, the definition of sustainable develop-
ment is also contested.22 Sustainable development is tied to environmental, social
and economic issues.23 The most frequently used definition of sustainable devel-
opment is from Our Common Future, also known as the Brundtland Report:
Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs. It contains within
it two key concepts: the concept of needs, in particular the essential needs of the world’s
poor, to which overriding priority should be given; and the idea of limitations imposed by
the state of technology and social organization on the environment’s ability to meet present
and future needs.24
Sustainable development views CSR as practices that are fully integrated and
considered as a central component of all decisions in a company, and not merely as
voluntary or philanthropic actions.25 As scholars have argued, for CSR to be truly
transformative, it must be integrated into the core of company decision-making ‘in
such a way as to lead to an internalization of externalities.’26
17
18
Harper Ho (2013), pp. 388–391.
19
Sjåfjell and Anker-Sorensen (2013), pp. 17–19.
20
Sjåfjell and Richardson (2015), p. 315. Whether one uses the term CSR or sustainability is
subject to substantial debate. Tonello (2011), p. 5.
21
Kytle and Ruggie (2005), p. 9.
22
Villiers and Mahonen (2015), p. 211.
23
United Nations ESCAP (2013), p. 14.
24
Villiers and Mahonen (2015), p. 212.
25
Sjåfjell and Richardson (2015), p. 315.
26
Sjåfjell and Anker-Sorensen (2013), p. 6.
2.2 The Rationales for CSR
CSR has both business and moral/ethical rationales. The ethical case for CSR
articulates CSR as management’s balancing of stakeholder interests, without any
specific regards to shareholder wealth. While the ethical case for CSR has strong
moral suasion, scholars mindful of the realities of business and institutional con-
texts in various countries have also advocated strategic rationales for CSR.27 As
with ethical rationales, these business rationales view CSR as more than just
philanthropy. Instead, they emphasise the ‘promise of shareholder gains from
investment in stakeholder well-being.’28
Advocates of CSR from a moral standpoint suggest that businesses are ethically
obligated to participate in CSR because it is the right thing to do, even if there are no
specific financial benefits or improved financial performance.29 Society expects
businesses to be good corporate citizens that actively engage in acts or programs to
promote human welfare or goodwill.30 Moreover, experts argue that businesses are
uniquely positioned to address social problems because of their ‘reservoir of
management talent, functional expertise and capital.’31 Scholars also argue that
businesses have an ethical duty to address social problems to which they may have
contributed or from which they may have profited.32 Despite powerful arguments
for ethical CSR, its prospects are somewhat compromised in business environments
where norms favour profit-making considerations as paramount.33
CSR advocates have articulated several business reasons to support CSR. Advo-
cates argue that it is in business’s long-term self-interest—enlightened self-inter-
est—to be socially responsible.34 This view holds that, if business is to have a
healthy climate in which to function in the future, it must take actions now that will
ensure its long-term viability.35 Advocates argue that not only can CSR enable
‘companies to manage the considerable non-financial risks of their operations,’ but
it can also help firms protect their ‘goodwill or brand name and intangible assets
that generally comprise a major part of the balance sheet of any corporation dealing
27
Millon (2015), p. 71.
28
Millon (2015), p. 78. There is also an argument against CSR which holds that the social
responsibility of corporations is to make profits, and that CSR implicates managerial agency
problems where managers engage in CSR that benefits themselves at the expense of shareholders.
Ferrell et al. (2016) includes a summary of studies addressing the agency costs of CSR activities.
29
Richardson and Sjåfjell (2015), p. 4. Du Plessis et al. (2005), chapter 14 include an insightful
discussion of the moral and ethical responsibilities of corporations.
30
Carroll (1991).
31
Davis (1973), p. 316.
32
Richardson and Sjåfjell (2015), p. 4.
33
Millon (2015), p. 77.
34
Millon (2015), pp. 65–71. Millon (2015), pp. 71–76 includes an excellent assessment of the
potential shortcomings of the business case for CSR.
35
Carroll and Shabana (2010), pp. 88–89.
100 A. Afsharipour
in public product, services or investment markets.’36 Moreover, effective CSR

practices can help firms better market themselves to their consumers and build
brand loyalty.37 CSR can also help a firm differentiate itself from its competitors
and gain ‘broad legitimacy in consumer and investor markets and society
generally.’38
Many large businesses embrace, or at least publicly appear to embrace, the
business case for CSR and sustainability. The 2016 UN Global Compact-Accenture
CEO Study on Sustainability of over 1000 CEOs listed brand, trust and reputation,
together with consumers, as their primary motivations to engage in CSR activi-
ties.39 Furthermore, the study found that almost 85% of CEOs agreed that their
company had embedded sustainability and that 59% of CEOs agreed that their
company can accurately quantify the business value of their sustainability
initiatives.
Experts have endeavoured to empirically assess the relationship between CSR
and firm performance. The results of a recent comprehensive study of CSR suggests
that CSR in general is not inconsistent with shareholder wealth maximisation, and
that CSR activities are often adopted by well-governed firms.40 Similarly, one study
that identified a set of US firms that adopted corporate policies related to environ-
mental and social issues before the adoption of such policies became widespread,
found that firms that adopted the sustainability policies outperformed their peers
over the long-term, both in terms of stock market and accounting performance.41
The study also found that the boards of directors of high sustainability companies
are more likely to be formally responsible for sustainability, and that such compa-
nies are more likely to have established processes for stakeholder engagement, to be
more long-term oriented, and to exhibit higher measurement and disclosure of
nonfinancial information.42
A number of studies have evaluated whether CSR initiatives can positively
affect firm value.43 While some research has questioned claims that CSR policies
can positively affect firm value, other research has shown a positive link between
firm value and CSR.44 A recent study, for example, found that during the
2008–2009 financial crisis, firms with high social capital, measured as CSR inten-
sity, had stock returns that were four to seven percentage points higher than firms
with low social capital.45 Lins, Servaes and Tamayo examined the performance of
36
Redmond (2012), p. 320.
37
Carroll and Shabana (2010), p. 94.
38
Redmond (2012), p. 320.
39
United Nations Global Compact (2016).
40
Ferrell et al. (2016), pp. 31–32.
41
Eccles et al. (2014), p. 2835.
42
Eccles et al. (2014), p. 2836.
43
Carroll and Shabana (2010), p. 93.
44
Carroll and Shabana (2010), p. 94; Millon (2015), pp. 69–70.
45
Lins et al. (2016), p. 2.
1673 non-financial firms with CSR. The study also found that the high-CSR firms
not only had better stock returns, but they also experienced higher profitability,
growth, and sales per employee relative to low-CSR firms, and were able to raise
more debt.46 The authors argue that the results suggest that the trust between the
firm and both its stakeholders and investors, built through investments in social
capital, pays off when the overall level of trust in corporations and markets suffers a
negative shock. Overall, the study was consistent with other recent studies that
indicate that ‘stakeholders are more likely to trust and cooperate with high-CSR
firms.’47
2.3 The Role of the Board in CSR
The transformation of the concept of CSR, including the expanded rationales for
CSR, has been combined with an effort to understand the role of corporate gover-
nance in advancing CSR. There is now ‘an evolving interplay between corporate
governance and CSR’ with similarities in the goals and strategies of both corporate
governance and CSR.48 At the core of this interplay are questions about the duty
and function of the board of directors.
In most jurisdictions, the central duty of the board is the protection and promo-
tion of the interests of the company.49 Admittedly, there is robust debate about what
roles and functions the board should play in promoting the interests of the company.
These debates address whether the board should primarily play an advisory role, a
monitoring or supervisory role, or an information-gathering role.50 Most often,
scholars highlight the core advisory and monitoring roles of the board.51
The role of directors is necessarily tied to questions about the fiduciary duties of
directors.52 Whose interests must the board consider when making decisions?53
What does it mean to say that corporate directors owe a fiduciary duty to the
corporation? Does the board’s fiduciary duty to the corporation mean that directors
must focus on maximising the wealth of shareholders even at the expense of other
non-shareholder constituencies? To what extent can directors consider the interests
of a broader group of stakeholders than just shareholders?
46
Lins et al. (2016), p. 3.
47
Lins et al. (2016), p. 7.
48
Gill (2008), p. 455.
49
Sjåfjell and Anker-Sorensen (2013), pp. 7–9.
50
Martin (2013), pp. 966–972, presents an overview of the various debates about the roles and
functions of the board of directors.
51
Adams and Ferreira (2007), pp. 217–218.
52
Tonello (2011), p. 28.
53
Mansell (2013), pp. 38–39.
102 A. Afsharipour
Questions about the role and responsibilities of directors in advancing the

interests of the corporation have arisen in many different contexts and jurisdictions.
In the US, for example, there has long been vigorous debate as to whether the board
of directors should have duties only to shareholders or whether their duties should
extend to stakeholders beyond shareholders.54 Many renowned scholars have
argued that ‘shareholder value is the proper object of corporate law’ because
‘focusing principally on the maximization of shareholder returns is, in general,
the best means by which corporate law can serve the broader goal of advancing
overall social welfare.’55 Other scholars argue that, in managing the company, the
board must consider the interests of all stakeholders, such as employees, con-
sumers, and the general public, and must make decisions for the benefit of all
stakeholders.56 Under the stakeholder view ‘the corporation has both public and
private roles.’57
Debates over the stakeholder versus shareholder-oriented models have occurred
in other parts of the world as well, with countries settling on different approaches.
Many countries have more readily recognised the stakeholder approach over the
shareholder-oriented approach adopted in US corporate law.58 Moreover, interna-
tional organisations have articulated the stakeholder approach in their various
principles.59 The Organization for Economic Co-operation and Development
(OECD) principles of corporate governance, for example, state that boards should
‘take into account the interests of stakeholders’ and should ‘take due regard of, and
deal fairly with, other stakeholder interests including those of employees, creditors,
customers, suppliers and local communities.’60
Whichever view one takes on board fiduciary duties, there is a strong argument
that the business case for CSR, especially under a strategic or sustainability model,
is clearly within the realm of the core roles to be played by the board.61 Directors
are expected to advise the company on strategy, and experts have advised that
directors should address sustainability from a strategic standpoint.62 Some have
even argued that ‘directors’ duty of care extends to being informed about those
sustainable investment opportunities’ that have both financial and social benefits for
54
Johnson (2013), pp. 435–437. In the 1930s Adolf Berle and Merrick Dodd famously debated the
nature and purpose of the corporation and director duties. Berle emphasised the fiduciary duties of
managers toward shareholder-beneficiaries, while Dodd argued for broader obligations to a wider
set of constituencies, including employees, consumers, and the public at large. Berle (1931),
pp. 1060–1069; Dodd Jr. (1932), pp. 1153–1157. In the 1970s, Milton Friedman argued for a
strong shareholder wealth maximisation goal. Friedman (1970), p. 32.
55
Kraakman et al. (2009), pp. 28–29.
56
Johnson (2013), pp. 435–436.
57
Harper Ho (2010), p. 71.
58
Harper Ho (2010), p. 72; Sarkar and Sarkar (2012), pp. 17–18.
59
Sarkar and Sarkar (2012), p. 17.
60
OECD (2015), pp. 51, 53.
61
Millon (2015), pp. 65–66.
62
Clarke (2015), p. 155.
the corporation in the long term.63 Moreover, the involvement of directors in CSR
and sustainability practices is also important in setting the ‘tone at the top’. The
policies set by the board and senior management significantly affect the culture,
values and practices of a company and influence the behaviour of management at
many levels of the firm.64
Experts have also noted that CSR particularly fits into the board’s role in risk
management, which involves both an advisory and monitoring function.65 Risk
management is a systematic and holistic approach for firms to address all of their
risks, whether operational, strategic or financial, comprehensively. As noted by the
OECD, risk management is not just about risk avoidance or risk elimination.66
Instead, taking appropriate risk needs to be at the heart of corporate strategy. For
this to happen, the board must understand and guide the company’s appetite and
ability to take risks, and must oversee the management of ‘key risks, including the
potential for reputational harm and legal liability associated with adverse social and
environmental impacts.’67 While not involved in the everyday management of risk,
the board of directors plays an important oversight role by guiding and reviewing
the company’s risk policy and ensuring that an effective risk management system is
in place.68 CSR policies and programs can assist the board in exercising this
oversight role and in ensuring that business strategies support the long-term sus-
tainability of the company.69 To be effective, the board needs to ensure that
companies integrate CSR as a core element of the management of their business.
In other words, CSR should not be just isolated efforts focused on corporate
philanthropy, but should instead be part of the evaluation of company’s business
activities, performance and compliance programs.70
While the academic debate over the role of the board will undoubtedly continue,
over the past decade CSR and sustainability have increased as a governance
concern for many companies.71 Many boards of large global firms accept the
broader case for CSR and sustainability.72 In a 2012 survey by The Conference
Board of 359 SEC-registered corporations, 40% or more of manufacturing and
nonfinancial firms reported that their boards, or a committee of the board, exercise
sustainability oversight.73 Some companies have even voluntarily formed board-
level CSR committees and have charged those committees with a central role in risk
63
Tonello (2011), p. 28.
64
Clarke (2015), pp. 155–156.
65
Altschuller (2011), p. 34; Kytle and Ruggie (2005), p. 1.
66
OECD (2014).
67
Altschuller (2011), p. 35.
68
Altschuller (2011), p. 35.
69
Altschuller (2013).
70
Tonello (2011), p. 6.
71
Tonello (2013), p. 1.
72
Tonello (2010), p. 3.
73
Tonello (2013), p. 2.
104 A. Afsharipour
mitigation.74 The movement toward board involvement in sustainability oversight

and reporting is one that is still in the development phase. For example, in the 2012
survey, The Conference Board found that the boards of many firms played only a
minor role in the company’s sustainability disclosure.75
Given the above debate on the role of the board in CSR and data on emerging
CSR practices, it is interesting to turn to discussion of CSR practices as currently
envisioned under company law in India. One of the world’s largest economies,
India is one of the few countries that requires CSR considerations as part of a
company’s corporate governance, mandating board level involvement in CSR
policies, practices and oversight. It is also one of a small handful of countries to
move toward mandatory CSR spending for all publicly traded companies.76
3 India’s CSR Reforms: Corporate Governance

as a Vehicle for CSR
3.1 Development of CSR as a Corporate Governance

Concern
Over the past decade, the convergence of CSR and corporate governance in India
has become significantly more pronounced. Since the late 1990s India has under-
gone ground-breaking reforms in its corporate governance standards.77 India’s
corporate governance reform efforts were spurred by the needs of its rapidly
expanding economy, including efforts to internationalise India’s capital markets
to attract both foreign and institutional investors.78 India’s corporate governance
reforms began through the introduction of voluntary shareholder-focused gover-
nance standards proposed by leading industry groups.79 In subsequent years, the
Securities Exchange Board of India (SEBI), the country’s primary capital markets
regulator, and the Ministry of Corporate Affairs (MCA) have worked to move
India’s corporate governance regime toward a rigorous set of mandatory require-
ments. These efforts culminated in comprehensive revision of India’s primary
corporate law, the Companies Act 2013.80
Prior to passage of the Companies Act, attention to CSR at various Indian
companies was sporadic. Charitable giving and corporate philanthropy have been
74
Altschuller (2013).
75
Tonello (2013), p. 9.
76
Van Zile (2012), p. 271; Kerr et al. (2009), p. 515.
77
For a detailed overview of India’s corporate governance reform efforts, see Afsharipour (2009),
pp. 365–377, and Afsharipour (2016), pp. 7–28.
78
79
Afsharipour (2009), pp. 367–368.
80
a priority for some large Indian companies.81 Long before any discussion of CSR as
a legal requirement, several of India’s largest conglomerates established separate
philanthropic funds and welfare programs or initiatives as a form of charity to
indicate the virtues of the company or the organisation.82 Some scholars have even
argued that ‘spirituality and CSR are deeply rooted in the Indian tradition’ and that
for India ‘CSR is not a new temporary phenomenon, but rather it is linked to Indian
culture and religion.’83 This spirit of philanthropy, while quite strong in some
companies, did not necessarily translate into widespread CSR practices among
Indian companies. Several studies have noted the historic lack of specific CSR
practices and disclosures at Indian firms.84
As part of the reform process in corporate governance, India has also funda-
mentally changed its approach to CSR, seeking to infuse CSR standards into the
corporate governance institutions that set the direction for Indian businesses.
Efforts to strengthen and encourage CSR were energised by a major corporate
governance scandal involving Satyam, a leading Indian information technology
company in 2009. Following the Satyam scandal, both the MCA and SEBI began to
focus on corporate ethics and CSR as a primary component of corporate gover-
nance. Both regulators sought to transform CSR activities from a collection of good
citizenship and philanthropic activities undertaken by only the largest business
houses to a way of doing business involving the right combination of enhancing
long-term shareholder value and protecting the interests of various other stake-
holders, such as employees, creditors, consumers, and society at large.85
Like many international efforts to promote CSR, India initially took a voluntary
approach to CSR. In 2009, the MCA made its first formal CSR-related efforts when
it introduced the Voluntary Guidelines for Corporate Social Responsibility (CSR
Guidelines).86 The CSR Guidelines ‘embrace[d] the triple bottom line approach’
from international CSR standards.87 The guidelines viewed CSR as part of corpo-
rate strategic planning and as an integral part of company’s business policy under
the oversight of the board of directors.88 In the same vein as the CSR Guidelines, in
2011 the MCA issued the National Voluntary Guidelines on Social, Environmental
& Economic Responsibilities of Business (ESG Guidelines).89 The ESG Guidelines
established concrete measures to be voluntarily adopted by companies to address
the interests of various stakeholders such as employees, customers and the
81
Afsharipour (2011), pp. 1012–1014.
82
Mitra (2007), pp. 34–36.
83
Lattemann et al. (2009), p. 429.
84
Chaudhari and Wang (2007), p. 244; Gautam and Singh (2010), p. 50; Jain and Winner
(2016), p. 36.
85
86
MCA, CSR Guidelines (2009a).
87
Deva (2012), p. 300.
88
89
MCA, ESG Guidelines (2011).
106 A. Afsharipour
environment.90 Moreover, the ESG Guidelines endeavoured to encourage busi-

nesses to adopt a sustainability-focused CSR program and even eschewed using
the term CSR, instead preferring to focus on ‘Responsible Business’. The ESG
Guidelines explained that ‘responsible businesses alone will be able to help India
meet its ambitious goal of inclusive and sustainable all round development, while
becoming a powerful global economy by 2020.’91
In addition to the adoption of various voluntary guidelines, India began to move
toward more mandatory provisions. For example, in August 2012, SEBI issued a
circular mandating that the top 100 listed companies based on market capitalisation
submit Business Responsibility Reports, as part of their annual reports, regarding
their ESG initiatives.92 Moreover, the process of amendment of the Companies Act,
which had been under consideration for a number of years, began to move toward
discussions of mandatory CSR.93 While the 2009 version of the Companies Bill did
not include any provisions related to CSR,94 the review of the bill by the Standing
Committee of Parliament on Finance included a discussion of the extent of CSR
being undertaken by corporations and the need for a comprehensive CSR policy.95
In response to the Standing Committee’s pressure, the MCA indicated that it would
introduce mandatory CSR requirements into the Companies Bill.96 Over the next
several years, the MCA fluctuated between imposing mandatory CSR requirements
into the Companies Bill and adopting CSR recommendations with a ‘comply or
explain’ approach, eventually settling on a compromise approach as adopted in the
Companies Act, 2013.97 The compromise approach arose after significant criticism
of the mandatory spend provision in the draft Companies Bill.98
3.2 The CSR Requirements of the Companies Act: Placing

the Board at the Epicentre
The Companies Act, 2013 takes on a broad view of directors’ duties and respon-
sibilities to non-shareholder stakeholders.99 The Act’s various provisions regarding
90
Deva (2012), pp. 309–310.
91
ESG Guidelines (2011), p. 4.
92
SEBI (2013).
93
94
Companies Bill (2009b).
95
Standing Comm. on Finance (2010).
96
Standing Comm. on Finance, 21st Report (2010), pp. 158–59, 9.41–9.45; Ministry of Corporate
Affairs (2010).
97
Standing Comm. on Finance (2012), pp. 14–15; Gopalan and Kamalnath (2015), pp. 61–62.
98
99
For a discussion of corporate purpose under the Companies Act, see Afsharipour (2017).
board fiduciary duties and responsibilities make clear that shareholder wealth
maximisation should no longer be the primary lens for decision-making by Indian
boards.100 For example, the Act includes a sweeping provision codifying the duties
of directors.101 Section 166 of the Act provides that directors must ‘act in good faith
in order to promote the objects of the company for the benefit of its members as a
whole, and in the best interests of the company, its employees, the shareholders, the
community and for the protection of environment.’102 This vision of directors’
duties to stakeholders more generally is then reiterated in the Code for Independent
Directors, which provides that independent directors shall ‘safeguard the interests
of all stakeholders, . . . [and] balance the conflicting interest of the stakeholders.’103
While the specific consideration of stakeholder interests is promising from a
sustainability standpoint, the MCA has provided little guidance on how directors
should go about balancing the conflicting interests of stakeholders and how such
balancing must work when there are conflicts between shareholder and other
stakeholder interests.104
In addition to directors’ duties to stakeholders, Section 135 of the Act specifi-
cally places CSR within the ambit of the board of directors. Under the Act, the focal
point of any company’s implementation of CSR is the board of directors, and CSR
is a board function that cannot be separated from a company’s corporate gover-
nance. The Act provides that every company with a net worth of Indian Rupees
(INR) billion (or INR 500 crore) (approx. $75 million), or turnover of INR 10 billion
or more (approx. $150 million), or a net profit of INR 50 million or more (approx.
$750,000) during any financial year must constitute a CSR Committee of the board
consisting of three or more directors, out of which at least one director must be an
independent director.105 The Act charges the CSR Committee with (i) formulating
and recommending to the Board, a CSR Policy which must indicate the activities to
be undertaken by the company; (ii) recommending the amount of CSR expenditure
to be incurred on such activities; and (iii) regularly monitoring the CSR initiatives
of the company.106 The Board must then take into account the recommendations
made by the CSR Committee and approve the CSR policy of the company.107
Moreover, the Board must ‘ensure that the company spends, in every financial year,
at least two per cent of the average net profits of the company made during the three
immediately preceding financial years, in pursuance of its Corporate Social
100
Afsharipour (2017), p. 483; Gopalan and Kamalnath (2015), pp. 70–71.
101
Companies Act (2013), Section 166.
102
103
Companies Act (2013), Schedule IV, II(5)–II(6).
104
Khanna and Varottil (2017), pp. 26–27; Naniwadekar and Varottil (2016), pp. 9.
105
Companies Act (2013), Section 135(2). The exchange rates have been calculated as of 1 March
2017. A crore is an Indian term—1 crore refers to 10 million rupees.
106
Companies Act (2013), Section 135(3).
107
Companies Act (2013), Section 135(4).
108 A. Afsharipour
Responsibility Policy.’108 With respect to the spending requirement, while there

was much debate over whether to have made the CSR spending provision in the Act
mandatory, the final consensus was to approach spending through a ‘comply or
explain’ framework.109 Thus, there is no penalty for failing to spend on CSR, but
there are penalties for failing to report on CSR activities conducted or failing to
explain why CSR spending was not carried out.110
Not only is the board charged with formulating and overseeing the company’s
CSR policy, it is also charged with managing the disclosure with respect to CSR.
An important aspect of the Companies Act is the additional public disclosure that
companies must make with respect to CSR practices.111 For example, the board’s
annual report must include a brief outline of the company’s CSR policy and the
policy must also be published on the company’s official website.112 Moreover, if a
company does not have adequate profit or is not in a position to spend the prescribed
amount on CSR, directors must provide disclosure and give suitable reasons in their
annual report about the failure to spend the required amount.113
Overall, the CSR approach adopted in the Companies Act complements other
provisions of the Act that place the board at the epicentre of policy-making and
monitoring of the firm. The board must frame the company’s CSR policy and the
amount that the company must spend on CSR activities, disclose the CSR policy in
the board’s annual report, and exercise oversight of the company’s CSR activities
by ensuring that the mandatory amount for CSR is spent on the activities outlined in
the policy.
4 Analysis of CSR as a Corporate Governance Model
By placing the board at the epicentre of CSR for Indian firms, the Act arguably
takes a progressive approach by indicating that CSR is a matter of primary
importance. The CSR approach in the Act, however, is not without shortcomings.
First, the definition of CSR and the Act’s approach to CSR spending sends to boards
a rather mixed message about the contours of CSR, and potentially moves away
from sustainability principles back to CSR as corporate philanthropy. Second, the
CSR provisions of the Act fail to consider the potential agency costs of promoter-
controlled companies and the limited role that directors can play in such companies.
108
MCA, CSR Rules (2014b), Rule 5(1).
109
110
Afsharipour and Rana (2014), pp. 218–219; Gopalan and Kamalnath (2015), p. 69.
111
IIAS (2014), p. 3.
112
MCA, CSR Rules (2014b), Rules 7 and 8.
113
4.1 Which Vision of CSR?
The move toward mandatory CSR in India was initially driven by the belief that the
private sector must participate in furthering economic development that is inclu-
sive, with wealth distributed among the Indian population.114 This belief was
clearly articulated by the then Minister of Corporate Affairs who in proposing the
2009 CSR Guidelines focused on sustainable growth and CSR practices as neces-
sary to address India’s many social issues.115 The vision of CSR as articulated in the
2009 CSR Guidelines views CSR as a central component of corporate activity. This
vision is in line with the approach advocated internationally which argues that CSR
should go beyond voluntary practices and move toward sustainable development
goals.
Experts have expressed concern that the brand of CSR as adopted in the
Companies Act, however, veers away from a sustainability approach.116 The Act
includes a detailed schedule of CSR activities (Schedule VII) that companies ‘may’
undertake.117 The list of activities initially included in the Companies Act is
narrower than the broad vision of CSR as an integral part of business decision-
making.118 Similarly, while the definition of CSR as adopted by the MCA in its final
rules expanded on the activities that can be considered CSR as originally espoused
in the Act, that definition continues to treat CSR as a potential list of philanthropic
activities.119 Under the final rules adopted by the MCA only CSR activities
undertaken in India will be taken into consideration for the 2% spending require-
ment, despite the fact that many of India’s largest firms are multinationals with
significant business activity outside of India.120 Treatment of employees is not a
factor in the CSR policies to be adopted pursuant to the Act since activities meant
exclusively for employees and their families are not considered CSR activity under
the MCA’s CSR Rules.121
The prescriptive nature of the types of activities considered as CSR could
discourage the adoption of a broader philosophy of CSR by boards. Nowhere
does the legislation or accompanying rules tie CSR with the board’s risk manage-
ment role or general oversight responsibilities. Moreover, the MCA’s CSR Rules
directly state that ‘CSR Activities [do] not include the activities undertaken in
pursuance of [the] normal course of business of a company.’122 Overall, India’s
114
Gopalan and Kamalnath (2015), pp. 59–60.
115
116
Afsharipour and Rana (2014), p. 224; Majumdar (2015), pp. 191–193.
117
Companies Act (2013), Section 135, Schedule VII. For a detailed discussion of the activities
that may be undertaken as CSR under Schedule VII, see Majumdar (2015), pp. 189–191.
118
Varottil and Naujoks (2016), p. 337.
119
MCA, CSR Rules (2014b), Schedule VII; Majumdar (2015), pp. 190–191.
120
Majumdar (2015), p. 191.
121
MCA, CSR Rules (2014b), Rule 4.
122
MCA, CSR Rules (2014b), Rule 6.
110 A. Afsharipour
approach to CSR could indicate to boards that CSR is not sustainability principles
integrated into core aspects of business decision-making, but is instead a good
citizenship endeavour in a particular project selected by the board.
Despite the narrow view of CSR adopted in the Act and accompanying rules, the
MCA has suggested that the interpretation of CSR needs to go beyond local
communities and beyond the concept of philanthropy.123 For example, in the
guiding principles of the draft rules, the MCA stated:
CSR is the process by which an organization thinks about and evolves its relationships with
stakeholders for the common good, and demonstrates its commitment in this regard by
adoption of appropriate business processes and strategies. Thus CSR is not charity or mere
donations.
CSR is a way of conducting business, by which corporate entities visibly contribute to the
social good. Socially responsible companies do not limit themselves to using resources to
engage in activities that increase only their profits. They use CSR to integrate economic,
environmental and social objectives with the company’s operations and growth.124
The MCA further tried to expand the vision of CSR in clarifications issued after
adoption of the final rules implementing Section 135 of the Companies Act.125 In a
2014 circular, the MCA stated that ‘while activities undertaken in pursuance of the
CSR policy’ must relate to the categories enumerated in Schedule VII of the
Companies Act, the list of matters in schedule VII ‘must be interpreted liberally
so as to capture the essence of the subjects enumerated in the said Schedule.’126
Although the MCA espouses a broad vision of CSR, boards would be well within
the ambit of the law by claiming that solely spending two per cent of their profits on
a specific project would render the company socially responsible even if the
company does not in any way undertake a sustainability analysis in running its
business. For example, given the definition of CSR under the MCA’s Rule, ‘a
corporation in a line of business that causes significant detrimental environmental
impact could spend the mandatory funds on building a school in an un-impacted
rural area rather than on ensuring that it decreased its adverse environmental
impact.’127 Leading sustainability experts have cautioned that India’s CSR
approach ‘could lead to forced philanthropy, ‘tick box’ behavior, tokenism or
even corruption, and masking of data to avoid having to comply. Time will show
if this legislation will have a real impact on poor people’s lives and prevent actual
environmental degradation.’128
123
Draft CSR Rules (2013).
124
Draft CSR Rules (2013).
125
Gopalan and Kamalnath (2015), pp. 66–67.
126
MCA Circular (2014a).
127
128
Global Reporting Initiative (2014), p. 12.
4.2 Promoter Dominance and CSR
An important question about the efficacy of India’s CSR mandate is whether the
board’s role in CSR will suffer from the same corporate governance challenges that
generally plague corporate India. Boards of Indian firms often function in the
shadow of concentrated shareholding in the hands of a controlling shareholder
(or promoter) that is either a business family or the state.129 The average share-
holding of promoters in Indian companies is said to be around 50%.130 One recent
study of ownership patterns for 50 large Indian firms found that ownership patterns
‘continue to be skewed toward controlling inside shareholders—a legacy of family-
owned business ventures and state nationalization’ and that ‘the trend seems to be
moving away from outside share ownership.’131 Apart from absolute shareholding
in Indian public companies, the control of promoters is emboldened through other
mechanisms such as crossholding, pyramiding and tunneling.132 Such shareholding
structures allow promoters to extract greater value through transactions with group
companies (in which they have a substantial interest) to the detriment of minority
shareholders and other stakeholders.
Ownership patterns in India inhibit director independence. The director election
rules prevalent in Indian company law result in directors, including independent
directors, being subject to the voting power of controlling stockholders in director
nominations, election and even removal.133 Experts have also noted that board
capture is not uncommon, particularly in controlled companies, and director inde-
pendence can be compromised by factors such as significant director compensation,
lack of director training, and director self-interest to remain in their board position
or to please the controlling stockholders who tend to have significant financial and
social power.134
Because of the dominance of promoters, the prospects for CSR in India are
uncertain. The dominance of concentrated ownership in Indian firms has meant that
directors, even independent directors, often view their position with an allegiance to
controlling shareholders who often directly manage the day to day activities of the
firm.135 While the Companies Act places directors in much more of an oversight
and monitoring role, it is not clear that the reality of corporate governance in India
has yet shifted to directors internalising their monitoring responsibilities. Boards
may be especially reluctant to monitor promoters for fear of losing their positions.
The informal expectation is that the board will act to further the interests of
129
130
For a listing of various studies regarding promoter shareholding in Indian companies, see
Varottil (2009), pp. 18–20; Varottil (2015), pp. 30–34.
131
Geis (2015), p. 592.
132
Bertrand et al. (2002), p. 126.
133
Khanna and Varottil (2017), pp. 22–23.
134
Balasubramanian (2016), p. 3.
135
Khanna and Mathew (2010), pp. 37–38.
112 A. Afsharipour
promoters above other interests, including the interests of stakeholders. Promoter

dominance may mean that directors will, within their discretion, place a priority on
the interests and views of promoters when designing CSR policies and determining
CSR spending.136 Investors have expressed concern that there is a need to be
vigilant when examining CSR programs to ensure that such programs do not unduly
benefit promoters or other related parties.137 This concern may be overstated,
however, as experts have noted that the CSR provision does not on its own ‘create
any new opportunities for self-dealing by controllers. If CSR spending happens to
be an effective mechanism for self-dealing, then controllers would already have
been engaged in this practice.’138
5 Improving the Indian Board’s CSR Function
The potential for CSR reforms in India is enormous. Reports indicate that certain
companies have increased their CSR spending substantially. In a study of the
impact of Section 135, Dharmapala and Khanna find a significant increase in
CSR activity among many firms—although firms spending more than two per
cent of their profits on CSR appear to have reduced their CSR spending after
Section 135 came into effect.139 Some expert analysis indicates that, at least for
the largest companies, CSR is beginning to be seen as integral to the company’s
strategy rather than as a charitable endeavour.140 Whether a broader CSR frame-
work will be adopted in India will depend on several factors, including the quality
of CSR reporting and disclosure and the level of board involvement in integrating
CSR as business strategy.
5.1 Enhancing Disclosure
Proponents of the disclosure framework in the Companies Act have argued that the
extensive disclosure required by the Act can ‘enable dissemination of information
to society about the value generated by the company’s activities and will facilitate
monitoring.’141 The reporting requirements together with the mandated board
involvement in disclosure may also serve a powerful function that would allow
136
137
138
Dharmapala and Khanna (2016), p. 33.
139
140
Rana and Majmudar (2017).
141
Gopalan and Kamalnath (2015), p. 103.
for boards and the company to reflect upon the broader framework for CSR and
sustainability.
To date, however, it is not clear that deep reflection regarding CSR policy and
disclosure is taking place. Several studies of early disclosure find that the CSR
reporting done by firms thus far does not provide much specific information to
stakeholders.142 Some of the companies with the most non-compliant disclosure
regarding CSR spending were public sector undertakings where the Indian govern-
ment is the controlling shareholder.143 A recent study analysing implementation of
the CSR spending requirement finds that disclosure of non-spending is vague and
generic, with companies using boilerplate language that provides little transparency
to stakeholders.144
Disclosure will only be valuable if stakeholders can access material information
easily, have resources to analyse the information, and can rely on the accuracy and
consistency of the information. Currently there is little systematic information on
the credibility and quality of the CSR reporting done by Indian firms. The Compa-
nies Act provides no mechanism for the auditing of compulsory CSR reports.
Evidence suggests that there is significant variability in such reports, so much
more work is needed to improve the disclosure regime around CSR. To improve
the disclosure regime with respect to CSR, various stakeholders including the
government, civil society, investors, and customers will need to be involved in
the monitoring of CSR reports. For example, some experts have called for the
establishment of an ‘independent agency’ to review and examine CSR disclosure
and spending.145
5.2 The Board’s Role in Integrating CSR into Governance
Similar to international standards, India’s regulatory framework recognises the

board’s central role in risk management. The Companies Act acknowledges the
need for risk management and requires that the board develop and implement a risk
management policy and identify risks which may threaten the company’s business.
Under Section 134(3)(n), the board’s annual report must include a statement
indicating development and implementation of a risk management policy for the
company including identification therein of elements of risk, if any, which in the
opinion of the board may threaten the existence of the company.146 Furthermore,
independent directors are charged with bringing ‘independent judgment to bear on
the Board’s deliberations especially on issues of strategy, performance, risk
142
Gopalan and Kamalnath (2015), p. 95; Dharmapala and Khanna (2016), p. 32.
143
IIAS (2016), p. 2.
144
Varottil (2017), p. 20.
145
Majumdar (2015), p. 196.
146
114 A. Afsharipour
management’ . . . and must ‘satisfy themselves . . . that financial controls and the
systems of risk management are robust and defensible.’147 In addition to the
Companies Act, for the top 100 listed companies, SEBI’s Listing Regulations
require that the company form a board-level risk management committee to
which the board may delegate monitoring and reviewing of the risk
management plan.
While there is currently insufficient legal guidance to boards about how to
develop effective risk management systems and little connection between CSR
and risk management, Indian boards could benefit from international guidance on
integrating risk management and CSR initiatives. As recognised by the OECD,
‘effective risk management is not about eliminating risk taking, which is a funda-
mental driving force in business and entrepreneurship.’148 The challenge for Indian
firms is to design a risk management system that encompasses a process capable of
being applied in strategy-setting across the enterprise, and that takes account of the
ways sustainability principles can help make corporate strategies more effective.149
Early data, however, indicates that very few Indian Boards appreciate the connec-
tion between CSR and risk management. For example, a study of financial year
2015 CSR spending by the S&P BSE (Bombay Stock Exchange) of 100 companies
found that almost 65% of spending was philanthropic, although about 39 companies
undertook CSR activities that related directly to their business.150
6 Conclusion
India has begun a journey toward a robust model of CSR that recognises the
valuable role of corporate governance and directors in ensuring that companies
behave in a socially responsible manner. This journey, however, is still in the early
stages and is not without shortcomings. Globally, CSR has evolved from voluntary
corporate practices toward a sustainability model where businesses address their
social and environmental impact as a core part of their activities and decision-
making. As discussed in this chapter, the CSR provisions enacted in the Companies
Act and final rules veer away from a sustainability approach. Instead, Indian
legislation places undue focus on CSR as philanthropy, and could discourage the
adoption of a sustainability model. In line with global trends that place CSR as
within the core roles to be played by the board, Indian legislation designates the
board at the epicentre of CSR policy-making and implementation by Indian firms.
Thus, the prospects for effective CSR depend very much on the institutional power
of the board of directors. However, most Indian companies have concentrated
147
Companies Act (2013), Schedule IV.
148
OECD (2014).
149
IIAS (2016), p. 6.
150
IIAS (2016), pp. 2–3.
ownership structures where controlling stockholders wields significant power in

director nomination, election, and removal. Many board members in India see
themselves primarily as advisors to promoters and as beholden to the dictates of
promoters. Thus, boards may be particularly influenced to design a CSR policy that
is disposed to the promoter’s vision of philanthropy rather than a CSR policy that
focuses on broader sustainability goals. In addition, India’s CSR regime does not
provide any connection between the board’s risk management function and CSR as
a means to ensure that sustainability is embedded as an integral part of business
policy and strategy. Given the current scenario in Indian corporate governance,
along with the philanthropic model of CSR adopted in the Companies Act, there is a
significant concern that Indian companies will not adequately address the social and
environmental impact of their businesses.
Acknowledgements I am grateful to Diego Valderrama, Umakanth Varottil and an anonymous

reviewer for their comments on this chapter. Khushi Desai provided outstanding research assis-
tance. I appreciate the institutional support of UC Davis School of Law, particularly Dean Kevin
Johnson and Associate Dean Madhavi Sunder.
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Afra Afsharipour Career, memberships and achievements: Professor of Law and Martin
Luther King, Jr. Hall Research Scholar (2009–) has published in highly ranked journals, including
Columbia Law Review, Minnesota Law Review, Oklahoma Law Review, National Law School of
India Review, Vanderbilt Law Review, and UC Davis Law Review. Author of Handbook on
Corporate Governance in India: Legal Standards and Board Practices (The Conference Board
2016). Selected for the Lawyers of Color’s 50 Under 50 list, a comprehensive catalog of minority
law professors making an impact in legal education (2014). ‘Transforming the Allocation of Deal
Risk Through Reverse Termination Fees’ selected by Corporate Practice Commentator as one of
the Top 10 Corporate and Securities Articles of 2011. Corporate Associate, Davis Polk &
Wardwell (2000–2007). Law Clerk to the Honorable Rosemary Barkett, Eleventh Circuit Court
of Appeals (1999–2000).
Research interests: comparative corporate law, corporate governance, mergers and acquisitions,
and transactional law. Selected papers available at https://ssrn.com/author¼842155.
Teaching: Business Associations, Start-ups and Venture Capital, Mergers and Acquisitions,
Antitrust.
Regulation of Corporate Social Responsibility
Through the Lens of Board Accountability
and the Case of China
Jingchen Zhao
1 Introduction
Corporate social responsibility (CSR), as a major contemporary focus for compa-

nies, governments, NGOs and communities, has been discussed from a multi-
disciplinary perspective, including the disciplines of philosophy, business manage-
ment, law, politics, sociology and economics, as well as pragmatically by business-
men and politically by public representatives.1 The term, introduced and defined to
achieve a combination of economic, social, environmental and philanthropic goals,
has increasingly become a mainstream business activity2 and has been taken
seriously by government, corporations and boards of directors. It is a term that
organises and accommodates corporations’ focus beyond profit maximisation
towards participation in activities that improve various stakeholders’ welfare, and
is typically regarded as a voluntary mechanism or self-regulatory system to achieve
sustainable corporate goals. It has been suggested that CSR goes beyond govern-
ment regulation, which sets minimum standards, and philanthropy, which lacks
mechanisms for long-term sustainability.3 Laws and policies have been increas-
ingly reinforced by market indices that recognise and measure company perfor-
mance according to social and environmental criteria.4
The value and effectiveness of CSR have been interrogated for interrelated
reasons such as the suspicion of ‘greenwashing’, as window-dressing or a public
1
Elbing (1970), Jamali and Mirshak (2007), Vallentin (2012), O’Rourke (2003), Besley and
Ghatak (2007), McBarnet et al. (2007), Padfield (2015), and Avi-Yonah (2014).
2
Kizmueller and Shimshack (2012).
3
Clapp and Utting (2008), p. 1.
4
Clarke (2016a), p. 532.
J. Zhao (*)
University of Leeds, School of Law, Leeds, UK
e-mail: J.Zhao@leeds.ac.uk; http://www.law.leeds.ac.uk/people/staff/zhao/

122 J. Zhao
relations exercise,5 its apparent contradiction with shareholder value, the nature of
voluntarism with directors’ discretion, ambiguity in the concept, and the lack of
regulation and its legislative necessity. CSR has sought to address new challenges
for business associated with risk, uncertainty and complexity. However, CSR itself
is an uncertain, complicated, discretionary and unpredictable term. Therefore, it is
vital to scrutinise the criticisms of CSR and raise the question of whether we could
recast CSR through an alternative lens to address these problems. Rather than
focusing on specific issues related to CSR such as employee satisfaction,6 customer
satisfaction,7 creditor protection,8 environmental protection9 or legitimacy in sup-
ply chains,10 this chapter aims to offer generalised arguments for promoting various
stakeholders’ interests in a collective manner, and to explore the possibilities of
using the notion of accountability to make CSR more solid, convincing and rational.
The prospect of applying the notion of accountability in Chinese Company Law
will be deliberated as a case study for a jurisdiction that has a CSR-oriented section
in the legislation which has so far not led to real impact.
In this chapter, I examine, firstly, the function of board accountability in relation
to the argument for CSR by investigating the extent to which the notion of
accountability could be used as a criterion of regulating CSR so that companies
might be held accountable for corporate decisions affecting their stakeholders.
Secondly, I critically examine the scope and objectives of CSR and board account-
ability, and propose the possibility of generating a more comprehensive under-
standing of the two notions by examining how they intersect. In doing so, I seek to
address two questions: (1) to what extent could board accountability be used as a
criterion for a CSR regulatory framework? and (2) if the notion of board account-
ability could contribute to the enforcement and effectiveness of CSR, could the
notion of corporate social accountability (CSA) be revised and applied in company
law, taking Chinese Company Law as a case study?
This chapter is therefore an original attempt to link CSR and board accountabil-
ity together in order to generate coherent arguments about the regulation of CSR in
the domain of corporate law, referencing the current literature on board account-
ability and current legislation for enforcing CSR. In a systematic manner, the
nature, scope and enforcement of the concept of CSA will be evaluated, with the
aim of broadening its latitude beyond disclosure.11 The feasibility of applying the
notion in Chinese Company Law will also be investigated. Through the lens of a
5
See Greer and Bruno (1996) and Utting (2002).
6
Zhao (2017), Hansmann (1990), Turnbull (1994), and Edmans et al. (2014).
7
Servaes and Tamayo (2013).
8
Zhao and Wen (2014), Zhao and Tribe (2010), and Anderson (2007).
9
Dowell et al. (2000) and Husted et al. (2016).
10
Mueller et al. (2009) and Carter and Easton (2011).
11
Based on the current literature, the notion of CSA has been closely associated with information
disclosure; for example, Owoeye (2015), Watts (2015), Gilbert and Rasche (2007), and Gray
et al. (1996).
Regulation of Corporate Social Responsibility Through the Lens of Board. . . 123
wenze system, with forms and characters of accountability that are likely to be able
to address the needs of corporate governance in China and foster its listed compa-
nies,12 the notion of gongsi shehui wenze zhi (公司社会问责制) will be proposed as
a logical, coherent and concrete approach for company law legislators and pro-
ponents of CSR and corporate accountability. It may create new ways for stake-
holders to hold board members accountable for their actions, and may change
corporate policies and practices before they do harm to stakeholders and lead to
unrecoverable damages.
This study is significant in searching for an enforceable notion which could lead
to authoritative sources of law, as active responses to, and reflections on, a set of
multidimensional and hierarchical social expectations that affect social actors
including corporations and their boards. As a result, the notion of CSA is presented
with the purpose of making it possible for companies to contribute to social
development and environmental protection by encouraging them to engage with
internal self-governance as components of a pattern of ‘inclusive development’,
rather than being motivated purely by economic growth. This study offers an
opportunity to address some current and urgent issues, such as corporate scandals,
the lack of effective law enforcement to protect the rights of various stakeholders,
especially in developing countries,13 and the danger of short-termism, particularly
in the aftermath of the global financial crisis.
This focus is particularly important for China. While CSR has become one of the
most urgent topics in China that is receiving close attention, the enforcement of
CSR-related legislation is far from satisfactory. One controversial issue has been
the question of whether China can afford to run high-speed trains at the risk of
passenger safety. China’s rapid economic rise has also brought risks to environ-
mental food safety, construction safety, and occupational and property safety. This
growth has also led to challenges that must be addressed ‘to avoid weakening the
nation’s ability to sustain economic growth and development progress in decades to
come’.14 The role played by corporations in facing these challenges is increasingly
recognised, and they are encouraged or even required to answer the call to introduce
the practice of CSR. Of course, there are objections to the proposed CSA system in
China, due to the discretion of directors in making business judgements, the
identification of key stakeholders, and judges’ discretion in agreeing or disagreeing
with the judgements of board members through objective and subjective tests. This
matter becomes even more serious considering the worrying lack of qualifications
among judges and board members in China, especially in SOEs.
This chapter is structured as follows: Sect. 2 provides an overview of the
definition, character and criticisms of CSR; Sect. 3 offers a comprehensive discus-
sion of board accountability and the wenze system in China; Sect. 4 links CSR and
12
Keay and Zhao (2006).
13
For a useful and comparative analysis of CSR in developing countries see Jamali and
Karam (2016).
14
Zadek et al. (2012), p. 4.
124 J. Zhao
board accountability and explores the possibility of enhancing the effectiveness and
enforceability of CSR, and of addressing problems of CSR through the lens of
board accountability. A more comprehensive notion of CSA will be introduced to
address issues beyond transparency in order to offer companies a more constructive
way to participate in the development agenda. Section 5 discusses the nature and
challenges of CSR in China and introduces the mechanism of gongsi shehui wenze
zhi (公司社会问责制), while Sect. 6 offers some conclusions.
2 Definition, Characteristics and Criticisms of CSR
So far a consensus regarding the definition of CSR has yet to be reached due to the
dynamic and complicated expectations and demands of various stakeholders.15
CSR has been described as a myth, a luxury, and sometimes as a must-have.16
The more contemporary understanding of CSR is situated at the intersection of
business development, society, the environment and human rights. It is claimed that
the CSR field presents not only ‘a landscape of theories but also a proliferation of
approaches which are controversial, complex and unclear’.17 The notion is impor-
tant and needs to be treated as an issue that is central to a company’s business, not as
something the company does in addition to its business.18
CSR is not a notion without critics, and it is often suggested that CSR does not go
far enough or is misdirected.19 As for the controversy surrounding CSR, much
scholarly ink has been spilled with the growth of the term towards a more complex
and multifaceted notion. A fundamental criticism, according to the general thrust of
CSR’s opponents, is the argument that suggests ‘CSR is bad capitalism’,20 echoing
Friedman’s statement that the only social responsibility of business is to increase its
profit.21 According to this critique, CSR is viewed as a set of inherently misguided
and ill-defined principles; shareholders will be indignant if CSR is promoted; and
companies are unfit for solving social and environmental problems.22 It has also
been argued that CSR can sometimes be regarded as the result of deliberate
greenwashing or the pursuit of public relations without addressing the real social
15
Zhao (2017).
16
Tan (2013).
17
Gariga and Mele (2004), p. 51.
18
Mitchell (2007), p. 280.
19
Genasci and Pray (2008), p. 41.
20
See Levitt (1958).
21
Friedman (1970).
22
However, from the opposite perspective, scholars argue that CSR has been concerned with
suggesting that those companies who promote the interests of society will tend to be financially
successful, especially in the long term; see Orlitzky (2008), p. 113; see also Urip (2010), chapter
1. The mantra of business has evolved from ‘profit alone’ to ‘profit, people, and planet’, to include
social and cultural issues, and environmental issues.
and environmental problems.23 A few mainstream arguments against CSR will be

discussed, with a focus on the necessity and difficulties of regulating CSR, to
provide a discussion of the necessity and appropriateness of a new notion—CSA.
First, voluntarism and mandatory attempts at CSR have made the notion rather
confusing in terms of its nature and virtues. The focus of CSR is typically on what
companies do that is beyond the law’s requirements, so that CSR may encompass
both internal and external aspects. Internal aspects include corporate management
policies and processes to ensure that the operation of companies is socially respon-
sible and ethical, while external aspects focus on initiatives that contribute to the
improvement and integrity of the communities within which businesses operate.24
From the school of voluntarism,25 corporate leaders and practitioners argue that
CSR should not be regulated because regulation would stifle innovation and
damage national competitiveness,26 and the necessity of regulating CSR is
questioned due to the causation of socially responsible behaviour and companies’
awareness of the financial benefits of these decisions based on the business case for
CSR.27 These voluntary initiatives towards CSR are described as the business case
for CSR, which benefits companies in terms of their long-term respectful corporate
relationship with stakeholders. CSR is regarded as a corporate discretionary activity
that benefits the community and is external to the core business of the company.
CSR goes hand in hand with appropriate financial management, because unethical
corporations tend to be unsustainable in the long run.28 The idea is that a reputable
record on CSR and governance will generate long-term interests for shareholders,
and also make investors believe in the likelihood of financial returns by pursuing
social, environmental or community goals and agendas.
On the other hand, a number of other factors make the characterisation of CSR as
a purely ‘voluntary’ concept a misleading one.29 These factors include the prolif-
eration of forms of corporate social conscience through CSR standards, customary
and soft law norms, international best practice standards, and direct contract-like
understanding between companies and their stakeholders. Of course, the awareness
of corporate sectors, government and NGOs also challenges the voluntary nature of
CSR. At the level of national legislations, the term CSR has been explicitly
embedded in the national company law legislation.30 The advantage of a regulatory
23
Genasci and Pray (2008), p. 41.
24
Drumwright (2014), pp. 91–92.
25
Moon (1995) and Porter and Kramer (2006).
26
Zerk (2006), p. 33. The European Commission initially proposed the voluntary character of CSR
in its 2001 Green Paper, stating that corporations will be keen to develop their strategic manage-
ment policy and collectively to raise the bar for industry in general, instead of being regulated. See
European Commission (2001).
27
See Vogel (2005) and Carroll and Shabana (2010).
28
Hopkins (2003).
29
Kerr et al. (2009), p. 535.
30
Such as Chinese Company Law 2005, Art. 5 which states that ‘a company must, when engaging
in business activities, abide by the laws and administrative regulations, observe social morals and
126 J. Zhao
focus on CSR will enable corporations to ‘want to do what they should do’.31 It is
observed that a shift has emerged in CSR deliberations away from voluntarism. An
alternative trajectory towards a greater appreciation and a wider acceptance of the
belief that the law completes the understanding of CSR is built.32 Disagreeing with
both schools, Kerr et al. thought that debate setting the mandatory regulation of
CSR against voluntary corporate rulemaking is ambiguous. Here, it is suggested
that corporations should be encouraged to engage in CSR activities through
‘enforced self-regulation in the shadow of the law’.33 However, I do not see
much difference between this approach and a voluntary approach guided by soft
law. I agree with Bakker and Richardson that, in order to address the limitations of
voluntary initiatives in urgent CSR issues such as environmental problems,34
embracing CSR at the level of both legal compliance and actions beyond compli-
ance is essential.35 The legal recognition of CSR is regarded as an expansion of the
scope of the legal licence as a result of integration between the legal licence and the
social licence, thereby resulting in social pressures on legislators and regulators to
enact, monitor and promulgate CSR obligations through law.36
Second, going one step further regarding the failure of voluntarism, the lack of
enforceability in the legislation is a fact that receives the most criticism in the
current legislative approaches to addressing CSR issues. Some provisions were
introduced without corresponding approaches to implementation. Article 5 of the
Chinese Company Law 2006 states that a company ‘must . . . undertake social
responsibilities’ and ‘observe social norms’. The section has unclear legal effects
without effective enforcement measures. Section 172 of the UK Companies Act
sets out to require directors, in a rather vague way, to ‘have regard to’ the ‘interests’,
‘needs’ and ‘impact’ of various stakeholders. A ‘comply or explain’ approach was
adopted in the Indian Companies Act,37 which is regarded as a mismatch with
weaker enforcement effects at the soft law level.38 It may lead to directors’
business ethics, be in integrity and good faith, accept regulation of the government and the public,
and undertake social responsibilities’.; Sect. 135 Indian Companies Act 2013; Sect. 50 L (1) Mau-
ritian Income Tax Act 1995; and in similar but more detailed terms such as ‘Social and Environ-
mental Responsibility’ in Art. 74, the Law of Republic of Indonesia No. 40 2007 concerning
Limited Liability Company.
31
Selznick (2002), p. 102.
32
Bendell (2004), p. 30.
33
Kerr et al. (2009), pp. 503–510.
34
See Bakker and Richardson (2013), p. 51.
35
Gunningham (2007), p. 476; Babiak and Trendafilova (2011); Morgera (2012); Sjåfjell and
Anker-Sørensen (2013), p. 5.
36
Buhmann (2016), pp. 701–702.
37
Sect. 135 (5) Indian Companies Act 2013 states that ‘the Board shall, in its report . . ., specify the
reasons for not spending the amount’ that the company is expected to spend towards CSR activities
as prescribed under this legislative provision.
38
Zhao (2017), pp. 130–131; see also Bhaduri and Selarka (2016). The effectiveness of the
‘comply or explain’ principle itself has been questioned in terms of its application to corporate
decisions being made only after a formal box-ticking exercise, which in turn could
lead to an increased administrative burden but no substantive change in directors’
behaviour39 and no remedies for stakeholders. These provisions do no more than
create explicit discretion for directors to sacrifice profits while exercising their
business judgment as to the best interests of the company in the long term. They
give directors permission to respect and respond to social norms in a general
manner.
In order to make the contribution certain and profitable in a quantitative manner,
some countries have introduced a quantitative requirement in CSR law. The
Mauritian approach made CSR mandatory by asking companies to ‘set up a CSR
Fund equivalent to 2 per cent of its chargeable income of the preceding year to
implement a CSR Programme in accordance with its own CSR framework’,40 a
feature directly transplanted in the Indian Companies Act 2013.41 However, these
laws are subject to potential problems, such as generating corruption.42 Even with
the quantitative requirement for CSR contribution, it is difficult to make CSR law
enforceable due to the complexity of corporate affairs and corporate decisions in
the context of balancing multiple stakeholders’ interests. In addition, the two per
cent requirement misrepresents the scope of CSR, limiting it to philanthropic
responsibilities after profits have been made, rather than being socially and envi-
ronmentally responsible while profits are being made. Partially due to the compli-
cated nature of the CSR issues and challenges themselves, legislative attempts are
seen as ambiguous and equivocal. It seems there is a need for participation and
engagement from stakeholders to make their needs more explicit, organised and
tangible.
Despite the fact that CSR challenges have been addressed at national and
international levels through public enforcement, different approaches have been
used to make the promotion of more ethical corporations feasible and enforceable.
Embedding CSR in legislation is regarded as an attempt to respond to crises and
scandals. However, including CSR in corporate law or progressive company law
legislation has generated a number of problems in terms of enforceability and
clarity. Furthermore, and most importantly, neither soft nor hard law approaches
have brought about significant changes in CSR practice in jurisdictions where they
governance codes; see European Commission (2011); Keay (2014); Soltani and Maupetit
(2015), p. 259.
39
Chivers (2007), pp. 6–7.
40
Sect. 50 L (1) Income Tax Act 1995: a ‘CSR programme’, according to Section 2 means ‘a
programme having as its objects the alleviation of poverty, the relief of sickness or disability, the
advancement of education of vulnerable persons or the promotion of any other public object
beneficial to the Mauritian community’.
41
Sect. 135 Indian Companies Act 2013; the government shifted responsibility to corporate
sectors, and it is estimated that the law will cover about 3000 companies in India and about $2
billion per annum of expenditure on CSR activities related to social welfare initiatives. See Ernst
and Young (2013a, b).
42
See Afsharipour, Chap. 5 in this volume.
128 J. Zhao
have been implemented. CSR, as a pragmatic term, may need further clarification
and scrutiny to make it fit well within company law legislations, in particular
exploring the possibilities of getting various stakeholders involved. While the
notion of CSR in itself has been used in a very broad and diverse manner, it has
been interpreted and adopted for many different reasons and aims. While increasing
numbers of organisations and scholars are seemingly embracing, discussing and
investigating CSR, the incidence of corporate scandals and irresponsible corporate
behaviour continues to grow.43 Multiple applications and different interpretations
of the nature and scope of the term make the notion quite a vague one, and restrict
its application both as an analytical tool and as a guide for decision-makers.44 The
necessity of developing such a term is becoming even more urgent after the
Financial Crisis of 2008 (FC). Hard law regulatory proposals always follow in the
wake of crises of various sorts.45 While the FC casts doubt on the effectiveness of
corporate self-regulation, voluntary initiatives and collaborative governance46 in
and through CSR, it may be an opportunity to revisit the term and explore the
possibility of developing the notion, especially in the context of using the term in
corporate law to address problems such as lack of accountability and the tyranny of
short-termism.47
3 The Notion of Board Accountability and the Wenze

System
It has been argued, at least from the Anglo-American corporate governance per-
spective, that accountability entails a process involving several stages.48 Before
considering these stages it must be recognised that for accountability to occur,
boards (the accountors) need to accept responsibility for their actions or inactions.49
Rather than necessarily leading to any action, an acceptance of the need for board
members to be accountable is an attitude that should exist within boards. Account-
ability in the context of corporate governance does not just convey a simple single
meaning. Two interrelated broad responsibilities are described as components of
board accountability, including directors’ duties to undertake certain actions and
43
Gray et al. (2014), pp. 48–49.
44
Blowfield and Frynas (2005), p. 503.
45
Utting (2008), p. 95; for example, the Oil Pollution Act 1999, the Sarbanes-Oxley Act 2002, the
Dodd-Frank Wall Street Reform and the Consumer Protection Act 2010.
46
For more discussion of collaborative governance, see Zadek (2006).
47
See de Bruin (2015), Ducassy (2013), Lins et al. (2017), Pirson and Turnbull (2015), and Soltani
and Maupetit (2015).
48
See Keay and Loughrey (2015).
49
Canadian Democracy and Corporate Accountability Commission (2001), p. iii.
the duties to provide an account of these actions.50 Keay and Loughrey claimed that
there are four stages involved in the notion of board accountability.51 The first stage
is the board’s responsibility to provide accurate information concerning its deci-
sions and actions. The second stage involves a board explaining and justifying the
issues for which it is responsible, including what it has done and what it has failed to
do, and why.52 The third stage is constituted by the questioning and evaluation of
the board’s given reasons for what has been done. The fourth and final stage is that
there is the possibility, but not the requirement, of the imposition of conse-
quences—and this may involve negative consequences.53 From the discussions of
the four stages of accountability, this notion of accountability implies obligations as
opposed to simple responsibility, with such obligations including penalties for
non-compliance, as opposed to impunity or damage to corporate reputations
alone.54 Beyond board responsibilities, board accountability can be interpreted as
corporate control with clear implications for sanctioning failure.55
Related to the theme of this study is a concern to examine the notion of board
accountability with a view to the common good for the wider community. The
wider objective of board accountability is to hold powerful corporations, especially
multinational companies, to account and to promote the ideals of democracy,
fairness, responsiveness and transparency. While much of the accountability liter-
ature related to CSR has focused on the stakeholders’ rights and forms of disclo-
sure, there is a need to examine the boards’ responsibilities and mechanisms for
rendering accountability for corporate actions. The laws, which regulate specific
stakeholders such as employment law or consumer protection law, lay down the
rights, responsibilities, and legal accountability at a minimum level. However, it
would be impossible to satisfy the demands of accountability from these disparate
stakeholders if accountability is left to legal forces at a minimum level and
voluntary initiatives alone, with little lasting or substantive impact on directors’
decisions.56 The fiduciary duties of the board require directors to use good judg-
ment and make long-term decisions for the company with reasonable skill and
care.57 Corporate law offers a real normative opportunity to address irresponsible
corporate behaviours by creating legal requirements for disclosure, questioning,
50
Gray et al. (2014), p. 51.
51
Keay and Loughrey (2015).
52
This is consistent with the ‘answerability’ element of accountability, with the board being
answerable for what they have decided and done; see AccountAbility (1999), p. 8.
53
Negative consequences could involve sanctions, perhaps the removal of one or more directors, or
the decision not to re-elect a director when his or her term comes to an end. Of course, it could also
constitute positive consequences, such as rewarding the directors by giving them bonuses.
54
55
Follesdal (1998), pp. 34–98.
56
Gray et al. (2014), p. 53; see also Tinker et al. (1991).
57
See Harvard College v Amory (1830) 26 Mass (9 Pick) 446; Parks of Hamilton Holdings Ltd v
Campbell (2014) CSIH 36, (2014) SC 726; Miller v Stonier (2015) EWHC 2796 (Ch); see also
Smith (2014), p. 608; Shattuck (1951), p. 491; Schanzenbach and Sitkoff (2016).
130 J. Zhao
dialogue and liability. The notion of board accountability should go beyond legal
accountability embedded in laws regulating corporate actions towards specific
stakeholders such as employment law to accommodate the dynamic and variable
nature of stakeholders’ needs, to avoid irresponsibility and make boards answerable
for their faults and misbehaviours. This accountability notion, with corporate
objectives that include the wider community, seeks to hold companies and boards
accountable when their behaviour results in poor social and environmental out-
comes, aims to empower victims of socially and environmentally abusive practices
to seek redress, and encourages legislators to consider the adoption of more
stringent regulations to hold companies and board members legally liable for
damages to stakeholders.58
With one of the goals of this chapter being to address the scenario in China, it is
crucial to discuss the most consistently and comprehensively matching Chinese
term for the notion of board accountability in China. The English word ‘account-
ability’ is not easily translated into different languages. Over time several Chinese
words have been used to translate accountability,59 and a number of Chinese words
have been translated as accountability in English language documents. It can be
seen from these documents that in corporate governance codes, government policy
papers, CSR reports, corporate governance reports and corporations’ reports, the
term ‘accountability’ has been used to represent a number of different Chinese
words or phrases. The following Table 1 represents these words in Chinese—the
same words in Chinese pinyin (a transliteration of the Chinese words into the
English alphabet). Their translation is based on one of the most often officially
used dictionaries, A New Century Chinese–English Dictionary (‘the dictionary’).60
Among the various Chinese translations of the term of board accountability in
the context of corporate governance, it has been argued61 that wenze is the most
appropriate. Keay and Zhao have noted that when combined with zhi we have a
term that can be translated as ‘board accountability system’.62 Chen contends that
wenze zhi is a system implementing balanced rights and responsibility mechanisms
via an institutionalised questioning process.63 He describes the wenze system as one
that clarifies and balances rights and responsibilities through a systematic enquiry
process in order to minimise risks from the actions of internal management.64 He
also discusses the key components of wenze zhi, which include clear responsibili-
ties, a solid legal basis rather than sole reliance on administrative documents, fair
distribution of power, and a system that matches responsibilities to liabilities.65
58
59
See Keay and Zhao (2016), pp. 689–695.
60
Editing section of Modern Chinese-English Dictionary (2011).
61
Keay and Zhao (2016), pp. 689–695.
62
Ibid.
63
Chen (2004); see also Chen and Chen (2004).
64
Chen (2004).
65
Mao (2005), p. 48.
Table 1 Chinese translations of ‘accountability’ into English

Chinese Chinese pinyin English translation
责 (责任) ze or zeren Duty, responsibility
责任追究 zeren zhuijiu Investigate or look into who is responsible
责任追究制度 zeren zhuijiu zhidu Accountability system (with emphasis on liability)
责任管理 zeren guanli Responsibility management
负责 Fuze To be responsible for
负责制 fuze zhi Responsibility system
问责 wenze Accountability (with an emphasis on enquiries)
问责性 wenze xing The nature of accountability (with an emphasis on
enquiries)
问责制/问责机 wenze zhi/wenze Accountability system (with an emphasis on enquiries)
制 jizhi
In one of the most influential newspapers in China, the People’s Daily (人民日报
Renmin Ribao), it has been argued by Professor Li Wei’an, one of the most eminent
Chinese scholars in the field of corporate governance, that the key issue in promot-
ing corporate governance is wenze66 and ‘real wenze in corporate governance’ is a
process of ‘collective decision making with individualized accountability’.67 Wang
and Li emphasise the importance of imposing punishment where directors are not
being accountable to the company.68 Despite the fact that wenze does not reflect
every aspect of board accountability as identified earlier, it is the Chinese term that
comes closest to the understanding of accountability as it applies in Anglo-
American systems and in international documents such as the G20/OECD’s Prin-
ciples of Corporate Governance.
The concept of a wenze system provides an opportunity to develop wenze in a
manner that tends to promote accountability in companies that can be, to a large
degree, in line with the Anglo-American understanding of board accountability and
which will benefit the development of the Chinese corporate governance system as
an economic model. Unlike the essence of wenze itself, the wenze system could
include dimensions with a rather wide scope relating to a process of balancing
rights and responsibilities through enquiry and disclosure. As suggested above, the
broad scope of the wenze system seems to come close to covering the four stages of
board accountability discussed in the previous section of this chapter, and arguably
extant in some Anglo-American systems. This system could include dimensions
with a rather wide scope relating to a process of balancing rights and responsibil-
ities through enquiry and disclosure. The system requires directors to be account-
able to the company and it includes, in a logical order, the following three broad
dimensions: the directors being responsible and exercising due diligence (“jinze 尽
66
Li (2008).
67
Li (2008), p. 5; the Chinese version of the article used the words ‘geren wenze 个人问责’ to
express the idea of individualised accountability.
68
Wang and Li (2010), pp. 110–111.
132 J. Zhao
责”or “l€ uze 履责”); directors clarifying and providing information concerning their
responsibility and setting standards, explaining, analysing and justifying the
responsibility they have been given (“mingze 明责”); and “wenze” in a narrow
sense, focusing on enquiry relative to the actions of the accountor (“wenze 问责”).
It is unlikely that China will embrace exactly the same concept or form of board
accountability as that applying in other systems around the world. The reason is that
China’s corporate governance system is different, and a unique form of account-
ability should develop to address the needs of corporate governance in China and
the fostering of its listed companies. The realisation and enforcement of the process
of “wenze” does imply these dimensions, and these three related aspects have been
practically and widely used to explain the wenze system. A good example is that the
accountability issue is emphasized in the Guidelines for the Internal Control of
Recommendations for Business drafted by the CSRC, which put forward require-
ments in relation to systems concerning due diligence, working papers, work
diaries, internal examinations and continuous inspections as specified in the Mea-
sures for the Administration of Securities Issuance and Listing Recommendations
for Business.69 The accountability system is introduced through three components
and dimensions including “mingze (明责)”, “jinze (尽责)” and “wenze (问责)”.70
4 Scope and Goals of CSR and Board Accountability,

and the Notion of Corporate Social Accountability (CSA)
Progress in CSR (for example in relation to climate change or alternative energy

issues) has been challenged by the FC with severe ramifications for poverty,
equality, access to food, weather and energy.71 Former US President Obama
attributed the crisis to ‘an era of profound irresponsibility that stretches from
corporate guardrooms to the halls of power in Washington DC with too little regard
for risk, too little regulatory scrutiny and too little accountability’.72 The FC is
closely related to notions of lack of accountability, particularly board accountability
to make corporate decisions more transparent, diverse, well-informed and long-
term oriented. While it may make sense to cut back on CSR initiatives and laying
off CSR costs post-FC, a more prudent response would be to take this as an
opportunity to work even harder to strengthen CSR-related regulations and imple-
ment sound CSR principles.73 Therefore, this discussion on an ‘upgraded’ CSR
69
Guidelines for the Internal Control of Recommendation Business (保荐业务内部控制指引)
www.csrc.gov.cn/.../P020110621654377810539.doc (accessed on 4th November 2014).
70
Section 5 (3) Guidelines for the Internal Control of Recommendation Business (保荐业务内部
控制指引).
71
Kerr et al. (2009), p. 590.
72
73
Kerr et al. (2009), p. 591; see also Theofilou et al. (2016); Dias et al. (2016); Fehre and
Weber (2016).
notion, namely CSA, would be an appropriate way to take this opportunity for
companies to address CSR problems in a more serious manner and possibly give
stakeholders greater voice and, potentially, remedies at their disposal. In order to
establish a more solid understanding of CSA, attempts will be made to link CSR
with board accountability. The notion of board accountability gives a fresh per-
spective to explore and upgrade CSR, while contemporary reactions to CSR have
‘certainly added fuel to the activism associated with corporate accountability’.74 In
particular, I explore the scope and goals of CSR and board accountability.
In terms of the scope of CSR and board accountability, the two notions can be
linked under the concept of stakeholder accountability, which recognises that
‘social and environmental transparency, verification and accountability may be
equally important for the long-term sustainability of companies’.75 Shearer and
Messner argue in favour of broadening the scope of corporate accountability
beyond purely economic and financial ends in order to embrace social and
non-economic goals.76 If CSR is a dynamic, constantly and historically varying
concept as described by Campbell,77 these dynamic characteristics should likewise
apply to the understanding and broadening of the concept of board accountability
due to the fact that the legitimacy and urgency of stakeholders’ claims may change
over time. This broadening of ‘board accountability may be multiple’, and ‘these
accountabilities may not be mutually exclusive but may be mutually reinforcing’.78
Therefore, a wider understanding of board accountability is consistent with the
dynamic nature of CSR, including the promotion of CSR by reinforcing stakeholder
accountability values through employee participation or via building additional
sustainable relationships with other stakeholders.
This brings us to the goals of board accountability and CSR. CSR plays a dual
role; in a preventative manner, it deals with minimising the impact of corporate
misconducts that harm society, the environment or corporate decisions; and in a
positive and active manner, it incorporates a vast array of philanthropic corporate
activities and pro-stakeholder undertakings.79 The goal of regulating CSR in
corporate law, which is the emphasis here, is to make these long-term ethical and
philanthropic goals not just symbolic window-dressing. As for the goal of board
accountability, the primary and overarching goal of the notion is to ensure that there
is an enhancement of good corporate governance.80 Keay has contended that board
74
75
McLaren (2004), p. 192.
76
Shearer (2002) and Messner (2009).
77
Campbell (2007); see also Carroll (2008), p. 19; Kinderman (2012).
78
Collier (2008), p. 951.
79
This is especially the case in developing countries, to enhance corporate reputation, culture and
image.
80
Australian Parliamentary Joint Committee (2008).
134 J. Zhao
accountability has multiple functions including enriching the board, enhancing

efficiency, benefiting the public and pre-empting the need for greater regulation.81
There is an ethical dimension to the role of accountability in corporate governance,
and a need to develop an ethical theory to provide a framework for the analysis of
accountability, elaborating and explaining the role and emergence of accountability
as a social phenomenon.82 Board accountability is seen as a preferential strategy
that should be applied to provide solutions to policy and social problems, including
CSR-related issues.
The movement from CSR to CSA, at least in the domain of corporate law,
expands the terrain where the voluntary and mandatory/legalistic approaches
merge, in a hybrid form, to become complementary and systematic.83 Going
beyond the debate about the voluntary versus mandatory nature of CSR, broader
terms such as institutional complementarity,84 regulatory frameworks,85 articulated
regulation86 or the meta-regulation approach of law87 are proposed in order to
establish an enabling legal environment for CSA and the enforcement of CSR
through voluntary and non-voluntary mechanisms. A broader coalition and network
are needed to facilitate and promote progressive institutional changes by potentially
identifying allies within state and business circles.88
The existing discussions on CSA are limited to information disclosure through
formal narrative corporate reporting as a focus of contemporary accounting
research and practice.89 Traditional research on CSA emphasises the importance
and functions of mandatory reporting for the promotion of CSA.90 Such research
uses CSA as a term for imposing disclosure requirements on CSR issues in order
that companies take CSR seriously,91 as a system of social reporting, social
accounting and social auditing,92 or as a term that that equates CSA to socially
responsible disclosure.93 Coming from a different angle, I am seeking to
reconfigure CSA as a system with clear stages that is able to provide a regulatory
environment, a rationale and incentives for compliance, while approaching
reporting and disclosure as only one stage of the mechanism. A CSA system with
richer scope regards relevant information as one of the prerequisites to facilitate
81
Keay (2015), p. 109.
82
Dubnick (2013).
83
Utting (2010), p. 181.
84
Boyer and Hollingsworth (1997).
85
Zhao (2017).
86
Utting (2006), p. 53.
87
Rahim (2005).
88
Utting (2008), p. 120.
89
Schweiker (1993), Sinclair (1995), and Messner (2009).
90
Cooper and Owen (2007).
91
Owoeye (2015).
92
Filios (1985).
93
Gupta (1995).
accountability as discussed by Bovens.94 An expanded notion of CSA will be

helpful in elucidating the nature and scope of board accountability, in terms of its
wider roles of addressing social and environmental issues and being accountable to
stakeholders. This is a broad view of board accountability, in which there could be
as many bottom lines beyond people, plant and product as there are stakeholders,
with significant inter-relationships between them.95 In other words, if the purely
voluntary efforts of companies in promoting CSR are not adequate and do not lead
to sustainable development of the socio-economic system and socially accountable
corporate behaviours, CSA will give CSR some teeth by regulating corporate
behaviours, compensating wronged stakeholders and empowering stakeholder
groups.96
CSA would enable boards to shape their CSR strategies to be enacted through
action, and may act as an inclusive approach. In addressing social and environmen-
tal problems, CSA requires the board to be accountable to those who have an impact
on the companies as well as those who are impacted by companies’ decisions. CSA
upgrades the notion of CSR in the domain of corporate law in a few key ways. The
CSA mechanism may involve communication with stakeholders, meeting stake-
holders’ needs through communication and consultation and seeking their involve-
ment in the decision-making process.97 This communication should enhance the
sensitivity of the board to stakeholder demands. It should be emphasised that not all
stakeholders are concerned only with their own interests, and the board should
consider the diversity of stakeholders’ needs.98 Stakeholder dialogues also enable
corporate decisions to withstand a greater degree of stakeholder scrutiny.
While responsiveness is a commitment of accountability to stakeholders in
relation to CSR policy, process and performance,99 it is also important for stake-
holders to have their voices heard when boards make decisions through stakeholder
dialogues and stakeholder engagements. Moreover, in terms of the imposition of
liabilities and sanctions, the notion of CSA is particularly relevant to irresponsible
directors as business organisations should be accountable to those they affect,
predominantly those who are negatively affected by corporate actions and deci-
sions.100 This is particularly relevant due to the fact that many jurisdictions have
already adopted CSR law, either implicitly or explicitly.101 It will then be logical to
expect the board to recognise the legitimacy of making socially responsible
94
See Bovens (2007, 1998).
95
Pava (2011), pp. 48–49.
96
Utting (2013), p. 171.
97
Demirag et al. (2005).
98
For example, 87% of global consumers believe firms should place equal weight on business and
society, and should deal with elementary concerns in a balanced manner. See Edelman
Goodpurpose (2012).
99
Mason and Simmons (2014), p. 84.
100
Bendell (2005), p. 372.
101
Zhao (2017), p. 107.
136 J. Zhao
decisions at the cost of short-term profit, and to be responsible and liable for the
social, environmental, and legal consequences of engaging in irresponsible corpo-
rate decisions.
Despite the fact that we could move this task to the CSR committee, the greatest
limitation of CSA rests in the directors’ discretion in balancing various stake-
holders’ interests. The board’s CSA efforts may be limited by its predisposition to
only really satisfy the needs of dominant and primary stakeholders.102 The scope of
social, environmental, and human rights-related problems is very wide, which
makes it difficult and a sensitive issue to prioritise social problems. This unpoliced
discretion makes CSA uncertain. It is neither realistic nor desirable to expect a court
to sit in judgment on whether company directors have struck what the court
considers to be an appropriate balance,103 since the disadvantages of a process in
which judges are required to review complex issues of business judgement104 in
terms of uncertainty, disruption, and direct legal costs would undoubtedly outweigh
the benefits.105 In order to avoid these consequences courts will only ask whether
the directors honestly believed their decisions would achieve an appropriate bal-
ance, rather than asking whether a course of conduct was in the interests of the
company.106 When Evan and Freeman tried to explain how to balance the interests
of various stakeholders, they argued that it is up to managers to decide which
‘normative core’ they will use for their particular corporation.107 Directors are
responsible for interpreting as well as implementing a balance in the interests of
their stakeholders when enforcing CSA mechanisms, and they remain free to pursue
their own arbitrary ends.108 Directors lack guidance regarding the scope of their
authority, principles and the values that they should follow in order to shape CSR
and their decisions. The question of the extent to which the interests of the company
as a separate legal entity may influence recognition and even resolve externally is
very a dynamic one, to which it is extremely difficult to give a definitive answer.
Scholars argued in favour of the end of the history of corporate law,109 but a clear
answer is difficult to give in either direction, whether towards shareholder value
creation or certain stakeholder ends.110
102
Oakes and Young (2008), p. 765; see also Afsharipour, Chap. 5 in this volume.
103
Parkinson (2002), p. 50.
104
See Arsht (1979), Bainbridge (2004), and Smith (2015).
105
Parkinson (1998).
106
Accordingly, as Lord Wilberforce has explained in Howard Smith Ltd v Ampol Petroleum Ltd,
‘there is no appeal on merits from management decisions to courts of law: nor will the courts of
law assume to act as a kind of supervisory board over decisions within the powers of management
honestly arrived at’; see Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 at 832, [1974]
All ER 1126 at 1131.
107
Evan and Freeman (2001), pp. 108–109.
108
Sternberg (1997), p. 5.
109
See Hansmann and Kraakman (2001), p. 439; Winkler (2004), p. 109.
110
Veldman and Willmott (2016) and Veldman et al. (2016).
It has been suggested that the content and procedures of a wenze system in the
context of corporate governance will be able to facilitate an effective board
accountability mechanism for China—for example, providing investors with the
means to access more comprehensible information, make enquiries, and assess the
actions of the board of directors and senior managers in order to hold them
accountable for their decisions and actions. The scope of accountees could be
enlarged in the wenze system to include stakeholders such as creditors and
employees, who are involved in the corporate management accruing to corporate
law through supervisory boards and work councils.111 Although this wenze system
has not been introduced in either legislation or the corporate governance code thus
far, it has been argued that it could be introduced into either or both to good
effect.112
Accountability is clearly not a concept limited to corporate governance. In
China, political reforms involving the introduction of an accountability system
were introduced so as to make government officials more responsive to societal
demands and more accountable for their performance as civil servants. In relation to
corporate governance, it is recognised that in Chinese listed companies, directors’
rights and responsibilities need to be clarified in order to make their enforceability
more credible. This makes the notion of a wenze system very attractive for devel-
oping the notion of CSR in China. The professionalism and competitiveness of
Chinese directors on boards have been questioned, and reforms through corporate
governance mechanisms and corporate law changes have been recommended.113
These problems are widely recognised in China and especially for directors
of SOEs.
A wenze system may be regarded as a concept that should be adopted in relation
to Chinese corporate governance, to enable China to develop its own unique
accountability system based on a constantly changing and unique corporate gover-
nance model, and reflect the fact that the development of its corporate governance is
affected by path dependence. This would also help China to develop a more
operative CSR mechanism that could be logically embedded in Chinese Company
Law. It is equally important for the enhancement of greater transparency and
accountability in companies generally. Key questions around this include how it
may be possible to enforce hard law on CSR, which has voluntary roots in China,
and furthermore, how China can build an efficient regulatory framework to promote
CSR as an effective policy to benefit stakeholders by enhancing board accountabil-
ity. In line with the process of economic reform and the implementation of the
opening up process, the transition of the Chinese corporate governance model has
produced a hybrid model with both administrative and economic dimensions. These
two elements of governance are expected to co-exist and develop to provide
111
See Article 14 and Article 17 of Chinese Company Law 2006.
112
Keay and Zhao (2016).
113
See Chun (2009), Yang et al. (2011), Rajagopalan and Zhang (2008), Cheung et al. (2008),
Sami et al. (2011), Miles and Zhang (2006), Li (2013), and Xu et al. (2013).
138 J. Zhao
equilibrium in China over a long period.114 In a corporate governance model with

administrative characters and involvement, it is logical to transplant the notion of
wenze or a wenze system in the domain of corporate governance and CSR, even
though the notion is more often discussed in relation to administrative law or
administrative management in the current Chinese literature.
5 CSR in China and the Gongsi Shehui Wenze Zhi
CSR is a topic that has been discussed by Chinese scholars from various disciplines
including law, especially the corporate law area. However, the sincerity and
enforcement of CSR have been a highly controversial issue, especially in countries
with emerging markets such as China.115 CSR-related social and environmental
problems in China are urgent, controversial and thorny issues. The embedding of
CSR into Chinese corporate strategic management policies, corporate governance-
related codes and regulations and corporate law is the result of external pressure
from multinational corporations, in combination with internal pull factors from the
modernised role of State Owned Enterprises (SOEs) and a strong civil society with
more demanding consumers, suppliers, and local communities.116 In terms of
regulating CSR, China’s laws and soft laws including a corporate governance
code or regulations issued by the stock exchanges neither provide guidance on
how to apply CSR regulations in practice by giving detailed enforcement measures,
nor set out the proper priorities when CSR is in conflict with shareholder interests.
Actual practice will depend heavily on directors’ discretion. Various reasons could
explain this including limited public awareness and understanding and poor law
enforcement in China in general. The development of Chinese Company Law from
1993 to the recent revision in 2014 has been a process of legal response to changes
and adaption to reality, such as shareholding structure changes, government eco-
nomic policies, economic development and the role played by corporations
including SOEs.
Most distinctively, government power and interference have played a vital role
in China, as a country that historically relied on administrative governance with
four decades of a planned economy, in terms of the process of legal reform.117 The
advancement and enforcement company law legislation are also heavily affected by
the political economy in China.118 A research report was published by a Chinese
legal publishing house in 2005 entitled ‘A Research Report on the Amendment to
Company Law’.119 The editors compiled and collected opinions from corporations,
114
See Li et al. (2012).
115
See Li et al. (2010) and Uzma (2016).
116
Zu (2009), pp. 44–50.
117
Zhao (2016); see also Clarke (2016a, b), Boubaker et al. (2012) and Firth and Rui (2012).
118
See Weng (2012).
119
Cao et al. (2005).
experts and the public, which were taken into account in the legislative process.
Regarding the opinion of the public, a group of delegates from the National
People’s Congress in Shanghai suggested the inclusion of CSR in the new company
law, proposing that ‘in addition to protecting shareholders’ interests, companies
should also consider other social interests such as the interests of employees,
consumers, creditors, local communities, the environment, socially disadvantaged
groups, and the general public’.120 Moreover, delegates from the National People’s
Congress in Guangdong Province proposed that the new company law should
include a section defining the relationships between corporations and their stake-
holders.121 Company stakeholders were defined and explained in Volume 2 of the
report, alongside some measures that were proposed to protect their interests in
Chinese Company Law 2006.122
With support from various sources, the legislators finally decided to incorporate
CSR into Article 5 of the new Chinese Company Law of 2006 which states that ‘a
company must, when engaging in business activities, abide by the laws and
administrative regulations, observe social morals and business ethics, be in integrity
and good faith, accept regulation of the government and the public, and undertake
social responsibilities’. At the most basic level, companies are required to abide by
the law and regulations when they try to make profits. It is implied in Article 5 that
apart from the interests of shareholders, employees and other stakeholders, the
performance and activities of the company have a deep impact on the economic
rules of the marketplace, and also on public social interests. Therefore, when
company directors and supervisors pursue the interests of their shareholders, they
also have to be socially responsible to internal and external stakeholders.
Moreover, according to Article 5, corporations are legally required to observe
social, moral and business ethics and undertake social responsibilities. Compara-
tively modern terms such as ‘business ethics’ and ‘social responsibilities’ have been
introduced in the general provisions of Chinese corporate law for the first time. This
corporate responsibility goes beyond economic and legal responsibility, introduc-
ing a level of social and philanthropic responsibility. In addition to Article 5, which
gives directors legitimacy in considering stakeholders’ interests, the rights of
employees were also emphasised in the new Chinese Company Law,123 which
may help to illustrate the philosophy underlying Article 5. Moreover, as far as
legislative tenets are concerned, it is stipulated in Article 1 of Chinese Company
Law 2006 that this legislation was enacted in order to ‘standardise the organisation
and activities of companies, to protect the legitimate rights and interests of com-
panies, shareholders and creditors, to maintain socio-economic order and to pro-
mote the development of the socialist market economy’.124 The interests of
120
Cao et al. (2005), pp. 13–30.
121
Cao et al. (2005), pp. 13–30.
122
Cao et al. (2005), pp. 68–78.
123
Art. 17, 18, 52, 117, 118, 126 Chinese Company Law 2006.
124
Art. 1 Chinese Company Law 2006.
140 J. Zhao
creditors as primary stakeholders were explicitly mentioned in this Article, along

with the interests of shareholders and the company itself.
Despite the modernised aspects considered by the reforms embodied in the
Chinese Company Law 2006, it is argued that amending existing law and enacting
new laws are not sufficient to meet the needs of business relationship in China to
make China into a competitive and attractive place for investment on a global
scale.125 The legislation and regulations regarding business relationships and com-
mercial transactions still suffer from a lack of clarity and consistency in relation to
other regulations, which makes laws imported into China from developed Western
jurisdictions difficult to enforce in order to satisfy the domestic political agenda.126
Judging by the enforcement of Chinese Company Law in China over the last ten
years, the CSR law in China is essentially ‘window dressing’ with no substantial
application by law-users. The CSR law has done little to change the public and
directors’ attitude towards CSR, especially with regards to making CSR an embed-
ded corporate strategy, or establishing a CSR culture. Challenging CSR issues,
including environmental pollution, human rights and corruption as three major
categories, have become acute in China due to the weak regulatory framework
(against unethical corporate behaviour) and lack of CSR practice.127 Although it is
already very positive that the government is making initial efforts to realise the
importance of corporate social responsibility and make it legitimate for directors to
consider their responsibility beyond shareholder value maximisation, it is still
important to identify the approaches by which the Chinese government may enforce
these rules. The search for a more enforceable and more applicable notion with rich
stakeholder engagement and stakeholder participation is key for identifying the
approaches by which the Chinese government may enforce these rules.
In this process of adoption and adaption, it is fair to say that the notion of CSR
has been put forward as a legislative declaration in the corporate law which needs
further responses from other legislation. However, the understanding, application
and further development of a CSR culture is inconsistent, confusing and sometimes
misleading: for instance, some companies equate CSR with purely philanthropic
activities such as making donations; some companies regard CSR as a public
relations strategy to promote their corporate image; some companies claim that
CSR is limited to their legal obligations; and some argue that their CSR is purely
limited to their moral obligations. There are inadequate incentives in China for
companies that are proactive in CSR and a lack of punitive measures for firms with
irresponsible social and environmental behaviours. Institutional failures and cor-
porate scandals are often attributed to weak legal institutions, ineffective law
enforcement and a lack of government transparency.128 A common criticism is
that China’s ‘weak legal institutions are inexplicably inexcusable since China
125
Young et al. (2007), p. 204.
126
Young et al. (2007), p. 204.
127
Tian and Slocum (2016), pp. 1–4.
128
Goelz (2009), p. 168.
boasts length, breadth and depth in its legal tradition’.129 La Porta et al. claim that
enforcement of laws is more effective than having strong regulations.130 This is
particularly the case in China. Allen et al. also agree that inefficiencies in the
Chinese market can be attributed to poor and ineffective law enforcement.131
This is arguably reflected in CSR-related legislation. Therefore, it is important to
establish a notion that represents the social and environmental responsibilities of
the board and make CSR enforceable and stakeholders’ engagement and participa-
tion legitimate. This notion should also enable a system to function with reward and
punishment for pro- and anti- CSR behaviours. CSA, as described in the previous
section of this chapter, is competent to play this role and achieve the related goals.
Mirroring the notion of CSA, it may be logical to propose a new notion in China
through the lens of wenze zhi (问责制) to make the idea of CSR (gongsi shehui zere
公司社会责任) more enforceable and effective. In a linguistically accurate form,
the notion of gongsi shehui wenze zhi (公司社会问责制) may serve the purpose.
The gongsi shehui wenze zhi (公司社会问责制) is a mechanism that is closely
linked with aspects and stages of the wenze system. In detail, the mechanism is
composed of elements including xize (析责), with enlarged scope including infor-
mation on social, environmental and human rights related issues. This will lay a
solid basis for the stages of mingze (明责), zhize (质责) and for starting the process
zhengze (惩责) or baoze (褒责) either as rewards or the imposition of liabilities in
relation to CSR-oriented duties. Mingze (明责) will be applied to a wider audience
to include key stakeholders; zhize (质责) will be achieved through stakeholder
dialogue and communication, and chengze (惩责) or baoze (褒责) as the result of
socially responsible or irresponsible corporate conduct. A good way of imposing
zhengze (惩责) or baoze (褒责) is an online information publicity system. The
National Enterprise Credit Information Publicity System of China was introduced
as an online search engine for companies’ credit and a blacklist of companies that
act socially irresponsible or dishonestly. In addition to criminal, civil or adminis-
trative penalties to which board members may be liable, companies on the blacklist
will suffer from serious reputation damage. Gongsi shehui wenze zhi (公司社会问
责制), as a mechanism that is composed of different stages to enable companies to
discharge their social responsibilities in a systematic manner, will bring about a
culture of genuine corporate accountability where corporations, governments and
stakeholders pursue strategic goals together, so that Article 5 of Chinese Company
Law can be regarded more than just a guideline.
In terms of discussions on gongsi shehui wenze zhi (公司社会问责制), the scope
of a wenze system should go beyond passive responsibilities. The enforcement of
the CSR policies within the gongsi shehui wenze zhi (公司社会问责制) should
involve active participation from board members and stakeholders. For the former,
it involves ethically and philanthropically responsible with subsequent possibilities
129
Head (2007), pp. 58–59.
130
la Porta et al. (2008).
131
Allen et al. (2005).
142 J. Zhao
of being rewarded; and for the latter: it will require active involvement from
stakeholders in challenging the boards’ decisions enhanced by communication
between stakeholders and the boards, together with potential participation in the
process of decision making. With reference to this action-oriented gongsi shehui
wenze zhi (公司社会问责制), wenze has a strong implication of being “answer-
able” in the sense of responding to questions on how well or how badly the board
has carried out its responsibilities. The encouragement of active involvement from
stakeholders and the linkage between involvement, engagement and answerability
are particularly important in China due to its history and traditions. The concept of
“avoiding conflicts and litigations” is deeply rooted in people’s minds, based on the
belief of “turning big problems into small ones and small problems into no
problems at all”.132 In a social relationship like this, people sometimes choose to
tolerate problems even if their interests are jeopardised. Therefore, in the current
investment and legal environment, it is very hard for individual Chinese share-
holders to file a lawsuit in the interests of the company and other shareholders. Even
if they could, there remains the problem of their incentives to do so.
An additional issue worth exploring in the case of China is the issue of legisla-
tive objects, namely to those companies to which CSA-related legislation should
apply. Different legislative experiences have been adopted in jurisdictions in terms
of legislative objects such as profitable companies,133 listed companies,134 large
companies based on the criteria of number of employees or amount of all assets,135
SOEs,136 and certain CSR sensitive industries.137 Despite these criticisms and
attempts to alter the nature and governance of SOEs, SOEs continue to function
as a crucial part of China’s economy, carrying great economic weight in the
contemporary context. They are influential and have multiple corporate goals,
which make them a very good starting point for a CSA legislative approach. To
date over 150,000 SOEs are active at the national and local levels, with half the
listed companies under their control. These SOEs controlled more than $5.6 trillion
in assets including an astronomical $690 billion in assets abroad, with 47 centrally-
owned firms ranked in last year’s Fortune Global 500.138 Three Chinese centrally
owned banks held onto the top three spots in the 2016 Forbes Global 2000.139
Taking the latest data from Ministry of Finance of China as an example, the net
income of SOEs from January to February 2017 reached 301.86bn Yuan
132
Da shi hua xiao, xiao shi hua wu (大事化小, 小事化无).
133
Such as Sect. 135 (1) Indian Companies Act 2013; in terms of exploring the possible of
transplanting the idea in China, the criterion of ‘enterprise above designated size’ may be used
to enforce CSA.
134
Such as Sect. 2 (1) and Sect. (2) Companies (CSR) General Order 2009.
135
Such as Art. 225 ‘Grenelle II’ France 2013.
136
Such as Guidelines for external reporting by state-owned companies 2008.
137
Such as Chapter V Art. 74 Indonesian Limited Companies Act 2007.
138
Leutert (2015).
139
Schaefer and Murphy (2016).
(approximately equivalent to 44.61bn US Dollars).140 These facts provide compel-

ling reasons for reconsidering SOEs’ efficiency in operation, the proper means of
governance to aid their development and place limits on their unwarranted privi-
leges, their roles and significance in socio-economic and -cultural contexts. Along-
side the ever-increasing trend of globalisation and China’s close economic ties with
other advanced economies, it is foreseeable that SOEs will play a more pivotal role
in global marketplace and governance matters. SOEs are making pragmatic efforts
to achieve and balance the commercial objectives and political/social agendas
advocated by the government. This also indicates why China is often mentioned
in the context of cross-border effects of SOEs. There are ideological and political
reasons for establishing SOEs in which a large public role played by SOEs in the
economy can be seen as necessary for rapid and sustained development.
SOEs are widely regarded as very useful for securing for the government
valuable industrial information and control of strategic industries, and SOEs
could be justified for reasons of employment creation and national security.141
The first and probably foremost feature of SOEs is its close proximity to govern-
ments, not just in terms of ownership but also corporate control and preferential
treatment conferred to these entities, resulted from a vested interest of government
in ensuring their success. Experience of OECD economies, for instance, suggests
that even in the so-called competitive or potentially competitive markets, several
possible sources of competitive distortion can be brought about in favour of
SOEs.142 Furthermore, there is also the difficulty of finding a balance between
these companies’ economic drivers and their roles and obligations to commit to
political and social agendas. Whilst acknowledging the fact that SOEs operating
towards purely commercial objectives is a ‘pie in the sky’ notion, the mainstream
Western view in this regard is still economically prioritised, as summed up by
Capobianco and Christiansen: ‘. . .whereas governments are free to set rules and
objectives for their SOEs consistent with overall policy priorities, an ultimate goal
should be to enhance economic performance and market integrity.’143 It is also
believed that the state’s agenda should be pursued in a manner that does not impair
the competitive landscape.144 In the meantime, questions arise from various per-
spectives, stemming from the distribution of SOEs across industrial sectors to the
balances between profit-making and non-commercial, strategic objectives of SOEs.
The applicability of a CSA approach to SOEs is strongly linked to the unique
corporate objectives of SOEs and Chinese corporate governance with administra-
tive characteristics. Alongside SOEs’ massive economic scale and significance in
terms of output, profit and employment, an important factor is also their rising
140
Ministry of Finance of China 2017.
141
Hassard et al. (2007), p. 19.
142
Capobianco and Christiansen (2011), p. 4.
143
144
144 J. Zhao
vigour in politics and governance.145 China’s gradual push to take a bigger role in
global affairs over the past few decades, has understandably also been in sync with
the expanding footprints of SOEs around the globe. Therefore, making CSA law
applicable to and tested on SOEs will have a globalised impact on a wide range of
stakeholders including a profound influence on government. While it is generally
alleged that the Chinese government uses SOEs as a tool to pursue social and
political purposes, discussions of the corporate objective of SOEs in the domain of
corporate law legislation have been overlooked. Starting with SOEs is a good
opening for boards to address social issues in a more codified manner, and consider
the balance between societal and profit-making considerations, given that SOEs
already have a number of social missions. The notion of gongsi shehui wenze zhi
(公司社会问责制) could be more effectively, realistically and efficiently enforced
in SOEs since the pilot legislative object as corporate strategy and profit distribu-
tions in SOEs are closely related to the needs of administrative government, and
their board members always have a close relationship with the government as civil
servants.
6 Conclusion
Multinational companies are facing a series of new globalised challenges, and a

new world of compliance that extends beyond goals to make profits and into terrain
that may deeply impact the survival, prosperity and sustainability of corporations.
The Canadian Democracy and Corporate Accountability Commission defined CSR
as ‘being accountable to a broader range of stakeholders, rather than just share-
holders’.146 However, the term ‘accountable’ is not fully explained in that context.
Board accountability, and equivalent term in Chinese language, the wenze system,
as the core value of corporate governance, has been discussed here for its potential
linkage with CSR. The deficiencies of the notion of CSR have also been discussed
to demonstrate that it is obstructive and unaccommodating when embedded in the
corporate law legislation in term of its goals, scope and implementation. I have
therefore suggested that the existing notion of CSR is better dispensed with
altogether in favour of a more established conceptual framework in the field of
corporate law. In particular, CSA is proposed as a more appropriate notion for
addressing social, environmental and human rights problems in corporate law from
both preventative and punitive orientations. The purpose of introducing the notion
of CSA is to make the increasingly popular and essential CSR framework more
systematic, logical and enforceable, and to prevent corporate social irresponsibil-
ity.147 Therefore, the scope of the notion of CSR may be explained beyond
145
Leutert (2015).
146
Georgetti K (2002) p.5.
147
Hi and Müller (2013).
philanthropic responsibilities to include a more socially responsible and strategic

decision-making process.
It is vital to emphasise that CSA is not opposed to profit and profitability; it
endorses profit in a socially accountable manner. Therefore, apart from the four
stages discussed by Keay and Loughrey,148 a fifth stage may be introduced and
embedded with the purpose of promoting and achieving success in line with
business goals,149 legal requirements and social expectations. While accountability
issues have become increasingly important for large and international corporations,
especially when it comes to responsibility for or being complicit in ‘human rights
abuses, stunted social development and environmental degradation’,150 CSA is a
mechanism in harmony with corporate law development on progressive issues, and
which can be regarded as a way to address the mismatch and conflict between the
traditional voluntary nature of CSR and trends towards regulating CSR. Board
accountability is a notion that links responsibility with governance, and these two
terms cannot be comprehensibly understood without referring to accountability.151
CSA links CSR and the regulatory framework of the notion, in order to make CSR
into a term not solely used for greenwashing, but rather into something which
impacts significantly on long-term profit maximisation. If the notion of CSA could
be effectively enforced, board accountability, in a wider sense, will lead to more
socially responsible companies.
A CSA mechanism seems to be a way forward in the context of the failure of
voluntary and soft law approaches. It could fill the gap created by the lack of any
effective regulatory framework for companies, at both national and international
levels,152 and the inaccessibility and underdevelopment of mechanisms of redress
and company liability regarding social and environmental concerns. It seems that
CSA would be a good starting point—a new conception that enables us to look at
companies as social or quasi-social institutions. The notion could be beneficial in
hardening and ratcheting-up voluntary initiatives for CSR.
China is one of the first countries in which CSR was given explicit recognition in
the national corporate law, namely Chinese Company Law which was passed by the
National People’s Congress and took effect in January 2006. The issue of CSR was
explicitly stipulated in the new Chinese Company Law 2006. However, even after
the enforcement of this law, the world has witnessed a series of incidents in China
such as food and production safety incidents, unfair treatment to employees, and
environment scandals that have caused irreparable damage. In response, activities
148
Keay and Loughrey (2015), pp. 267–269.
149
Such as those stated in the constitutional documents in the case of B Corps; whereas B Lab is a
non-profit organisation that serves a global movement of people using business as a force for good;
see https://www.bcorporation.net/what-are-b-corps/about-b-lab.
150
Bendell (2005), p. 362.
151
Kaler (2002), p. 327.
152
For an international perspective, see the UN guiding principles on business and human rights
(2011), and the OECD guidelines for multinational enterprises (2011).
146 J. Zhao
including interference by the government, increased accountability of corporations

towards the public and requirements for sustainable development began to emerge.
Here I suggest a new notion corresponding with CSA, namely gongsi shehui wenze
zhi (公司社会问责制), as a good way forward. This notion would help Chinese
Company Law to establish a framework for more enforceable CSR. The legal
framework should be led by Chinese Company Law through information disclo-
sure, directors’ duties, stakeholders’ participations and stakeholders’ engagement in
order to accommodate CSR as a mainstream concern in China.
Acknowledgements I am greatly indebted to Prof Andrew Keay, Dr Jeroen Veldman, Dr

Umakanth Varottil, and Dr Suren Gomtsyan for providing me with valuable comments on the
draft of this chapter. I would also like to thank Prof Jean Du Plessis for his encouragement and
support. The chapter was presented 2016 at the ICGL Forum held on 14–15 December 2016 in
Beijing and the author thanks Prof Junhai Liu, Prof Cindy A. Schipani, Prof Gill North, Dr
Alexander Scheuch and Prof Patrick Leyens for their comments.
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Springer-Verlag, Berlin
Jingchen Zhao Career, memberships and achievements: Holds Associate Professor in Law and
deputy director of Centre for Business Law and Practice at the University of Leeds. Published in
high quality journals including Legal Studies, Northwestern Journal of International Law and
Business, European Business Organization Law Review, Journal of Business Law and Journal of
Corporate Law Studies. Monograph ‘Corporate Social Responsibility in Contemporary China’
published by Edward Elgar in the ‘Globalisation, Corporation and the Law’ series. Investigator of
major ESRC funded project on financial law in China. Member of Society of Legal Studies and
European Association of Law and Economics.
Research interests: Corporate law, corporate social responsibility and corporate governance,
insolvency law, Chinese business law and financial law. Extends from general aspects of business
law to interdisciplinary areas such as corporate governance, business ethics and law and finance.
Teaching: Commercial Law, Company Law, Corporate Social Responsibility, Corporate Finance
and Securities Law and International Trade Finance.
Part IV
Corporate Social Responsibility
Legislation and Implementation:
Evidence and Experience
Corporate Social Responsibility in European
Union Law: Foundations, Developments,
Enforcement
Patrick C. Leyens
1 Introduction
Corporate social responsibility (CSR) has long entered the corporate governance
arena. In the European Union, the CSR Directive of 2014 requires reporting on an
array of non-financial aspects from 2017 onwards.1 The Directive leaves the
formulation of CSR policies to the individual corporation but it requires publishing
a self-commitment to that policy and obliges the corporation to explain a possible
non-compliance. This regulatory technique of ‘comply or explain’ is known from
the more general area of corporate governance as a moderate form of
harmonisation. Its effects will come over time and they can include changes of
the societal role of corporations as well as of directors’ duties.
This chapter explores how the new CSR reporting duties will contribute to such
changes and what future advances might be expected from European Union legis-
lation. It will be argued that ‘comply or explain’ benefits the integration of the
European common market by establishing a uniform information channel which
enables signaling CSR engagement to investors. On a closer look, the new disclo-
sure duty, however, is a supra-national intervention into the diverse and path-
dependent national perceptions of the societal role of corporations. The degree to
which such intervention is justified firmly depends on how tightly disclosure duties
are formulated. Following the developments in corporate governance, it is not
unlikely that the duties will be tightened in the future. Given the diversity and
1
CSR Directive (2014), Art. 4.
P.C. Leyens (*)

Humboldt University of Berlin, School of Law, Berlin, Germany
Erasmus University Rotterdam, School of Law, Rotterdam, The Netherlands
e-mail: leyens@law.eur.nl; https://www.eur.nl/people/patrick-c-leyens/

158 P.C. Leyens
path-dependence of existing national CSR arrangements, a form of disclosure that

de facto prescribes specific contents of CSR engagement seems non-advisable.
The chapter is organised in three main parts: (2) asks whether and how European
Union law can and should intervene into national perceptions of CSR; (3) explores
the state of CSR regulation within the European Union and tries to anticipate
possible modes of further action; (4) explains the impact of corporate self-
commitments to CSR policies with a view to enforcement by shareholders, market
mechanisms and third-party verification. The main conclusions will be summarised
at the end.
2 Foundations
Inspired by the United Nations Global Compact, the goals of CSR are commonly
seen in transforming our world, aiming to create a ‘sustainable and inclusive global
economy that delivers lasting benefits to all people, communities and markets’.2
The usefulness of these goals can hardly be contested. It is much less clear though,
whether and how law, especially European Union legislation, can and should
contribute to possible achievements beyond establishing the contours of mandatory
behaviour. The following sections will show that there is not one universally
applicable concept for voluntary CSR engagement and that empirical evidence of
benefits from enhanced CSR engagement must be read with caution. A brief survey
of legislative history summarises the evolution of national regulatory approaches as
well as the ongoing search for suitable arrangements to safeguard the interests of
non-shareholder constituencies. In particular, corporate internal institutions of
pluralistic decision-making through worker codetermination at the board level
will be discussed with a view to illustrate path-dependencies of CSR. The general
finding from this scrutiny is that the ‘comply or explain’ approach chosen by the
CSR Directive 2014 is a viable, if not the only, regulatory technique feasible for the
European Union.
2.1 Conceptual Issues
So far, there is no universal consensus on the duties of directors to implement CSR

goals beyond statutory prescriptions of behaviour.3 The most obvious reason for
this is that national laws differ greatly in regard to statutory protection of
non-shareholder constituencies. For example, additional layers of employee pro-
tection against contract termination might be beneficial to corporations under an
2
United Nations (2015), p. 16.
3
For an account of existing theories see Melé (2008), pp. 47, 52 et seq.
Corporate Social Responsibility in European Union Law: Foundations. . . 159
employment-at-will rule as known under US law.4 They might be less attractive for
corporations in jurisdictions that provide for mandatory dismissal protection.5
It is for this reason that Milton Friedman’s seminal essay title ‘The Social
Responsibility of Business is to Increase its Profits’6 does not provide a universally
applicable answer to the question whether directors should spend corporate funds
on CSR. Still, the European Commission believes that CSR is generally in the
interests of enterprises as ‘it can bring benefits in terms of risk management, cost
savings, access to capital, customer relationships, human resource management,
and innovation capacity.’7 This belief might be valid in general but it also carries a
certain danger of a circular conclusion: If enhanced CSR engagement was an
explaining variable for benefits of the corporation, furthering social interests
would simply equal due exercise of directors’ duties towards shareholders. Specific
CSR legislation would be expendable, at least, as far as directors’ duties are
enforced.
The CSR movement, internationally and within the European Union, clearly
intends to go beyond guiding corporations in their resilience management. It
pursues to strengthen the societal role of the corporation, last not least, by changing
perceptions of directors’ duties.8 Coordinated legislative action appears to be
advisable with a view to avoid hampering the competitiveness of corporations in
single jurisdictions. This is why supra-national law making by the European Union
can be considered as a reasonable chance to effect change, possibly with spill-overs
for countries outside the European Union.9 Further discussion is needed regarding
the justification, mode and intensity of legislative intervention.
2.2 Empirical Evidence
Enhancements of CSR have often been justified on the basis of alleged proofs of
beneficial effects for shareholders. A number of empirical studies underpin the
hypothesis of value-enhancing CSR, of course, with different degrees of signifi-
cance and partly diverging explanations.10 Correlation, however, does not equal
causal inference. Increases in profitability, i.e., return on assets, due to improved
resilience can only be tested on the basis of very large samples. Furthermore,
4
Cf. Schipani et al. (2017), in this volume, for an account from a US perspective.
5
Edmans et al. (2017), p. 18.
6
Friedman (1970).
7
European Commission (2011b), para. 1.1.
8
Cf. Veldman (2017), in this volume.
9
Sjåfjell (2015), p. 97.
10
See, for example, Ferrell et al. (2016), pp. 587, 591; on employee satisfaction Edmans et al.
(2017), p. 18; on corporate donations Liang and Renneboog (2016), p. 20; on climate change,
water and children’s rights Serafeim and Grewal (2017).
160 P.C. Leyens
market periods of distrust as during the global financial crisis might explain value-
creating investments into social capital.11 Stock prices can also be subject to
learning effects, i.e., a process of slow repricing, which will end abnormal returns
after completion of the repricing phase. It is also possible that an increase of CSR
expenditures within the relevant peer group will level out positive effects.
In addition to such general considerations, Roland Bénabou and Jean Tirole
observed that empirical studies often do not make clear which of three possible
visions of CSR they test12: Firstly, the adoption of a more long-term perspective in
the sense of a win-win strategy for shareholders and society, secondly, the dele-
gated exercise of philanthropy on behalf of stakeholders as a form of saving
coordination costs, or thirdly, self-interested corporate philanthropy by directors.
Visions one and two can be in the interest of investors and, intuitively, they
might cause positive effects for the corporation. Vision three is likely to lead to
opposed reactions. To make this clear, take the following example: if a sportswear
producer spends funds on avoiding child work abroad, this can attract customers,
satisfy investors and hence be in the interest of shareholders and stakeholders. If the
same corporation funds a sports club of which the CEO is a board member, the
outcome might be the opposite. Accordingly, the reactions to CSR expenses depend
on which vision is tested. The information value of a possible correlation will be
low because without such specification positive outcomes are as likely as negative
outcomes.
Debates on themes of strong public interest like CSR appear to be particularly
receptive for goal-driven uses of (alleged) empirical proof. It should not be doubted
though that the market provides for a mechanism to transform information on CSR
into prices. For example, a study on German energy providers—energy providers
are naturally in the focus of the public—explains that the reports on CSR (spanning
250 pages or more) are reviewed by financial analysts and thus somehow find their
way into investor decisions.13 It is also clear that the social behaviour of large listed
corporations stand under continuous scrutiny. Investors will hardly be attracted by
those issuers when they signal ignorance of social interests.14 The regulatory
approach to mandate CSR reporting on a ‘comply or explain’ basis builds exactly
on this assumption and it seems reasonable to believe that it has an impact on the
behaviour of corporate actors.
11
Lins et al. (2016).
12
Bénabou and Tirole (2010), pp. 9, 12.
13
Gutsche et al. (2015), p. 458.
14
Serafeim and Grewal (2017), p. 29.
2.3 Legislative History
Reporting duties are just one possible approach towards enhancing CSR. Disclosure
is a relatively new technique in the history of the making of company law. The
struggle for viable approaches to better align the corporate interest with social
interests has a much longer history. The following brief survey outlines the steps
that led to the rise of the disclosure-driven information model.
In the beginning, we find limited liability entrepreneurship under state control
(octroi-system). Perhaps the best known example is the Dutch East Indian Com-
pany which was founded in 1602 and vested with quasi-governmental powers, not
least, to further colonialism on other continents.15 The company’s immense need
for finance led to the first stock listing in Europe, triggered investment by the public
and gave rise to the distinction between the interests of different owner groups, at
the time, rather not of other private constituencies.
Until the second half of the nineteenth century, setting up a corporation with a
legal personality separate from the owners remained subject to state approval of the
corporate charter (concession system).16 The era of mercantilism, during which the
corporation was seen as an institution to fulfill goals of the state, ended in the course
of the industrial revolution, partly triggered by the rise of foreign investment. The
concession system was not flexible enough to accommodate the changes and was
abolished. Within Europe, England was ahead, Germany and other states followed a
bit later.
At this point, a new idea was formed—the idea of the corporate interest.
Consequently, courts struggle with the blurred line between expenses to be consid-
ered good or bad for the company. Arguably the most famous statement of this
struggle stems from an English court: ‘The law does not say that there are to be no
cakes and ale, but there are to be no cakes and ale except such as are required for the
benefit of the company.’17 Many argue that times have changed since then and that
courts consider or, at least, that they should consider stakeholder interests in their
assessment of directors’ duties.18 So far, the number of reported cases which could
underpin this argument is small and that number will most probably remain small
outside exceptional circumstances.
The reason for the missing judicial backing of social responsibilities of the
corporation must not necessarily be viewed through the lens of a static treatment
of directors’ duties. The small number of cases rather results from the lack of
standing of non-shareholder interest groups in a judicial setting. This is why in
some countries institutional pluralism in corporate decision-making is considered
necessary for safeguarding social responsibilities.
15
Frentrop (2003), p 115; Gepken-Jager (2005), p. 47.
16
Baum (2005), p. 5 with further references.
17
Hutton v West Cork Railway Co (1883), per Bowen LJ.
18
Du Plessis (2017), p. 33.
162 P.C. Leyens
2.4 Pluralism Through Employee Voice?
A well-known institutional safeguard of the societal role of the corporation relates

to giving voice to non-shareholder constituencies in corporate decision-making,
and hence to institutionalise pluralism within the corporation. It is widely agreed
that the firm is an economic function (a nexus) composed of finance by share-
holders, delegated management by directors, and of other constituencies, especially
the workforce.19 As we will see in later sections, European Union legislation takes
the number of workers employed by a corporation (merely) as a factor for deter-
mining the scope of reporting duties on CSR.20
At least on paper, section 172 of the English Companies Act 2006, reaches
further. It states that in performing directors’ duties the interests of employees inter
alia must be taken into consideration. However this seems widely nonexistent in
case law.21 Earlier attempts to introduce worker participation in corporate decision-
making by the Bullock proposals of the 1970s did not gain momentum.22 In one of
her first speeches, British Prime Minister Theresa May insinuated that the discus-
sion could be revived.23 The Brexit referendum and the criticism against
overregulation (by the European Union), of course, make far-reaching reforms
unlikely.
Similar to the English Companies Act, the German Stock Corporation Act of
1937 explicitly stated that the corporate interest encompasses contribution to the
public interest. The Stock Corporation Act of 196524 currently in force deleted the
explicit reference to the public interest but the perception prevails that
non-shareholder constituencies still form part of the corporate interest.25 Since
2009 the preamble of the German Corporate Governance Code, a ‘soft’ law
instrument, clarifies that the interest of the enterprise includes the ‘sustainable
creation of value in conformity with the principles of the social market economy.’26
This is in line, for example, with the new Dutch Corporate Governance Code 2016
which considers the corporation as a ‘long-term alliance between the various
stakeholders of the company’, including employees.27
Discussions on the societal role of limited liability corporations and especially
on their responsibilities towards employees continue in many European Member
States. To understand the reasons for the ongoing discussion in Germany, consider
19
Coase (1937), p. 386; Gelter (2016), p. 9.
20
Infra Sect. 3.3.
21
Enriques et al. (2017), p. 98.
22
Bullock Report (1977). For accounts of the debate see Davies (1978), p. 245; Lord Wedderburn
of Charlton (1985), p. 36.
23
Department for Business, Energy & Industrial Strategy (2016), pp. 2, 34.
24
Section 76 German Stock Corporation Act (Aktiengesetz) 1965.
25
Kort (2015), paras. 52, 84.
26
German Corporate Governance Code (2015), preamble.
27
Dutch Corporate Governance Code (2016), preamble.
that in the 1950s the Allies pushed legislation which provided for worker codeter-
mination for the war-relevant industries of mining, coal, and steel.28 After recon-
struction of corporate Germany this approach was extended, with modifications, to
all industries by the codetermination legislation of 1976.29 Since then companies
with more than 2000 employees are obliged to set up a supervisory board composed
of 20 members who are appointed in equal measure by shareholders and the
workforce respectively.30
For a private market economy, employee codetermination in parity with share-
holder representation is the strongest form of pluralism within the corporation.31
Views are divided as to whether codetermination benefits the economy as a
whole.32 In a judgment of 18 July 2017 the European Court of Justice held that
German codetermination is not in breach with European Union Law.33 To be sure,
the court did not answer the question as to whether codetermination is useful for
society as a whole. The judgment is limited to the finding that employees of
subsidiaries and branches in other European Union Member States are not subject
to unequal treatment for the reason that they do not participate in the election of the
supervisory directors of the German mother company.
German codetermination has the clear advantage of providing an ex ante mech-
anism to balancing the interests of different constituency groups. There are con-
siderable doubts though about whether it should be used as a European Union-wide
mechanism to further CSR goals. Advocates must admit codetermination comes at
a price. In the past, the German supervisory board was mainly seen as an institution
for balancing interests. This perception has changed.34 Today many observe con-
vergence with the role of non-executive directors within the internationally pre-
dominant one-tier board model as it is set out, for example, by the UK Corporate
Governance Code.35 The change of perception forces to look at possible weak-
nesses of employee representation at board level.
28
German Codetermination Act on Supervisory Boards in the Industries of Mining, Coal, and Steel
1951 (Montan-Mitbestimmungsgesetz).
29
Section 7 German Codetermination Act 1976 (Mitbestimmungsgesetz).
30
Baum (2005), p. 15; Hopt (1984), p. 1348.
31
Enriques et al. (2017), p. 98 for a functional account.
32
Habersack et al. (2016) for the most recent state of the discussion in Germany.
33
European Court of Justice (2017). For details of the discussion in Germany see
Wansleben (2017).
34
Hopt and Leyens (2004), pp. 141, 160 on France, Germany, Italy and the UK.
35
UK Corporate Governance Code (2016), para. A.4, supporting principle: ‘Non-executive direc-
tors should scrutinise the performance of management in meeting agreed goals and objectives and
monitor the reporting of performance. They should satisfy themselves on the integrity of financial
information and that financial controls and systems of risk management are robust and defensible.
They are responsible for determining appropriate levels of remuneration of executive directors and
have a prime role in appointing and, where necessary, removing executive directors, and in
succession planning.’
164 P.C. Leyens
Codetermination is a source of unavoidable conflicts of interest that are not in

line with modern concepts of monitoring at the board level.36 The conflicts of
employee representatives are a result of their parallel responsibilities towards the
corporation and towards their electorate. An often-quoted German experience
concerns Frank Bsirske, chairman of the powerful service industry trade union
Ver.di and at the same time employee representative and co-chairman of the
supervisory board of Lufthansa. His strike call of 2002 led to losses of millions of
dollars for Lufthansa although the company was not even a party to the collective
bargaining negotiations.37 The example shows that codetermination restrains
trusted cooperation between shareholder and employee representatives on the
supervisory board. Furthermore, a mandatory quota of worker representatives
constrains the appointment of a sufficient number of independent directors which
could serve as a device to strengthen the no-conflicts requirement under the
business judgment rule.38
3 Developments
The preceding part of this chapter has illustrated the diversity and path-dependence
of national approaches towards CSR. For the European Union, full harmonisation,
especially with regard to workers’ voice, seems illusionary against this background.
For furthering the integration of the European common market, disclosure seems to
be a promising tool. This leads to the ‘comply or explain’ approach chosen by the
CSR Directive. In theory, this approach allows corporations to individually deter-
mine their level of engagement. The degree to that this freedom can be used de facto
firmly depends on the extent to which tight reporting duties are formulated.
The following sections explore the rise of the CSR movement within the
European Union and try to analyse existing advances into law making patterns
that have been observed in regard to corporate governance. It will be shown that the
CSR Directive is in line with those patterns. On this basis one might attempt to
make careful predictions as to the probability and mode of a tightened CSR
reporting. Combining the findings of this part with the review of CSR foundations
in the foregoing part, it seems advisable for the European Union to find a balanced
approach, and to abstain from over-regulation.
36
Sandrock and du Plessis (2012), pp. 168–172.
37
Hopt (2004), pp. 52, 74; Sandrock and du Plessis (2012), pp. 168–170, n. 120.
38
Leyens (2012), p. 187.
3.1 The Rise of CSR
The understanding of the evolution and state of the CSR legislation within the
European Union is best informed by looking back at earlier harmonisation attempts.
Advances to prescribe a German-type two-tier board system including codetermi-
nation for all Member States were given up in the 1990s.39 France has offered a
choice between the one- and two-tier model since 1965. Other Member States
introduced more than two board model options.40 The discussion about providing
board model options gained further momentum following the Statute of the
European Company, a supranational company form introduced in 2001.41 In sum
these developments, however, can hardly be attributed to an endeavor to provide a
basis for pluralism at the board level. They rather resemble the (convincing) belief
that internal governance structures should be left to private actors.42
Corporate governance, including CSR, came into focus through the European
Commission Action Plans of 2003 and 2012.43 Both Action Plans were reactions to
corporate scandals—the first by the breakdown of Enron which invigorated the
corporate governance debate worldwide, the second by that of Lehman Bros which
led to the escalation of the global financial crisis.44 Restoring confidence of the
public was at the heart of each Action Plan.
According to the definition of the Cadbury Report of 1992, which meanwhile
was adopted by the European Commission, ‘corporate governance is the system by
which companies are directed and controlled.’45 This definition is functional and
does not prescribe substance. It gives room to envisage control power by constit-
uencies other than shareholder interests under the national arrangements of internal
corporate governance within the Member States.
European Union legislation so far has accepted diversity amongst Member
States and abstained from intervention into the substance of national CSR arrange-
ments. The mechanism of harmonisation is disclosure—the so-called information
model.46 Disclosure duties do not in themselves lead to immediate changes of
behaviour. They, rather, stimulate change and effect gradual convergence. The
CSR Directive 2014 is one of the most recent steps and it will possibly not be the
last step on this line.
39
For details see Grundmann (2011), p. 262.
40
E.g. Italy; cf. Hopt and Leyens (2004), p. 164.
41
Art. 39, 43 SE Statute (2001).
42
Hopt (2011), p. 20.
43
European Commission (2003, 2012).
44
For accounts of the foregoing corporate governance failures see the background reports by the
High Level Group of Company Law Experts (2002), pp. 27, 43; de Larosière Report (2009), p. 29,
paras. 110 et seq.; Reflection Group (2011), p. 10.
45
Cadbury-Report (1992), para. 2.5. European Commission (2011b), p. 2.
46
Grundmann (2011), p. 165 et seq.
166 P.C. Leyens
3.2 Law Making Patterns
The identification of law making patterns in the area of corporate governance can
serve to better understand where European Union legislation stands in regard to
CSR and how it might further develop47: In a first step, the European Commission
‘kicks off’ regulatory processes within the Member States through Communica-
tions and Recommendations which do not require approval by the European
Council.48 Absent an approval requirement the Commission is widely free to
formulate its own supranational law making policies. For example, in a recommen-
dation of 2005 the European Commission made clear what it expects from national
corporate governance commissions and their drafting of codes of conduct in regard
to the role of non-executive (supervisory) directors.49
It is true that Communications and Recommendation are non-binding for Mem-
ber States or corporate actors.50 However, they (tend to) inform the interpretation of
European Union legislation by national governments or courts. Perhaps the most
important effect is what transaction lawyers would call ‘punctuation’. After the
ignition by the European Commission the direction is set and further movement into
that direction will not easily be stopped.
In a second step, legislation is brought through directives that require transfor-
mation into national laws by Member States. Following the line of law making on
corporate governance a Directive of 2006 introduced the annual corporate gover-
nance statement for corporations of public interest.51 Since its implementation
listed companies must state their code compliance or explain possible
non-compliance. Corporate governance codes within the European Member States,
possibly around the world, tend to reveal similar features. Deviations from inter-
nationally agreed standards normally do not seem advisable in business. This is why
the ‘comply or explain’ approach serves as an indirect harmonisation device.
In a third step, the European Commission measures the effects against the policy
goals set in earlier stages. If effects do not emerge fast enough, further action
follows. In 2014 the European Commission published a recommendation on
enhancing the quality of the annual corporate governance statements, especially
regarding explanations of non-compliance.52 The novelty of this recommendation
is that explanations of non-compliance should extend to how the spirit of the
national corporate governance code is observed. Alternative measures by the single
corporation remain possible and, no doubt, they can be highly advisable under
47
Leyens (2016), p. 398.
48
Initiating EU legislation is difficult. To give an example: the struggle for the 13th directive, the
takeover directive, reaches back to the 1970s Pennington proposal but came into force only
in 2002.
49
European Commission (2005), p. 51.
50
Treaty on the Functioning of the European Union (2012), Art. 288.
51
Directive 2006/46/EC, Art. 46a.
52
special circumstances like, for example, restructuring. For the normal course of
business, it is clear though that the recommendation of 2014 seeks to tighten the
range of alternatives to be considered reasonable.
What we tend to see in corporate governance is that, step-by-step, soft law
becomes hard law. This development follows a pattern that might also determine
the future of CSR regulation.
3.3 The CSR Directive of 2014
The making of CSR legislation, so far, has come in line with the described law
making pattern. Firstly, in its Green Paper of 2001 the European Commission
kicked-off the debate and formulated its policy goals regarding CSR.53 In 2011,
the Commission outlined its goals more precisely.54 Secondly, the CSR Directive of
2014 introduces ‘comply or explain’. Its recitals claim a ‘need to raise to a similarly
high level across all Member States the transparency of the social and environmen-
tal information provided by undertakings in all sectors.’55 Scenarios for a possible
third step will be explored below.56
The CSR Directive applies to listed corporations and other public interest
entities with 500 employees or more and obliges them to publish a management
report ‘containing information to environmental matters, social and employee-
related matters, respect for human rights, anti-corruption and bribery matters.’57
The report must name the ‘policies, outcomes and risks related to those matters’, to
‘the due diligence processes implemented by the undertaking’, and they expand to
‘supply and subcontracting chains’. Furthermore, a description is needed regarding
the ‘diversity policy applied in relation to the undertaking’s administrative, man-
agement and supervisory bodies with regard to aspects such as, for instance, age,
gender, or educational and professional backgrounds, the objectives of that diver-
sity policy, how it has been implemented and the results in the reporting period.’
Aligned to general corporate governance, the regulatory mechanism to imple-
ment this approach is ‘comply or explain’: ‘If no such policy is applied, the
statement shall contain an explanation as to why this is the case.’ The German
government has opted for a one-to-one implementation; other European Member
States as well.
53
54
European Commission (2011a), p. 2.
55
CSR Directive (2014), recital 1.
56
Infra, Sect. 3.5.
57
CSR Directive (2014), recital 6, Art 19a.
168 P.C. Leyens
3.4 ‘Comply or Explain’
The operation and impact of ‘comply or explain’ is less obvious than that of a
behaviour prescription through rules or standards. It hence deserves a closer look.
The approach finds its roots in the corporate governance movement, more precisely
in the already mentioned UK Cadbury Code of 1992. As a reporting duty, it
provides a uniform information channel that might be considered in two ways.
The first and obvious aspect relates to enabling corporations to satisfy the demand
for information, mainly by shareholders and outside investors. The second relates to
strengthening the awareness for specific matters of those who are responsible for
reporting.
These two aspects interact. Corporations have always been free to satisfy
information demands regarding CSR by voluntary disclosure. In fact, prior to the
CSR Directive of 2014 annual reports often contained self-commitments to certain
CSR aspects.58 Under voluntary disclosure, subsequent changes to the adopted
policy could but did not have to be reported. Under the new disclosure duty, the
outcomes of policies regarding the general matters and the mode of implementation
of aspects relating to diversity must be reported. Accordingly, explanations must be
given if the corporation did not achieve its CSR goals during the reporting period.
It follows that corporate actors will carefully consider the economic viability of
their CSR policies already ex ante and that, ex post, they will probably be reluctant
to deviate from the chosen policies. Directors of large issuers especially will hardly
risk that their corporation is ranked within a group of low level market participants.
Experience with the ‘comply or explain’ approach in Germany underpins this
assumption. Since the reporting duty was introduced, annual statements of
Germany’s largest 30 reported a 90 per cent or higher percentage of compliance
with the national Corporate Governance Code.59
3.5 Scenarios of Future Action?
Possible scenarios of future action regarding CSR will most probably be in line with
the experiences in the broader field of corporate governance. For the moment,
legislation leaves the task of setting the benchmark of CSR goals to the individual
corporations. The recitals of the CSR Directive, however, show the expectation that
policies are formulated in line with national or international prescriptions of good
conduct.60
58
Ahern and Clarke (2013), p. 32 on diversity aspects.
59
Lutter and v. Werder (2016), para. 1929.
60
Recital 9 CSR Directive (2014) lists ‘national frameworks, Union-based frameworks such as the
Eco-Management and Audit Scheme (EMAS), or international frameworks such as the United
Nations (UN) Global Compact, the Guiding Principles on Business and Human Rights
Future action is likely should the policies adopted by individual corporations not
rapidly reach a sufficiently high standard in light of the earlier formulated goals. A
less predictable option concerns the harmonisation of directors’ duties as this would
mean direct intervention into the core of path-dependent company laws of Member
States. The more probable options relate to a tightening of the ‘comply or explain’
approach.
There are two possible scenarios: In scenario one the European Commission
might try to improve the quality of individual CSR policies. Following the approach
chosen in regard to the role of non-executive directors of 2005, it might issue a
recommendation which outlines a supranational comprehension of what individual
goals should amount to (model goals). Given the reference of the CSR Directive to
international guidance, this is a scenario which might be accompanied by the
following scenario.
In scenario two, the European Commission might take action parallel to its most
recent step in corporate governance taken in 2014. In that scenario, it would try to
trigger improvements of the quality of CSR statements, in particular, with a view to
statements of non-compliance. A possible recommendation could (indirectly)
oblige corporations to explain how the chosen behaviour accords to the spirit of
CSR goals as formulated in international guidelines or, under scenario one, by the
European Commission itself.
Under both scenarios, the corridors for acceptable self-commitments and indi-
vidually set CSR goals will narrow, at least gradually.61 The effect might not be
identical to a prescription of the societal role of corporations but it comes close to
that. The Brexit referendum in the UK could be read as a warning against
far-reaching law making in areas where Member States wish to maintain sover-
eignty and diversity.
In sum, ‘comply or explain’ is, no doubt, a possible way forward but it should
focus on its key function that is channeling information rather than indirectly
prescribing specific measures of CSR engagement.
4 Enforcement
The impact of a disclosure-based CSR movement firmly depends on enforcement.

The ‘comply or explain’ approach does not by itself prescribe specific behaviour
but it does oblige corporations to commit themselves to observing certain modes of
behaviour and to provide sufficient explanation should they fail to do so. The
implementing the UN ‘Protect, Respect and Remedy’ Framework, the Organisation for Economic
Co-operation and Development (OECD) Guidelines for Multinational Enterprises, the Interna-
tional Organisation for Standardisation’s ISO 26000, the International Labour Organisation’s
Tripartite Declaration of principles concerning multinational enterprises and social policy, the
Global Reporting Initiative, or other recognised international frameworks.’
61
On enforcement, infra, Sect. 4.
170 P.C. Leyens
following sections will show that the enforceability of the self-commitment by

shareholder suits is limited, albeit not non-existent, and that binding effects pri-
marily build on market mechanisms. This is why—similar to the debate on the
annual corporate governance statement—one might think of submitting CSR dis-
closure to an annual certification by the statutory auditor.
4.1 Shareholder Enforcement
National laws differ regarding shareholder suits based on the misbehaviour of direc-
tors. Generally, the proof of causality between the act of the directors and the loss for
the corporation or the individual shareholder can be an insurmountable barrier for the
recovery of monetary losses. To underpin this with a view to CSR, pleading that CSR
measures are costly does not by itself suffice to make the claim. Similarly the absence
of CSR measures does not necessarily qualify as duty breach. Directors are obliged to
act within the boundaries set by mandatory law. If the law would prescribe a specific
way of engagement with CSR it would be a breach not to do so. Outside such specific
prescription of behaviour it is the duty of directors to further the corporate interest.
This can mean that directors must opt for a high standing, but theoretically, it can also
mean that they must choose a low standing CSR policy.62
Weighing up possible options is part of the business strategy. In many, but not all
of the European Member States, directors are vested with discretion under a US
type business judgment rule. Accordingly, the decision to follow a high standing or
a low standing CSR strategy will amount to a duty breach only if the decision was
not taken on the basis of adequate information, or if the director was conflicted.
Following the earlier employed example, cases of directors’ philanthropy
(e.g. donations to a local sports club of which the CEO is a board member) will
not necessarily qualify as a breach.63 A decision of the full board with support from
independent directors combined with voting abstention by the conflicted director
will normally provide sufficient procedural safeguard for due decision making.
Absent a concrete insolvency threat the dangers for damage liabilities appear to be
rather low.64
In some countries shareholders are given specific rights to sanction violations of
disclosure duties. For example, the German Bundesgerichtshof (Federal Court of
Civil Matters) decided in two cases in 2009 that the annual shareholder resolution
on the approval of directors’ actions can be invalidated on grounds of a false or
misleading annual corporate governance statement.65
It is not clear whether and in which cases courts will accept a suit brought on the
basis of incorrect CSR reporting. The cited German judgments, however, show that
62
Sch€on (2016), p. 286.
63
Supra Sect. 2.2.
64
Du Plessis (2017), pp. 30, 31 et seq.
65
Bundesgerichtshof (2009a), para. 18; Bundesgerichtshof (2009b), para. 16.
‘comply or explain’ can cause legal consequences even though the reference point
of the statement is a soft law instrument like a non-statutory code of conduct or, in
the case of CSR, a self-commitment to individually set goals.66
4.2 Market Enforcement
Arguably the market mechanism should be the primary enforcement mode for
implementing disclosure-based policy goals. In anticipation of market reactions it
is clear that directors will hesitate to formulate a low standing CSR policy and that
they will not easily deviate from their commitment when that deviation must later
be disclosed.
Despite all criticism against the European Commission for intervening into the
competences of national legislators, the ‘comply or explain’ approach can clearly
serve market integration and enable European issuers to enhance their standing
internationally. The business case for CSR might be cumbersome.67 It is clear
though that possible benefits firmly depend on the availability of a uniform infor-
mation channel which provides for comparability of the efforts made by individual
corporations.
It will take time until the effects of a newly established information channel
become visible. Initial criticism against corporate governance disclosure, for exam-
ple in Germany, was partly due to the lack of experience with the technique of
‘comply or explain’ and of soft law regulation.68 In Switzerland opposition held
until 2014 when finally the SIX rules included ‘comply or explain’ as ‘the state of
the art’.69 CSR disclosure might follow this path and accordingly gain acceptance
over time.
4.3 Third-Party Enforcement?
A question closely related to market enforcement concerns the verification of

non-financial information by third parties. In the past, it was intensely debated
whether the annual corporate governance statement should be made subject to the
statutory audit. European Union law does not require verification of the contents of
the statement but merely of whether it has been made and where it is available.
66
Leyens (2017b), forthcoming.
67
Supra Sect. 2.2.
68
Leyens (2016), p. 402.
69
Economiesuisse (2014) n. 27, 29; SIX Exchange Regulation (2014), Art. 7. For background
information cf. Hofstetter (2014), p. 26.
172 P.C. Leyens
The CSR Directive of 2014 follows this approach but allows Member States to
foresee more far-reaching verification requirements. Arguably, abstention from
third-party verification is convincing, for CSR reporting as for the annual corporate
governance statement. In both areas, the major chance for the ‘comply or explain’
approach lies in the alignment of offer and demand for good corporate behavior.
Disclosure duties serve to enable and foster a dialogue between the corporation
and the market.70 Submitting CSR statements to statutory audits would shift the
organisation of this dialogue in large parts to the auditing industry.71 The auditing
industry would basically be forced to define which particular arrangements must be
in place for a viable strategy regarding gender quota, age, diversity and so on. The
result would be a tick-the-box approach by corporations. This could be a pitfall
for CSR.
5 Summary
In summary, the paper has argued that the current state of CSR legislation within
the European Union might be a mere stage of transition on a way to further reaching
action. The current mode of ‘comply or explain’ under the CSR Directive of 2014
arguably benefits corporations in that it establishes a uniform information channel
which enables signaling CSR engagement to investors. Experience from law
making patterns in the area of corporate governance, however, indicates that further
action might follow should the policy goals which are mainly set by the European
Commission not be reached fast enough. In one scenario, the European Commis-
sion might formulate supranational guidance on what it considers to be an accept-
able behaviour, in another it might recommend to explain how the measures chosen
by the individual corporation meet the spirit of international CSR guidelines. Both
advances would go too far given the diverse and path-dependently grown CSR
arrangements within European Member States. The regulatory technique of ‘com-
ply or explain’ will unfold its effects only over time. For the time being, patience
seems more advisable than a tightening of the disclosure duties.
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Patrick C. Leyens Career, memberships and achievements: Jun. Professor of Private Law and
Economic Analysis of the Law, University of Hamburg Law School (2007–2013). Adviser to the
German Ministry of Finance and the German Federal Parliament on depositor and investor
protection (2007–2009). Director, European Doctorate in Law and Economics, University of
Hamburg (2009–2012). Hon. Professor, Erasmus University Rotterdam Law School (2014–).
Expert group on corporate governance reporting, Schmalenbach Society (2014–). Acting Profes-
sor, University of Munster (2015–2016) and Humboldt University of Berlin Law School (2016–).
Several research prizes for works on corporate governance and financial markets.
Research interests: Corporate and commercial law, securities regulation, especially corporate
governance.
Teaching: Contract Law, Corporate and Commercial Law, Banking and Capital Markets Law,
Law and Economics.
From Transparency to Due Diligence Laws?
Variations in Stringency of CSR Regulation
in Global Supply Chains in the ‘Home State’
Of Multinational Enterprises
Andreas R€
uhmkorf
1 Introduction
In the past 20 years, most multinational enterprises have voluntarily adopted Corpo-
rate Social Responsibility (CSR) standards related to their global supply chains.
These private governance initiatives address issues such as working conditions at
supplier factories and are often incorporated into the contractual relations with the
suppliers. However, despite these private CSR standards, there are continuing reports
about violations of CSR principles in global supply chains. This has led to a
recognition that the ‘home state’ of multinational enterprises can contribute towards
filling the ‘governance gap’ of global supply chains.1 The home state is the country in
which the multinational corporation at the top of the supply chain (i.e. the parent
company in a corporate group structure) is incorporated.2 In contrast, the host state is
the state in which the multinational enterprise operates, either directly or through its
subsidiary or its suppliers.3
Against this background, there has been a wave of transparency legislation on
supply chains in many Western countries recently such as the US or the UK, for
example, the California Transparency in Supply Chains Act 2010, the transpar-
ency in supply chains clause in the UK Modern Slavery Act 2015, and the US
Dodd-Frank Act. Whilst these pieces of legislation vary in design, they have in
common the requirement that companies report on their CSR activities. Still, there
are calls for more stringent legislation, particularly liability-based due diligence
1
International Labour Organisation (2016), p. 39.
2
Cragg (2010), p. 751.
3
Cragg (2010).
A. Rühmkorf (*)
University of Sheffield, School of Law, Western Bank, Sheffield, UK
e-mail: A.Ruhmkorf@sheffield.ac.uk; https://www.sheffield.ac.uk/law/staff/aruhmkorf

178 A. Rühmkorf
requirements.4 In the context of mineral supply chains, due diligence has been
described as an ‘on-going, proactive and reactive process through which compa-
nies can ensure that they respect human rights and do not contribute to conflict.’5
An example of due diligence that affects the global supply chain can be found in
the UK Bribery Act 2010. Companies that conduct risk-based due diligence take
steps to ‘identify and address actual or potential risks’ of their supply chain
activities.6 The purpose of such due diligence is to prevent or reduce their
negative impact in the chain.
To date, the legal literature on law and CSR has particularly focussed on interna-
tional law.7 More recently, private law has begun to be considered as a tool to
promote CSR in supply chains.8 However, the literature has not yet sufficiently
engaged with the recent trends towards home state regulation of CSR issues in global
supply chains. There is no all-encompassing definition of the term ‘home state
legislation’. This term is used in this chapter to refer to laws that address the way
multinational enterprises deal with CSR issues such as bribery, modern slavery or
health and safety at the workplace within their supply chains. The laws can therefore
be either liability-based laws such as tort or corporate criminal law or reporting duties
such as transparency laws or directors’ duties. This list is not exhaustive and shows
that the term covers laws that address internal decision-making processes such as
directors’ duties, laws that require companies to communicate about their actions,
and laws that create liability regimes (i.e. civil and criminal) for corporate conduct.
Some of these laws can have an extraterritorial effect.
So far, the legal literature has not said much about how multinational enterprises
deal with CSR issues such as bribery, modern slavery or health and safety at the
workplace in their global supply chains with their subsidiary companies and/or
suppliers, if these CSR issues are subject to regulation in their home state. The
question is, for example, how do companies deal with issues in their supply chain
that they are required to report about (e.g. modern slavery) or which can lead to
liability, if they occur at a supplier (e.g. bribery). To some extent, this question
raises the issue of how multinational companies react in their voluntary relations
(e.g. contracts) with their subsidiaries and suppliers to statutory regulation in their
home state. This gap in the existing literature, inter alia, requires not only much
empirical work on the behaviour of companies, but also a detailed legal analysis of
the design and stringency of existing legislative approaches.
This chapter aims to contribute to filling the gaps in the literature by doctrinally
reviewing different forms of home state legislation from the UK and US which
affect CSR issues in global supply chains. The legislation assessed here has been
chosen as representative of different ways of addressing supply chains. The
4
Nolan (2016).
5
OECD (2011).
6
OECD (2016), p. 16.
7
See, e.g., Zerk (2006) or de Jonge (2011).
8
See, e.g., Rühmkorf (2015).
From Transparency to Due Diligence Laws? Variations in Stringency of. . . 179
arguments in this chapter thus contribute to the evolving debate about ‘CSR and the
law’, which is important given the increasing ‘appetite’ of home states of multina-
tional enterprises to regulate the global CSR activities of these companies.
This analysis is situated in the interdisciplinary Global Value Chains (GVC)
theoretical framework of supply chains which focusses on the relationship between
buyers and suppliers, and will contribute to the developing literature on CSR and
the law in two ways. First, through a doctrinal analysis of the stringency of
CSR-related laws it will systematise and critically assess existing forms of home
state legislation in order to assess their likely impact on the behaviour of multina-
tional enterprises. This legal assessment will contribute to the debate about future
legislative approaches to CSR in global supply chains. I will argue that the flurry of
disclosure laws on CSR issues exhibit significant differences in their stringency.
This finding is important as it shows that existing laws that address how multina-
tional enterprises deal with CSR in their supply chain differ significantly. In turn,
this situation has ramifications for how companies address those issues in their
supply chain. I take the view that the existing reporting requirements which
currently seem to be the legislative tool of choice for regulation on CSR can be
seen as part of a continuum with the UK Modern Slavery Act at the soft end (adding
little to existing voluntary CSR reporting done by companies) and the US regulation
on conflict minerals being at the more stringent end.
Secondly, this chapter contributes to the existing literature by arguing that the
present forms of transparency legislation are not capable of sufficiently steering
companies towards genuinely exercising CSR due diligence in their global supply
chain. Whilst ‘due diligence’ is currently often mentioned in the context of supply
chains, the legislation reviewed here does little to meaningfully promote compa-
nies’ due diligence of CSR issues in their supply chain. This is unfortunate as
genuine due diligence would have the potential to better prevent the occurrence of
some of the repeated violations of CSR principles in global supply chains.
I conclude by arguing that whilst home state legislation of CSR has much
potential towards closing the governance gap in global supply chains, its potential
has not been sufficiently used so far. In order to meaningfully improve the way
multinational enterprises address CSR in their global supply chains, home state
legislation needs to move from ‘soft expectations’ towards imposing ‘hard’ CSR
due diligence requirements on companies.
2 The Global Value Chains Framework

and the Shareholder Value Doctrine: Limits
for Voluntary CSR
The concept of CSR has, in recent years, attracted renewed interest due to the
recurrent reports about violations of CSR principles at supplier factories in global
supply chains. This chapter adopts the 2011 definition of CSR used by the European
180 A. Rühmkorf
Commission as ‘the responsibility of enterprises for their impact on society’.9 This

definition superseded the Commission’s longstanding definition of CSR as ‘volun-
tary’.10 The important advantage of the 2011 definition is its recognition that CSR is
not just purely voluntary, but overlaps with law in different ways.11 In the context
of CSR in global supply chains it is important to note that human rights are among
the issues that CSR encompasses.
It is also important to note that multinational enterprises use different sourcing
strategies. They can use directly owned foreign subsidiaries (and the multinational
enterprise is then the parent company) and/or they can use independent local firms
as contractual partners.12 Trade between multinational enterprises and their sub-
sidiaries abroad and between foreign subsidiaries is referred to as ‘intra-firm
sourcing’.13 However, increasingly, multinational enterprises base their sourcing
strategy on the widespread use of independent foreign suppliers. They are only
linked to these companies through contracts.14 Under English law, there has been
longstanding discussion around the vicarious liability of parent companies for their
subsidiaries. The case law firmly holds that even wholly owned subsidiaries are
legal entities which are separate and independent from the parent company and thus
not vicariously liable for the conduct of their subsidiaries.15 This separate legal
nature of subsidiaries is a consequence of the Salomon v Salomon case which is the
basis of the doctrine that companies have separate legal personality from their
shareholders.16 The issue of liability of Western companies for their independent
suppliers faces even more challenges as, in that situation, the supplier company
which produces the goods and at whose factory the violation of CSR principles
occur is only contractually linked to the Western multinational company. The
supplier company is owned by people who are different from the multinational
enterprise at the top of the chain, which makes it even more difficult to establish
liability of the multinational company for the conduct of its suppliers.
The examples of corporate irresponsibility in global supply chains are manifold
and range from the use of forced labour on cocoa plants in West Africa and the Thai
fishing industry to environmental pollution by the oil industry in Nigeria, and gross
health and safety breaches leading to factory fires and factory collapses in Pakistan
and Bangladesh.17 The fact that these violations have continued to occur despite the
existence of private CSR programs by companies calls into question the hitherto
9
European Commission (2011) para 3.1.
10
11
Buhmann (2011), p. 148.
12
Mosley (2011), p. 17. See generally Rühmkorf (2017).
13
Kotabe and Murray (2004).
14
Cavusgil et al. (2014).
15
Adams v Cape Industries (1990).
16
Salomon v Salomon & Co. Ltd (1897).
17
See, for example, the coverage of The Guardian on Rana Plaza.
soft law, voluntary approach to CSR.18 Over the last decades, many western
multinational enterprises have adopted codes of conduct which often include CSR
principles.19 The suppliers are usually also required to comply with the company’s
code of conduct.20 The fact that violations of CSR principles persist despite those
codes of conduct has led to calls for legislative intervention to address working
conditions at supplier factories.21
The supply chain (also referred to as the ‘value chain’) consists of the parties that
contribute to the product which is sold to the customer—the seller of the end
product, the manufacturer, retailers, transporters and sub-suppliers.22 Global supply
chains expand across different countries and usually have a multinational enterprise
at their top. Companies organise their supply chain through their supply chain
management which can be defined as the planning and management of all activities
involved in sourcing and procurement, and all logistics management activities.23
The governance of these global supply chains is framed by the Global Value Chain
(GVC) theory.24 The GVC theory focusses on the creation of value and the use of
power by lead firms (i.e. the buyers) in relation to their suppliers.25 Traditionally,
the emphasis of the GVC framework has been on economic upgrading, that is, the
move to higher value activities in production, improved technology, knowledge,
skills and increased profits. However, more recently, the understanding of the term
‘upgrading’ has expanded to include social upgrading.26 This broader understand-
ing means that social aspects (including CSR) can now be included in the analysis
of the buyer–supplier relationship within this framework. It is argued that the role of
CSR in global value chains is evolving as part of ‘synergistic governance’—the
confluence of private governance, social governance and public governance.27 The
broader understanding of upgrading in the GVC framework is significant in the
context of the discussion here as it recognises that CSR is no longer purely within
the domain of private governance, but is gradually also becoming part of state
legislation.
However, the fact that the focus in the GVC analysis of supply chains is still on
economic upgrading limits the potential for the genuine promotion of CSR issues
such as working conditions at supplier factories. The underlying corporate doc-
trine of shareholder primacy in Anglo-American company law and corporate
governance further limits the scope for companies to pursue voluntary private
18
See Locke (2013), p. 174.
19
See van Opijnen and Oldenziel (2011).
20
Millington (2008), p. 365.
21
Burrow (2016).
22
Chopra and Meindl (2013), p. 13.
23
Chopra and Meindl (2013), p. 13.
24
See Gereffi et al. (2005), p. 78; Gereffi (2014), p. 9.
25
See Gereffi et al. (2005), p. 85.
26
Gereffi and Lee (2016), p. 29.
27
Gereffi and Lee (2016), p. 25.
182 A. Rühmkorf
governance CSR activities.28 The shareholder value doctrine is based on an

agency model that has its origins in Berle and Means’ observation known as
‘separation of ownership and control’.29 They note that the ownership of the
company and its control are divided between the shareholders of the company
and its management.30 As a consequence of this separation, managers gained
effective control over the company (also referred to as ‘managerialism’) whereas
the shareholders struggle to exercise control. The argument of the agency model is
that the directors are the agents of the shareholders and they should, consequently,
be exclusively accountable to the shareholders as their principals and strive
towards maximising their profit.31 In the shareholder value theory, shareholders
are seen as the owners of the company by virtue of having purchased shares.32 In
line with this conception of the firm, Friedman argues that a director who acts in a
socially responsible way would become a ‘public employee’, although he is an
‘employee of a private enterprise’.33 Such a manager would impose taxes on the
shareholders.34
Whilst significant criticisms have been made of the theoretical foundations of
the shareholder value theory, it is not possible within the scope of this chapter to
engage with these issues. However, due to the theory’s ongoing dominance in
Anglo-American company law it is important to note that under the shareholder
value paradigm companies are likely to only pursue CSR voluntarily on grounds of
the so-called business case.35 The shareholder value theory indicates how multina-
tional enterprises address CSR issues in their supply chain management. Compa-
nies only promote CSR to the extent that this improves their reputation and,
therefore, ultimately increases their sales and the returns on investment for share-
holders. The limitation of this approach for the promotion of CSR is that many
companies often only pay lip-service to CSR rather than genuinely trying to
improve working conditions (e.g. health and safety at the work place, pay and
working hours) throughout their supply chain. The priority towards maximising
profits, short-term gains and dividends for shareholders, mandated by the share-
holder value theory, is therefore an important reason why cases of corporate
irresponsibility in global supply chains persist. The combined effect of the focus
on economic upgrading in the GVC framework and the dominance of the share-
holder value theory of the firm is that company directors have limited room for
promoting CSR through private standards.
28
See Johnston (2009), p. 21.
29
Berle and Means (1991) [1932].
30
Berle and Means (1991) [1932].
31
Fama (1980), p. 288.
32
Hansmann (1988), p. 267.
33
Friedman (1970).
34
Friedman (1970).
35
See Kurucz et al. (2008), p. 84.
3 The Governance Gap for CSR in Global Supply Chains

and the Turn to the Home State
In addition to these limitations on CSR through private governance, the recent trend
towards home state regulation of CSR issues can also be viewed against the
background of a governance gap in global supply chains. First and foremost, the
reason why the debates about CSR in global supply continue is that many host states
of supplier factories, especially in the developing world, do not provide adequate
protection for workers. This situation is often attributed to the low standards of local
laws, but more often it is the failure of those states to have adequate law enforce-
ment mechanisms in place.36 Also, the multinational enterprises can collaborate
with governments in host states which, again, can negatively affect enforcement.
Second, there is no comprehensive binding human rights framework for compa-
nies in public international law.37 Soft law standards in international law such as the
UN Global Compact are important benchmarks for corporate behaviour, but they
lack enforceability.38 Third, victims of torts committed at supplier factories wanting
to gain access to justice face barriers from the rules of private international law.39
These laws make it almost impossible for tort victims affected by supplier factories in
the developing world to sue the tortfeasor in the country where the multinational
enterprise (who is the buyer in the supply chain) is based. Fourth, although the private
CSR standards are often integrated into the supply chain relations between multina-
tional enterprises and their overseas suppliers, their effect is limited by the privity of
contract doctrine.40 Due to this doctrine, the contractual obligations only bind the
parties to the contract, but not third parties.41 The contractual partners of the
multinational enterprises are only their first-tier suppliers whereas, in reality, these
often have their own sub-suppliers. The supply chain is therefore more complex and
deeper than the reach of contract law.42 The legal structure of global supply chains
therefore poses challenges for legal liability as these chains can span across countries
in different continents and consist of multiple tiers of suppliers.
The existing plethora of private CSR standards arose against the background of
the decline of state-based public regulation in many sectors.43 It is a response to the
governance gap just outlined, often due to public pressure on companies, and is part
of the general trend towards ‘governance without government’.44 The recent trend
36
See Barrientos (2008), p. 977.
37
See Muchlinski (2012), p. 148.
38
Zerk (2006), p. 259.
39
See generally Baughen (2015).
40
McKendrick (2009), para. 7.1.
41
Poole (2012), para. 11.2.
42
See LeBaron (2014), p. 245.
43
Vogel (2008), p. 266.
44
Rhodes (1996), p. 652. See also O’Rourke (2003), p. 40.
184 A. Rühmkorf
towards regulating CSR issues in global supply chains in the home states of
multinational enterprises can, at least partly, be understood as a reaction to the
repeated scandals at supplier factories which occurred despite the existence of
private CSR standards. It is also an attempt to overcome the governance gap. The
potential importance of the home state of multinational enterprises for promoting
human rights has also been recognised by the UN Guiding Principles.45
4 The Developing Legal Framework of CSR: Different

Stages of Regulation
It is argued here that the existing regulation of CSR issues in global supply chains
can be classified into different stages. The first stage consisted of the private
governance approach of corporate self-regulation in which multinational enter-
prises voluntarily adopted private CSR standards due to public pressure and on
grounds of reputational concerns.46 One CSR standard that several companies have
adopted is the Base Code of the Ethical Trading Initiative47 which contains the
principle: ‘There is no forced, bonded or involuntary prison labour’. However, as
with most of these codes, the ETI Base Code lacks enforcement mechanisms in case
a company does not comply with the standards. This situation has led to criticism
that companies can adopt CSR standards and use them for marketing purposes
when, in fact, they do not live up to the principles in those standards.48
The recent wave of transparency legislation such as the UK Modern Slavery
Act’s transparency in supply chains clause can be seen as the second stage of CSR
regulation.49 In fact, transparency legislation on CSR issues such as forced labour is
the first step in the legal regulation of CSR. Disclosure laws are ‘not heavily
interventionist’.50 They are a ‘communicative-based tool’.51 Disclosure laws intend
that the audience is able to make more informed choices based on the information
available. Transparency legislation can be characterised as regulation of self-
regulation.52 It gives companies a framework to operate in that it establishes an
45
See Principle 2: ‘States should set out clearly the expectation that all business enterprises
domiciled in their territory and/or jurisdiction respect human rights throughout their operations.’
See UN Guiding Principles on Business and Human Rights.
46
Wells (2007), p. 52.
47
ETI Base Code.
48
Companies use CSR as part of their marketing strategies to positively influence their image in
the perception of consumers, see Lii and Lee (2012), p. 78.
49
UK Modern Slavery Act 2015, Section 54.
50
Baldwin and Cave (1999), p. 49.
51
Morgan and Yeung (2007), p. 96.
52
I use ‘transparency legislation’ interchangeably with ‘disclosure laws’ and ‘statutory reporting
duties’.
expectation that companies have policies on the areas that the respective transpar-
ency legislation addresses such as combatting forced labour. However, the compa-
nies themselves decide how they are going to fill in the framework established by
the transparency legislation. The transparency legislation calls into question the
viability of the argument that is particularly made by business organisations that
CSR would be voluntary.53
Despite the transparency legislation there are calls for mandatory CSR legisla-
tion, particularly due diligence requirements imposed on companies in relation to
CSR issues in their global supply chain. The UK Bribery Act is one model of
mandatory CSR legislation as it indirectly imposes due diligence obligations on
companies. Such an approach to regulating CSR constitutes the third stage as it
would require companies to act in a certain way—for example, mandate CSR due
diligence. This kind of regulation might be classified as ‘command and control’.54
Whilst this approach is, at present, rarely found, NGOs continue to call for it and, in
fact, France is currently discussing a bill about imposed due diligence (discussed as
follows).
5 CSR Disclosure Laws: On a Continuum
As indicated, the present approach towards the legal regulation of CSR is, by and
large, based on reporting duties. In fact, statutory reporting regimes and voluntary
CSR/Sustainability reporting overlap. When the idea of dissemination of
nonfinancial information by companies was developed in the UK during the review
of Company Law in the late 1990s and early 2000s it appeared to be an innovative
and novel idea.55 But when this idea was incorporated into the Companies Act 2006
through the business review, it had, in the meantime, been overtaken by voluntary
reporting undertaken by companies as an instrument to portray themselves to the
public as acting in a responsible manner.56 Nonfinancial information disclosure is
also called ‘narrative reporting’ by accountants.57 Narrative reporting is an instru-
ment for managers to explain the company’s performance without numbers and to
indicate the future direction of the company’s business.58
In fact, there are significant differences in terms of scope and stringency between
different types of nonfinancial information disclosure which will be assessed in this
section. It is argued here that they can be seen along a continuum with different
53
See the discussion of CSR definition above.
54
See for ‘command-based regulation’: Morgan and Yeung (2007), p. 80.
55
Hannigan (2012), paras 9–40.
56
Hannigan (2012), paras 9–40.
57
French et al. (2011–2012), para. 9.9.6.
58
Villiers and Aiyegbayo (2011), p. 702. See generally for a discussion of potential readers of
corporate reports: Villiers (2006), p. 92.
186 A. Rühmkorf
levels of stringency. This section will contain a critical doctrinal assessment of the
following examples of nonfinancial information disclosure: the strategic report in
the Companies Act 2006; the transparency in supply chains clause in the Modern
Slavery Act 2015; the UK’s implementation of the EU Directive on nonfinancial
information disclosure; and the US Dodd-Frank reporting requirement in relation to
conflict minerals.
5.1 UK Companies Act 2006: The Strategic Report
The Companies Act 2006 (CA) in the UK requires companies to issue a strategic
report. This reporting regime was previously called the business review when the
CA came into force. However, following a consultation process on the state of
narrative reporting in the UK, in 2013 the government replaced the business review
with the strategic report.59 The strategic report should complement the financial
statements.60
The directors must prepare a strategic report, unless the company is entitled to the
small companies’ exemption.61 The purpose of this report is to inform members of
the company and help them assess how the directors have performed their duty to
promote the success of the company under Section 172 CA.62 The importance of this
report for the discussion here is that the list of factors that directors must have regard
to in their decision-making process under Section 172 CA overlap with the issues
that CSR addresses, for example, the interests of the company’s employees and the
need to foster the company’s business relationships with suppliers.63 However, it is
important to note that Section 172 CA ultimately requires directors to pursue
shareholder value as they can only ‘have regard’ to stakeholder issues as long
as this promotes the success of the company for the benefit of the members
(i.e. shareholders). Despite this weakness of Section 172 CA, the overlap between
this section and CSR (at least in theory) means that the strategic report captures CSR
issues.64 The report must contain a fair review of the company’s business and a
description of the principal risks and uncertainties facing the company.65 In the case
of a quoted company, the strategic report must also, to the extent necessary for an
understanding of the development, performance or position of the company’s busi-
ness, include: (a) the main trends and factors likely to affect the future development,
performance and position of the company’s business; and (b) (1) information about
59
BIS (2012).
60
Financial Reporting Council (2014), p. 14.
61
Companies Act 2006, section 414A (1).
62
Companies Act 2006, section 414C (1) CA.
63
Companies Act 2006, section 172 (1).
64
Rühmkorf (2015), p. 53.
65
Companies Act 2006, section 414C (2) CA.
environmental matters (including the impact of the company’s business on the

environment), (2) the company’s employees, and (3) social, community and human
rights issues, including information about any policies of the company in relation to
those matters and the effectiveness of those policies.66 If the company is a parent
company and if the directors prepare group accounts then the strategic report must be
a consolidated report (i.e. a ‘group strategic report’).67
Whilst, prima facie, this reporting requirement appears to be a suitable oppor-
tunity for the promotion of greater CSR by companies, it suffers, upon a closer look,
severe weaknesses in its legislative design which raise questions with regards its
effectiveness. The first limitation is that, if the review does not contain information
regarding the issues mentioned in (a) and (b), it must only state which of these
categories it does not contain. The companies that are subject to the reporting duty
(i.e. quoted companies) are therefore allowed to leave out information about
environmental matters, employees as well as social, community and human rights
issues, so long as the company declares that its strategic report does not contain this
information. This situation makes the reporting about CSR issues voluntary. The
second limitation is that the wording of this provision does not specify what
companies must include in their reporting about these issues. This means that
directors can make neutral statements in the report.68 And, thirdly, directors are
only liable for false and misleading statements or the omission of anything required
to be in the report under the condition that the director knew that the statement was
untrue or misleading or if he was reckless as to whether it was untrue or misleading
and he knew the omission to be a dishonest concealment of a material fact.69
Directors are therefore only liable in cases of deceit, but not in negligence (this
has been referred to as a ‘safe harbour provision’).70
Moreover, research into the business review, which is the predecessor of the
strategic review and very similar to it, questions the effectiveness of the reporting
duty.71 Villiers and Aiyegbayo conducted a study of the business review and argued
that it made little difference to the quality of reports.72 They found that companies
were struggling to report effectively their non-financial key performance indica-
tors.73 The review of the statutory narrative reporting regime in the Companies Act
2006 by accounting firms supports this critical view. For example,
PricewaterhouseCoopers (PWC) concludes in a review of the narrative reporting
practice of the FTSE 350 that ‘companies still fail to present a clear, credible and
66
Companies Act 2006, section 414C (7).
67
Companies Act 2006, section 414A (3).
68
Villiers (2013), p. 108.
69
Under these circumstances the director is required to compensate the company for any loss
suffered as a result of the misconduct, Companies Act 2006, section 463 (2) CA.
70
Hannigan (2012), para 16–28.
71
Villiers and Aiyegbayo (2011), p. 700.
72
73
188 A. Rühmkorf
coherent picture of the direction of travel and short-term performance’.74 In a

different review, the Accounting Standards Board, which is an operating body of
the Financial Reporting Council (FRC), reviewed the reports of a sample of 50 listed
companies. The FRC concluded that only 20% of the companies in their sample
revealed best practice in terms of their disclosure of the CSR issues concerning
environmental matters, employees as well as social and community issues, 34%
were compliant in spirit whereas 40% were either not compliant with the law or
were compliant but the discussion was either generic or related to matters that were
unimportant to the business.75 The first assessments of the strategic report is slightly
more positive than those of the business review, but still indicated the need for
further improvement. For example, a study conducted by the UK’s Financial
Reporting Authority (the independent regulator responsible for promoting high
quality corporate governance and reporting to foster investment) concludes that
‘the overall quality of corporate reporting has improved since the introduction of
the strategic report’.76 However, the report also notes that there is still scope for
further improvements.
In essence, the strategic report is a very soft form of regulating the disclosure of
companies’ CSR activities as it allows companies a lot of discretion. It is also not
particularly concerned with global supply chains, so companies are not only able to
decide if and what they want to report, but also to what extent this reporting will
cover their CSR activities in their global supply chain. The strategic report is
therefore placed at the soft end of the continuum of CSR disclosure laws.
5.2 UK Modern Slavery Act 2015: Transparency in Supply

Chains Clause
Contrary to the business review/strategic report in the Companies Act, the proposal
to include a transparency clause on forced labour in supply chains in the Modern
Slavery Act 2015 was a step forward as it expressly refers to supply chains. This
new reporting duty refers to modern slavery in the supply chain of a company,
including sourcing from its subsidiaries and independent supplier companies
irrespective of whether suppliers are owned by the company at the top of the
chain. Previous regulatory attempts did not expressly include suppliers.
Section 54 of the Modern Slavery Act 2015 requires every organisation carrying
on a business in the UK with a total annual turnover of £36 million or more to
produce a slavery and human trafficking statement for each financial year of the
organisation.77 The companies that are subject to this duty must make ‘a statement
74
PWC (2009).
75
Accounting Standards Boards (2009), pp. 23–25.
76
Financial Reporting Council (2015).
77
Modern Slavery Act 2015, section 54 (1). See also Home Office (2015).
of the steps the organisation has taken during the financial year to ensure that
slavery and human trafficking is not taking place in any of its supply chains, and any
part of its own business, or a statement that the organisation has taken no such
steps’.78 The legislation further requires that, in their slavery and human trafficking
statement, companies ‘may include information’ about a number of issues including
their policies in relation to human trafficking and slavery, their due diligence
processes in relation to slavery in their business and supply chains; the parts of
the business and supply chains where there is a risk of slavery and human traffick-
ing taking place, and the steps they have taken to assess and manage that risk.79
Companies that have a website must publish the slavery and human trafficking
statement on the website and include a link to the statement in ‘a prominent place on
that website’s homepage’.80 Moreover, the statement must be approved by the
board of directors and signed by a director.81
It is clearly a positive step for the promotion of CSR in global supply chains that
one of the key issues of CSR, the combatting of forced labour in supply chains, has
been addressed by home state legislation in the UK. At least in theory, this gives
greater weight to the issue. However, upon a closer reading, it is evident that the
transparency in supply chains clause is, like the strategic report, very loosely
drafted and amounts to little more for companies than publishing what many
companies already voluntarily publish as part of their own CSR/Sustainability
report. First, the wording of this transparency clause is vague as it does not specify
what companies have to report in terms of the ‘steps’ they have taken. Second,
although the list of factors that companies ‘may’ report about contains important
aspects such as due diligence processes, it is again the wording that leaves too much
discretion to businesses. It is not compulsory for companies to report about these
issues due to the use of the word ‘may’.82 Even worse, in case companies choose to
report about topics on the list of factors that they ‘may’ report about, there is no
requirement about the way they carry out this reporting. This means that both the
‘if’ and the ‘how’ of their reporting about forced labour due diligence in their
supply chains is left to the discretion of the companies. Like the strategic report, the
transparency clause in the Modern Slavery Act is therefore a soft form of ‘regula-
tion of self-regulation’. In theory, companies only need to state that they have taken
‘no steps’ to prevent slavery from occurring in their supply chain to comply with
this reporting duty. A company that does not produce a modern slavery statement
can be subject to an injunction for specific performance of a statutory duty.83
However, the Government’s guidance mentions that where a company fails to
78
Modern Slavery Act 2015, section 54 (4).
79
Modern Slavery Act 2015, section 54 (5). See also the guidance by the Home Office
(2015), p. 11.
80
81
82
Home Office (2015), p. 11.
83
Court of Session Act 1988, section 45.
190 A. Rühmkorf
comply with the provision or where a company states that it has taken no steps, ‘it
will be for consumers, investors and Non-Governmental Organisations to engage
and/or apply pressure’.84 This comment shows that the Government intends to rely
on market actors to push for higher quality reporting.
It can therefore be expected that, just like the strategic report, the transparency in
supply chains clause is unlikely to give rise to much impact on the behaviour of
multinational enterprises for reasons as discussed above. Many companies will
therefore be able to publish a similar statement to comply with the Modern Slavery
Act. The transparency in supply chains clause is therefore little more than ‘merely a
paper exercise’.85 It is unlikely that it will change corporate behaviour as there is no
requirement for companies to have due diligence processes in place. Moreover,
companies do not have to publish audit reports verified by third parties. In fact, this
sceptical view is confirmed by the first assessments of the statements that compa-
nies have published under the Modern Slavery Act. A study from May 2015 of
230 statements shows that these are primarily focussed on policy commitments and
general descriptions of processes, but that they ‘tend to be light in terms of
descriptions of more innovative due diligence processes and actions taken’.86
However, given that the transparency clause in the Modern Slavery Act expressly
addresses supply chains and that it requires a statement that is published on the
companies’ websites, it is a step forward in comparison to the strategic report.
Whilst it is not a very stringent form of legislation, its publicity and focus on supply
chains places this form of disclosure law somewhat closer to the centre of the
continuum of CSR disclosure laws.
5.3 Non-financial Information Statement: The UK’s

Implementation of the EU Directive on Non-financial
Information Disclosure (2016)
A recent legislative development around reporting on CSR issues is the EU Directive

regarding disclosure of non-financial and diversity information by certain large
companies and groups.87 In fact, some have called this Directive ‘the CSR Direc-
tive’.88 The Directive covers large public-interest entities (i.e. listed companies,
84
See Home Office (2015), p. 6.
85
Henty and Holdsworth (2015) p. 12.
86
Ergon (2016).
87
The Directive is available at: http://ec.europa.eu/finance/company-reporting/non-financial_
reporting/index_en.htm.
88
For example, the German Ministry of Justice refers to this Directive as the ‘CSR Directive’, see for
example Press Release of 21 September 2016, ‘Stärkung der unternehmerischen Verantwortung
durch neue nichtfinanzielle Berichtspflichten’ http://www.bmjv.de/SharedDocs/Pressemitteilungen/
DE/2016/09212016_CSR-RL.html.
banks, insurance undertakings and other companies that are so designated by Mem-
ber States) with more than 500 employees. This section will critically review the
UK’s implementation of the Directive for a consistent approach in this chapter which
discusses the stringency of domestic legislation.
The UK transposed the Directive by way of the Companies, Partnerships and
Groups (Accounts and Non-Financial Reporting) Regulations 2016. The Regula-
tions came into force in mid-December 2016. The new reporting duty is hereafter
referred to as the ‘non-financial information statement’. The UK did not increase
the minimum requirements of the Directive. Under the new disclosure regime, the
strategic report (discussed above) must include a non-financial information state-
ment if the company was at any time within the financial year a large public-interest
entity. This reporting regime is new whereas the regime for quoted companies in the
Companies Act remains unchanged. However, companies that issue this new
non-financial statement do not have to duplicate the information in their strategic
report in accordance with the reporting obligations that already existed before the
Directive was transposed. Those companies will be exempt in their strategic report
from providing certain information that quoted companies must now report on.
The non-financial information statement must contain information about, inter
alia, at least environmental, social and employee matters, respect for human rights,
anti-corruption and bribery matters. This statement must include a description of
the policies pursued by the company in relation to these matters (including due
diligence), a description of the outcome of those policies and the principal risks
relating to these matters and how the company manages those risks. Where the
company does not pursue policies in relation to one or more of those matters, it must
provide a clear and reasoned explanation for not doing so (‘comply or explain’
approach). Among the differences between the two reporting regimes is that the
non-financial statement also requires disclosure on anti-corruption and bribery and
a description of the principal risks relating to the matters that they have reported
about. Moreover, contrary to the existing reporting regime, companies cannot
simply state under the non-financial statement that they do not have a policy.
Rather, they must give a reason for this under the so-called ‘comply or explain’
approach. This approach goes beyond the reporting regimes in the strategic report
and the transparency in supply chains clause.
Although the supply chain is neither included in the text of the Directive nor in
the UK’s transposition of it, it is nevertheless referred to in the recitals of the
Directive. Recital 6 mentions that ‘where relevant and proportionate’ companies
should refer to their supply and subcontracting chains.89 However, this wording is
still relatively vague and the fact that the UK does not expressly refer to the supply
chain in the text of the new statutory provision means that too much discretion is
left to the companies in deciding whether to report on this issue. Whilst it could be
89
Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014
amending Directive 2013/34/EU with regards disclosure of non-financial and diversity informa-
tion by certain large undertakings and groups, Recital 6.
192 A. Rühmkorf
argued that this approach enables companies to report about their approach to those
issues in the way they deem best for the needs of the company, in reality it is more
likely that the new non-financial information statement will change little for the
majority of the companies in the way they report about their supply chain. Most, if
not all, of these companies already publish their voluntary CSR/Sustainability
report that usually addresses the issues that the new reporting regime requires. It
would have therefore been possible to go beyond the information that most com-
panies already release voluntarily, for example, by requiring companies to have
their CSR record externally verified as a step towards making disclosure more
reliable.
Due to the limitations of its legislative design, the non-financial information
statement is unlikely to significantly improve the approach of companies to CSR
and their reporting on CSR. This is a missed opportunity, particularly given the
reference to the underlying Directive as ‘the CSR Directive’. It is therefore argued
here that the non-financial information statement is only mildly more stringent than
the Modern Slavery Act’s transparency clause and the strategic report. It is there-
fore placed at the slightly stronger end of the CSR disclosure laws continuum.
5.4 US Dodd-Frank: Due Diligence Reporting on Conflict

Minerals
The final piece of reporting requirements on CSR issues assessed here is the US
Dodd-Frank Act 2010. Section 1502 requires companies that use conflict minerals
(as described below) to file a report with the US Securities and Exchange Com-
mission (SEC). This duty applies to listed US companies as well as foreign
companies that are listed on a US stock exchange. The fact that foreign companies
listed in the US are also subject to this reporting duty means that some companies
can be subject to both the UK Modern Slavery transparency law as well as the US
Dodd-Frank reporting duty on conflict minerals.
Under the Frank-Dodd Act reporting regime, companies must disclose if they
use conflict minerals that originated in the Democratic Republic of the Congo or an
adjoining country if the minerals are ‘necessary to the functionality or production’
of a product manufactured or contracted to be manufactured by the company. The
companies required to file a Conflict Minerals Report must exercise due diligence
as to the source and chain of custody of their conflict minerals, using a nationally or
internationally recognised due diligence framework, such as that developed by the
Organisation for Economic Cooperation and Development (OECD). The fact that
the disclosure must be ‘filed’ with the SEC means that companies are subject to the
liability for fraudulent or false reporting on conflict minerals under the Exchange
Act.90 However, anyone who is sued under this provision is not liable if they can
90
Securities Exchange Act of 1934, section 18, 15 USC.
demonstrate that they acted in good faith and had no knowledge that such statement
was false or misleading (‘good faith defence’).
The advantage of the approach taken in the Frank-Dodd Act is that its reach
extends into the supply chain with companies having to disclose where the minerals
are sourced from. Companies have to be more specific than in the pieces of
legislation scrutinised here so far. Any company that is covered by the duty in
this Act has to conduct a ‘reasonable country of origin inquiry’.91 Moreover, an
added strength of this Act is that the company has to exercise due diligence if it
knows or has reasons to believe that the minerals originated in any of the listed
countries or are from scrap or recycled sources. The quality of this due diligence
must meet a standard that is nationally or internationally recognised, such as the due
diligence guidance approved by the OECD. Given these requirements, the Frank-
Dodd Act has a higher level of stringency than the three reporting regimes assessed
so far. It is therefore at the stronger end of the continuum of CSR disclosure laws.
Still, the Act has deficiencies. First, with its focus on conflict minerals it addresses
only one aspect of CSR. Instead, CSR in global supply chains could be better
promoted by a more coherent approach which would include a number of CSR
issues in one piece of legislation and require companies to have due diligence
mechanisms on these in place. Second, the very nature of a transparency-based
piece of legislation means that there is only liability for violations of the reporting
duty, but not for the violation of CSR principles per se.
6 The Need for More Stringent Home State Legislation

on CSR
The assessment of the different types of CSR disclosure laws in the previous section
has shown that statutory reporting duties on CSR differ significantly in their scope
and level of stringency. Within the continuum of the existing disclosure laws on
CSR, the strategic report and the transparency in supply chains clause in the UK are
softer forms of transparency regulation. In contrast, the non-financial information
statement in the UK is somewhat in the middle due to its ‘comply or explain’
approach. The Dodd-Frank Act’s regulation of conflict minerals moves beyond the
pure regulation of self-regulation (that we find, for example, in the transparency in
supply chains clause) as it requires companies to exercise due diligence in certain
circumstances and to report about this. What it does not do, however, is to establish
the threat of liability for violations of CSR principles. It is therefore still part of the
reporting continuum, but placed at its more stringent end.
On the whole, present approaches towards regulating CSR in the home states of
multinational enterprises through disclosure laws are a first step, but not yet a
significant improvement over the private governance approach to CSR. Most of
91
See also Woody (2013), p. 1330.
194 A. Rühmkorf
the laws reviewed in the previous section allow companies too much reporting
discretion which means that the companies that already have a CSR policy will
simply be able to refer to it, but are not required to assess its effectiveness and to
provide verified data. The extent to which these reporting duties can improve the
CSR record of multinational enterprises is therefore questionable. Whilst the
reporting regimes can be classified as hard law due to their statutory basis, they
are in reality a very soft form of hard law.
It is argued here that despite these weaknesses home states have a potentially
important role to play in promoting CSR in global supply chains. In the absence of
any international binding human rights framework on companies and in light of the
continuing failure of many host states to provide adequate protection of generally
accepted CSR principles such as international labour standards and in light of the
failure of the private governance approach to CSR, the home states of multinational
enterprises must make full use of their legislative power. Whilst one could question
the piecemeal approach in which legislation by different home states might lead to,
it is still a second-best option in light of the governance gap outlined above.
Moreover, home states could learn from each other and best practice could be the
model for legislation by other countries. Another point in favour of the potential
effectiveness of home state legislation is the concentration of the biggest multina-
tional enterprises in relatively few countries. In 2014, 419 headquarters locations
for the Fortune Global 500 Companies were based in 10 countries such as the
United States (128), China (95), Japan (57), France (31), Germany (28) and the
United Kingdom (28).92 This figure further demonstrates the potential impact a
small number of countries can have for the promotion of CSR issues in global
supply chains through home state legislation.
The flaws of the transparency-based approach to CSR demonstrate that a
more stringent regulation of CSR issues in global supply chains in the home
states of multinational enterprises is needed. In particular, legislation now needs
to require companies to exercise due diligence on CSR issues in their supply
chain in order to better contribute to the prevention of further gross violations of
CSR principles such as human rights at supplier factories. The reporting laws
discussed in this chapter do not sufficiently mandate due diligence mechanisms.
For this reason, mandated due diligence requirements is being widely debated in
some countries. For example, the French devoir de vigilance bill which, at the
time of writing, is still in the legislative process would create a requirement for
French companies to demonstrate, if sued in civil, commercial or penal court,
that they have put in place preventive systems to avoid causing or contributing
to harm in the framework of their economic activity.93 If this bill became law it
would impose a responsibility on companies to implement due diligence in their
supply chain. Similarly, an expert report has recently proposed the implemen-
tation of human rights due diligence in German law for German NGOs such as
92
Bloomberg (2014).
93
European Coalition for Corporate Justice (2015).
Germanwatch.94 If this proposal were implemented it would require companies

to conduct a risk assessment of the danger of human rights violations in their
supply chain. In cases where such a violation occurs or is imminent the
company would have to take remedial action. And the company would have
to take preventive measures if there were a possible risk of such a violation.
Whilst the German proposal is yet to be acted on, the French proposal is at the
bill stage. Irrespective of whether these proposals become law, they illustrate that
due diligence on CSR issues are likely to form the next step of home state regulation
of CSR. Such a move would be welcomed, given the weaknesses of the present
transparency-based approach. As the French and German proposals are not laws
yet, the following section will critically assess an actual example of a law that
imposes due diligence on companies in their supply chain—the UK Bribery Act.
6.1 Example of Imposed Due Diligence: The UK Bribery Act

Model
In fact, the approach taken in the Bribery Act was discussed as a model during the
legislative process leading to the Modern Slavery Act. However, in the end the
transparency clause discussed earlier was chosen. Under section 7 of the Bribery
Act a commercial organisation (‘C’) is guilty of an offence if a person (‘A’)
associated with C bribes another person intending to obtain or retain business
for C, or to obtain or retain an advantage in the conduct of business for C.95
However, the particularly important aspect for discussion about due diligence
here is that the same section contains a defence if C can prove that it had adequate
procedures in place designed to prevent persons associated with C from undertaking
such conduct.96 The type of businesses subject to this offence is broad as relevant
‘commercial organisations’ under the section are defined as ‘a body or partnership
incorporated or formed in the UK irrespective of where it carries on a business, or
an incorporated body or partnership which carries on a business or part of a business
in the UK irrespective of the place of incorporation or formation’.97 The person A is
associated with C if it is a person who performs services for or on behalf of C.98 An
associated person can, for example, be an employee, agent or subsidiary of the
commercial organisation.99 Suppliers are not expressly mentioned in this list, but
the list is non-exhaustive and the Government’s guidance on the Act notes that a
contractor could be an associated person to the extent that they are performing
94
Klinger et al. (2016).
95
Bribery Act 2010, section 7 (1).
96
97
98
99
196 A. Rühmkorf
services for or on behalf of a commercial organisation.100 The guidance then uses

the example of a supply chain with subcontractors and it recommends that in such a
scenario companies should have in place anti-bribery procedures vis-a-vis their
direct suppliers. Moreover, suppliers should require the same from their
sub-suppliers.101 With regards to the discussion about due diligence it is important
to note that the government’s guidance lists a number of principles as ‘adequate
procedures’ which would constitute a defence against criminal liability. Among
these principles are ‘due diligence’ mechanisms.102 Another interesting feature of
the approach taken in the Bribery Act is that there is no requirement that the bribery
occurred within the UK.103 This means that the offence has an extraterritorial
dimension.104
This approach is an interesting model for the future of home state regulation of
particularly pressing CSR issues in global supply chains such as health and safety at
the workplace, excessive working hours and forced labour. In comparison to the
different examples of CSR reporting regimes, the Bribery Act is a much more
stringent form of regulation. It is a form of ‘command and control’ type of
regulation.105 Its extraterritorial corporate criminal liability gives it both wide
reach and the threat of a strong sanction. Its strength is the indirect imposition of
due diligence procedures on companies. The Government’s guidance has
reinforced the importance of a compliance-based approach by companies to make
sure that they do not run the danger of being criminally liable. However, whilst this
regime is a much stronger approach than the different disclosure laws discussed
before, its weakness is that it is not clear how far the liability reaches into the supply
chain. Companies are unlikely to be liable for bribery committed by sub-suppliers
at the bottom of their supply chains.
Still, lessons from this model indicate that it would require companies to
exercise due diligence. It is outside the scope of this chapter to discuss the different
ways of imposing due diligence on companies. Here it is argued that home state
legislation needs to move beyond its present ‘soft touch’ approach to regulating
global supply chains if it is to meaningfully change working conditions. The GVC
framework discussed at the beginning of this chapter primarily understands supply
chains as buyer–supplier relations. It is this relationship that home state legislation
can address. It is submitted that home state legislation which requires multinational
companies as the buyers in global supply chains to exercise due diligence can
influence how these companies use their bargaining power vis-a-vis their suppliers.
100
Ministry of Justice (2011), p. 16.
101
102
103
UK Bribery Act 2011, section 12(5): ‘An offence is committed under section 7 irrespective of
whether the acts or omissions which form part of the offence take place in the United Kingdom or
elsewhere.’
104
UK Bribery Act, section 7(5). See also the discussion in O’Shea (2011) chapter 8.
105
Baldwin and Cave (1999), p. 35.
So far, the soft reporting requirements effectively allow multinational enterprises to

have CSR policies without the need to enforce these and to report about their
effectiveness. In contrast, imposed due diligence requirements would force com-
panies to assess the risks of CSR violations such as human rights violations in their
supply chain and to address these, be it through the power of criminal law as in the
Bribery Act, as a defence such as that proposed in France or as a public duty on
companies such as in the German proposal. It is to be expected that such a duty on
companies is more likely to result in action by companies (i.e. that companies
translate the duty into their supply chain relations with their suppliers). Imposed
due diligence would thus be a better means of steering corporate behaviour by
forcing companies to take active measures to ‘clean up’ their supply chain to
comply with the law. CSR in supply chains would therefore no longer be a
voluntary commitment that companies undertake on reputational grounds as part
of the so-called ‘business case’ for CSR. Instead, the companies would have to
integrate CSR due diligence into their supply chain management and thus make
CSR a much more central point of their bargaining process with their suppliers. The
economic power of the lead buyer that the GVC framework emphasises would thus
be directly addressed through legal regulation. Given that the voluntary approach to
CSR by companies has so far not prevented the repeated violations of CSR
standards, it is time for more stringent laws to force companies to act. Such an
approach would also recognise the restrictions the shareholder value theory places
on the voluntary pursuit of CSR by directors. By legally mandating CSR due
diligence in the supply chain, directors would have to comply with this obligation
irrespective of its impact on the profits.
7 Conclusion
The GVC theory of global supply chains focusses on the use of economic power of
buyers vis-a-vis their suppliers and therefore leaves little room for voluntary private
governance of CSR. This is exacerbated by the limitations the shareholder value
theory of the firm imposes on the pursuit of CSR by company directors. As a
consequence of these limitations and the failure of host states to adequately address
CSR issues, instances of irresponsible corporate conduct tend to persist.
In this situation, the home states of multinational enterprises have, in recent
years, started to fill the governance gap for CSR in global supply chains. So far,
home state legislation of CSR which affects the way how multinational enterprises
operate worldwide has primarily focussed on disclosure laws. This chapter has
critically assessed different forms of transparency legislation on CSR. It has
revealed significant differences in the scope, legislative design, stringency and
enforcement of the pieces of legislation. I have argued that these disclosure laws
can be seen as ends of a continuum with the UK’s strategic report and the
transparency in supply chains clause in the Modern Slavery Act 2015 as softer
forms which are almost private governance in statutory form. The non-financial
198 A. Rühmkorf
information statement is placed in the middle of the continuum and the US Dodd-
Frank Act at the more stringent end.
The disclosure laws assessed here can be seen as ‘regulation of self-regulation’
which establish a basic expectation—that companies have policies on the issues
listed in the respective pieces of legislation and that companies report on their
approach to them. However, the reporting requirements are often not very stringent,
so companies can comply with the disclosure duty by generally outlining their
policies. The present state of the transparency legislation falls short of sufficiently
impacting how multinational enterprises use their bargaining power in their supply
chains in order to genuinely promote CSR. As a result, within the GVC framework
with its focus on economic upgrading and the constraints of the shareholder value
theory, these transparency laws are unlikely to change the current light-touch
approach of companies towards CSR in global supply chains. This is why the
violations of CSR principles seem to repeat themselves. Instead, what is needed
is due diligence imposed on companies by hard law. Such laws can take different
forms, ranging from the model of the UK Bribery Act with its criminal liability to
the currently debated French devoir de vigilance to the German proposal on a duty
of companies to conduct due diligence. Whatever the exact form of imposed due
diligence adopted, the key step for the discussion about promoting CSR in global
supply chains is the recognition that home states can have an impact on the way
multinational enterprises address CSR in their supply chain through legal interven-
tion. However, the subsequent impact on corporate behaviour will depend on the
stringency of the laws. Companies are unlikely to meaningfully change current
business practices unless they are forced to, as more stringent laws would require
them to translate the legal duties into their relationships with their suppliers as part
of their supply chain management. In the absence of a binding international human
rights framework on companies and the failure of host states to sufficiently protect
workers at supplier factories, the home states of multinational enterprises play an
important role that needs to be bolstered.
Acknowledgement Dr. Andreas Rühmkorf is a member of Sustainable Market Actors for

Responsible Trade (SMART) (smart.uio.no). SMART has received funding from the European
Union’s Horizon 2020 research and innovation programme under grant agreement No 693642, and
we gratefully acknowledge its support.
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Andreas R€ uhmkorf Career, memberships and achievements: Has lectured at the University of
Sheffield, School of Law, since 2008, first as a Lecturer in German Law (2008–2013) and since
2013 as a Lecturer in Commercial Law. Programme director of the LLB Law (European &
International) at the School of Law. Also a visiting lecturer at the University of Münster in
Germany. Contributing Editor of Shawcross and Beaumont commentary on Air Law (LexisNexis)
(2013–). Member of the Anglo-German Jurists Association. Also member of the Sheffield Institute
of Corporate and Commercial Law and the Sheffield Centre for International and European Law.
Author of the monograph ‘Corporate Social Responsibility, Private Law and Global Supply
Chains’, published by Edward Elgar in 2015. Author of several book chapters and articles in his
areas of interest, most recently he published the co-authored article ‘Steering CSR Through Home
State Regulation: A Comparison of the Impact of the UK Bribery Act and Modern Slavery Act on
Global Supply Chain Governance’ in Global Policy.
Research interests: Company Law and Corporate Governance (European and Comparative),
Corporate Social Responsibility and Comparative Law. Current research focusses on the legal
aspects of Corporate Social Responsibility (CSR) with a particular interest in the role of the home
state of multinational enterprises in promoting greater CSR in global supply chains.
Teaching: Corporate Law, Corporate Social Responsibility, Internet Law (E-Commerce) as well
as Comparative Law.
Soft Law Requirements with Hard Law
Effects? The Influence of CSR on Corporate
Law from a German Perspective
Alexander Scheuch
1 Introduction
Corporate social responsibility (CSR) has become a ‘hot topic’ in German corporate
law in recent years as witnessed by a surge of recent publications concerning this
subject. In Germany, CSR—a ‘foreign’ concept which is usually referred to by its
English name—may have been neglected and not taken seriously by many corpo-
rate lawyers initially.1 I suspect this is, at least in part, due to the fact that in
Germany scandals, such as Volkswagen’s infamous ‘dieselgate’, seem to be con-
textualized less as CSR issues than as failures of compliance.2 However, CSR has
become virtually impossible to ignore not least due to the European Union’s
Directive 2014/95/EU3 dealing with the disclosure of non-financial information
by large public-interest undertakings.4 CSR, a concept usually associated with
classic soft law guidelines,5 has thus entered the stage of hard law at least in the
1
See for example, Mülbert (2009), pp. 766–767; Walden (2015), pp. 1, 8.
2
That is not to say that CSR issues did not arise in connection with the Volkswagen scandal. For
instance, Asmussen (2017), pp. 118–123 discusses whether Volkswagen’s failure to live up to its
own advertised CSR policies could render its diesel cars defective in a legal sense.
3
Hereinafter referred to as the ‘CSR Directive’.
4
The CSR Directive was to be transposed by EU Member States by 6 December 2016. However,
the transposition process in Germany was delayed. The Act Transposing the CSR Directive
(Gesetz zur St€ arkung der nichtfinanziellen Berichterstattung der Unternehmen in ihren Lage-
und Konzernlageberichten) was ultimately passed on 11 April 2017 and published in the Federal
Law Gazette (Bundesgesetzblatt) 2017, Part I, pp. 802–814 on 18 April 2017.
5
For an overview of existing frameworks see Spießhofer (2014a), pp. 1284–1285; Wehrmann
(2015), pp. 57, 71–77.
A. Scheuch (*)
University of Münster, Institute for International Business Law, Münster, Germany
e-mail: alexander.scheuch@uni-muenster.de; https://www.jura.uni-muenster.de/de/institute/
institut-fuer-internationales-wirtschaftsrecht-abt-iii/team/ar-dr-alexander-scheuch/

204 A. Scheuch
area of reporting. This development is not only of academic interest, but it obvi-
ously affects company directors in significant ways as well. Are we witnessing a
‘paradigm shift’6 or even a ‘revolution’7 in corporate law? And, most importantly
from a director’s perspective, is this accompanied by the establishment of new
duties?
This chapter aims to explore these questions using German corporate law as an
example. The most fundamental legal issues associated with this topic, however,
are likely to present themselves in a similar fashion in other jurisdictions as well. To
begin with, the next section will analyse which novel duties arise in connection with
the transposition of the EU’s CSR Directive (Sect. 2). Subsequently, the focus will
extend to whether the CSR Directive indirectly generates further obligations for
company directors to take CSR issues into account (Sect. 3). Or, in other words,
does the Directive impact substantive corporate law beyond mere disclosure rules?
I will attempt to demonstrate that, at least in highly regulated jurisdictions such as
Germany, the area of application for such novel duties is smaller than one may
initially contemplate (Sect. 3.1). The chapter will then address some general
concerns regarding the derivation of corporate obligations in the field of CSR
(Sect. 3.2). Ultimately, I take a look at different areas that could potentially serve
as ‘entry points’ for CSR duties into German corporate and private law and analyse
each point in some detail (Sect. 3.3). The conclusion (Sect. 4) consists of a summary
as well as an outlook.
2 Direct Legal Impact from the Transposition of the CSR

Directive
When looking at the immediate legal implications of the transposed CSR Directive,
one should first note that the Directive itself is silent on the issue of enforcement.
Recital 10 merely asks member states to ‘ensure that adequate and effective means
exist to guarantee disclosure of non-financial information [. . .] in compliance with
this Directive’. Yet, it is quite clear that at least some enforceable duties arise from
the new reporting rules.8
6
Spießhofer (2014a), p. 1282.
7
Hommelhoff (2015), p. 291.
8
This is, in itself, quite remarkable when compared to other jurisdictions where disclosure of
non-financial information is voluntary, see du Plessis (2016), pp. 69–71.
Soft Law Requirements with Hard Law Effects? The Influence of CSR on. . . 205
2.1 Duty to Report (Correctly)
Obviously, the CSR Directive requires enterprises that fall within its scope to report
in the first place on the specified non-financial information.9 The audit process must
include checking whether the non-financial statement or report, respectively, has
been provided.10 The same is not necessarily true for the accuracy of the informa-
tion contained in the statement as the Directive leaves the member states to decide
whether this must also be audited.11 Nonetheless, there can be little doubt that
disclosure of incorrect non-financial information is a violation of directors’
duties.12 However, such a breach will only rarely result in liability as it is extremely
difficult to ascertain damages13 and to prove that the damages resulted from the
misinformation.14 The very problem of proof of causation will usually also prevent
a successful contesting action against the discharge resolution of the shareholders’
meeting.15 In terms of corporate law, in the German two-tier board system16 this
leaves the supervisory board’s power (and possible obligation) to seek declaratory
action in case the management refuses to correct a false statement.17
A more effective method of enforcement could arise under the German Act
Against Unfair Commercial Practices.18 Competitors could potentially claim that a
false non-financial statement violates this Act as a false or misleading
9
In Germany this has been transposed in ss. 289b–289c German Commercial Code
(Handelsgesetzbuch—HGB). It has been estimated that approximately 550 German enterprises
fall within the scope of the new reporting regulations, see Bl€
oink and Halbleib (2017), p. 184.
10
Art. 19a(5) of amended Directive 2013/34/EU.
11
Art. 19a(6) of amended Directive 2013/34/EU. Germany has opted to give the choice to the
enterprises themselves, see s. 289b (4) HGB. For the reasoning behind this see for example Kumm
and Woodtli (2016), p. 228; also see Bl€ oink and Halbleib (2017), p. 191. It remains unclear
whether an auditor who is merely tasked to check whether the non-financial statement has been
provided must intervene in cases where s/he notices that information contained in the statement is
manifestly false, see Schmidt (2016), p. 392.
12
Du Plessis and Rühmkorf (2015), pp. 59–60.
13
See Seibt (2016), p. 2715.
14
See Roth-Mingram (2015), p. 1344; Saenger (2017), p. 270. This problem is familiar to German
corporate lawyers from the context of false declarations of compliance with the German Corporate
Governance Code pursuant to s. 161 German Stock Corporation Act (Aktiengesetz—AktG), see
Bayer and Scholz (2015), s.161 r. 100.
15
See Roth-Mingram (2015), p. 1344; Saenger (2017), p. 270. The German Parliament’s judicial
committee has also voiced the opinion that there should be no grounds for a contesting action with
regard to the supervisory board’s duties in connection with CSR reporting, see Bl€
oink and Halbleib
(2017), p. 192. In any case, in German stock corporations discharge resolution lack immediate
legal consequences according to s. 120(2) AktG.
16
For a general overview see du Plessis et al. (2017).
17
See Roth-Mingram (2015), p. 1344; Weller et al. (2016), p. 412; For other possible consequences
see for example Seibt (2016), p. 2715.
18
Gesetz gegen den unlauteren Wettbewerb—UWG.
206 A. Scheuch
advertisement practice.19 It is questionable whether consumer protection organisa-

tions could bring similar actions because non-financial reporting is viewed as not
being directed primarily at consumers.20
Apart from the aforementioned instruments, it is doubtful whether shareholders
or stakeholders could bring successful action by themselves.21 If CSR reporting by
a company specifically refers to individual services or products, these services or
products could be deemed defective in case their CSR-related description turns out
be false, giving rise to action by the recipient or buyer.22 However, such specific
product descriptions in non-financial reporting are rare in practice.23 False general
CSR statements by a corporation, in contrast, are not seen to render its individual
products or services defective.24 Nonetheless, recipients of services or buyers of
products could potentially avoid the respective contract by pointing to fraudulent
misrepresentation due to the incorrect CSR statement.25 They would have to prove
causation as well as intent though, which may prove difficult in most cases.
Thus, the most significant possibility of enforcement may be found in the
potential penalties and fines for false or non-reporting as criminal or administrative
offences. The maximum amounts for fines have been significantly raised simulta-
neously with the implementation of the CSR Directive in Germany.26
In summary, it is nonetheless hard to argue with the assessment that the options
for enforcing correct non-financial reporting seem, as of today, ‘few and not very
effective’27.
19
For a closer look at the implications in the context of unfair commercial practices cf. Spindler
(2012), pp. 1133, 1146; also see Boor and Nowrot (2015), pp. 35, 37 (note 7); Nietsch
(2016), p. 1333.
20
See Roth-Mingram (2015), p. 1345; also see for example Birk (2014), pp. 169, 172–173; K€ ohler
(2014), pp. 161, 165–66; Seibt (2016), p. 2715.
The official reasoning for the Government Draft for the Act Transposing the CSR Directive
(2016) makes no mention of such ‘consumer enforcement’. A notable case in which a consumer
protection organisation brought action in connection with an enterprise’s CSR communication
activities involved the German store chain Lidl, but it was settled before a judgment was passed,
see Rühmkorf (2016), p. 395; Birk (2011), p. 197. The American landmark case regarding false
CSR advertising is Kasky v Nike, 27 Cal. 4th 939 (2002).
21
See Roth-Mingram (2015), pp. 1344–45; also Kumm and Woodtli (2016), p. 232.
22
See for example Asmussen (2017), pp. 119–120.
23
Seibt (2016), p. 2715.
24
See Asmussen (2017), pp. 121–123.
25
Again, see Asmussen (2017), p. 120.
26
For fines regarding administrative offences see s. 334 HGB, for criminal offences see s. 331
HGB; also see Bl€oink and Halbleib (2017), p. 193; Kumm and Woodtli (2016), pp. 229–231.
27
Saenger (2017), p. 269.
2.2 Duty to Acquire Relevant Information?
Whereas, regardless of enforcement problems, a duty to publish a correct

non-financial statement undoubtedly exists, it is less clear whether and to what
extent directors are obliged to obtain information in order to assemble this state-
ment. The official reasoning for Germany’s transposition of the CSR Directive
states explicitly that directors are not under any obligation to conduct a CSR due
diligence.28 This, in my view, seems to be in accordance with the CSR Directive
that considers CSR due diligences as part of the policies that do not need to be
pursued as long as this is explained in the non-financial statement.29 The German
legislator has even explicitly voiced the opinion that the mere lack of a due
diligence process does not even need to be explained because a duty to explain is
only assumed where a concept is missing in its entirety and not where due diligence
processes as part of a concept are lacking.30
On the other hand, as has been already established, directors have an obligation
to publish a true non-financial statement.31 At the same time, they must make a
business judgment32 whether to implement certain CSR policies or explain why
they chose not to.33 Both these considerations mandate that directors make reason-
able efforts to acquire the necessary information.34 Of course, it remains to be seen
what a court would consider ‘reasonable’ under the given circumstances of a
disputed case. The circumstances are not altogether different from declarations of
compliance with the German Corporate Governance Code (Deutscher Corporate
Governance Kodex—DCGK) pursuant to Section 161 of the German Stock Corpo-
ration Act (Aktiengesetz). In that context, it is emphasised that formulation of a
general standard is difficult and that to some extent directors must be allowed to
rely on information passed on to them by others.35
28
Government Draft for the Act Transposing the CSR Directive (2016), p. 49.
29
See Art. 19a(1)(b) of amended Directive 2013/34/EU. Bl€oink and Halbleib (2017), p. 188 assert
that the mere absence of due diligence measures need not be explained as long as a policy exists.
30
31
See supra Sect. 2.1.
32
In Germany, the business judgment rule has been codified in s. 93(1)(2) AktG; also see infra
Sect. 3.3.2.
33
In other words, directors must examine which of the matters are relevant for their enterprise.
This is correctly pointed out by Hommelhoff (2014), pp. 137, 138.
34
S. 93(1)(2) AktG requires as part of the business judgment rule that directors act ‘on the basis of
adequate information’; also see for example du Plessis and Rühmkorf (2015), p. 61.
35
Goette (2013), s. 161 r. 40.
208 A. Scheuch
2.3 Duty to Develop Policies?
It seems somewhat surprising that there is also considerable debate on whether the
CSR Directive leads to an obligation to develop policies in the field of CSR. This is
explicitly asserted by some authors36 and even opponents of such an obligation
seem to be of the opinion that it may arise as a consequence of the Directive.37 As
indicated above, such a view is in fact quite astonishing in light of what the
Directive actually says. It is unequivocally aimed at introducing a ‘comply or
explain’ regime.38 It clearly states: ‘Where the undertaking does not pursue policies
in relation to one or more of those matters, the non-financial statement shall provide
a clear and reasoned explanation for not doing so.’39 Although this may create
factual pressure on directors40—arguably, this is exactly what is meant to be
achieved—it does not seem plausible to deduce from this a direct legal obligation
to create policies. Interpreting the Directive to mean something completely differ-
ent from what is actually being stated by the rules themselves41 would mean putting
words in the mouth of the European legislator. Such an approach cannot be justified
in a democratic system. Rather than that, another legislative act would be required
to change the law. For the time being, the wording of the Directive remains clear:
enterprises are at liberty to refrain from formulating a policy. This is in line with
what the German legislator has explicitly stated in the reasoning of the CSR
Directive’s transposition: the new provisions on non-financial reporting are not
aimed at forcing corporations to change their concepts for the purposes of reporting.
Rather, the corporation must independently decide how to deal with non-financial
aspects and whether and to what extent concepts are developed and implemented.42
Of course, all of this does not mean that directors do not have to make a sound
business judgment in deciding whether to install a certain CSR policy or rather
explain why they did not.43 The required compliance declaration regarding the
German Corporate Governance Code may again serve as a point of comparison.
36
See Hommelhoff (2014), p. 137; Podszun (2014), pp. 51, 63 speaks of an ‘indirect duty to
establish and enforce a CSR policy’, a description that is at least ambiguous. I would concur only if
it is meant in the sense described under infra Sect. 3.3.4.
37
See Sch€on (2016), p. 285.
38
Government Draft for the Act Transposing the CSR Directive (2016), p. 52. Also cf. Bl€ oink and
Halbleib (2017), p. 185; Rühmkorf (2015), p. 60; Spießhofer (2014a), p. 1284.
39
Art. 19a(1) subpara. (2) of amended Directive 2013/34/EU.
40
I certainly agree with Hommelhoff (2015) when he asks the rhetorical question ‘Which enter-
prise in the textiles trade will dare to report that it does need to create provisions to prevent child
labour?’, pp. 291, 293. Seibt (2016), p. 2708 classifies this mechanism as paternalistic nudging.
41
This is what Hommelhoff (2015) does, pp. 291, 295.
42
Government Draft for the Act Transposing the CSR Directive (2016), p. 49; also see Bl€ oink and
Halbleib (2017), p. 187; Kumm and Woodtli (2016), p. 219; Rühmkorf (2015), p. 61.
43
For instance, Seibt (2016), p. 2707 points out that corporate reputation management is an
integral part of directors’ responsibilities at least in corporations that are particularly ‘exposed’
to certain shareholders.
Regarding the DCGK’s recommendations it is recognised that there is no duty to

comply with them; the decision rather falls under the directors’ scope of discretion
under the business judgment rule.44 Consequently, from a corporate law perspective
there is merely a duty to gather sufficient information45 to then make a business
judgment on whether to develop a policy. And in certain instances the answer may
well be negative.
2.4 Duty to Achieve Published Objectives?
We now turn to a final question concerning possible duties arising from the CSR
Directive. Let us assume that a corporation has made the decision to publish a
policy on a certain CSR issue. Such statements will often include announcements of
future steps rather than a mere account of existing or past measures. This leads to
the interesting question whether directors are subsequently obliged to meet such
commitments. To clarify, this is not about possible CSR duties that may exist
independently of what is reported,46 but about whether directors bind themselves
by announcing plans in their non-financial statement. Some observers apparently
assume an obligation to implement policies that have been presented in the CSR
statement.47 There are good reasons to disagree—regardless of the fact that in many
cases the objective in question will not be concrete enough to form the base for
litigation.48 Undeniably, as with the question of whether a policy must be devel-
oped in the first place,49 there can be significant factual pressure to attain the self-
imposed objectives.50 But from a purely legal view we are dealing, as has been
correctly pointed out, with an obligation de moyens instead of an obligation de
re´sultat.51 This position is again supported by looking at the German Corporate
Governance Code compliance regime. The parts of the compliance statement that
pertain to the future are viewed as non-binding by the German Federal Court of
Justice. The court merely sees an obligation to immediately update the statement if
the corporation decides to cease the pursuit of a stated objective.52
44
Bayer and Scholz (2015), s. 161 r. 49 with further references.
45
46
We take a closer look at this at infra Sect. 3.3.
47
Again this is most prominently voiced by Hommelhoff (2014), p. 137.
48
See for example, Saenger (2017), p. 270.
49
50
This is presumably what Sch€ on (2016), p. 293 means when he states that under the CSR
Directive enterprises must now ‘involuntarily voluntarily’ bind themselves.
51
Roth-Mingram (2015), p. 1344; Saenger (2017), p. 270; Weller et al. (2016), p. 411.
52
Federal Court of Justice (Bundesgerichtshof—BGH), 16 February 2009. 180 BGHZ 9, 23–24
Kirch/Deutsche Bank; also see Goette (2013) s. 161 r. 43; Lutter (2016) r. 1847.
210 A. Scheuch
3 Further Impact on Substantive Corporate Law?
Having now established the limits to the direct legal impact of the implemented
CSR Directive, it is of immediate interest whether CSR as promoted by the
Directive has an additional layer of impact. More precisely, we are looking at
whether the fact that CSR is considered by the EU to be an important field of
reporting also shapes substantive (national) corporate law. Is the CSR Directive
really a ‘camouflaged’ change to substantive law, as Peter Hommelhoff has
phrased it?53
3.1 A Priori Limitation to Non-Regulated Aspects
When looking at possible novel effects of CSR on substantive corporate law, one
should realise from the outset that the area of impact is limited. This is because we
cannot speak of new influences in areas where CSR aspects are already dealt with
by hard law. For example, the German system of employee co-determination is
virtually unrivalled.54 Of course, the managers of a German enterprise must adhere
to co-determination rules when conducting their business. This is compliance in its
purest form, and regardless of whether one considers compliance to be part of
CSR55 it is a matter of course56 and certainly nothing new. There is simply no need
to derive any novel concept from the CSR Directive or frameworks to establish this
self-evident principle. And it is not just co-determination rules, but also other
aspects of labour law, environmental law, criminal law and tax law,57 just to
name a few, that serve CSR without creating a need to leave the firm ground of
hard law.58
Thus, a potential new impact of CSR is limited a priori to unregulated fields. But
do such ‘blank spaces’ exist at all in a highly regulated environment such as the
German legal system?59 Without globalisation the answer could possibly be neg-
ative. However, the internationalisation of the economy provides new challenges
53
Hommelhoff (2014), pp. 137, 144.
54
For an overview see Sandrock et al. (2017).
55
Apparently, the EU now sees compliance as a minimum ‘ingredient’ of CSR, see inter alia http://
ec.europa.eu/growth/industry/corporate-social-responsibility (accessed 25 November 2016); this
view is shared by Sjåfjell and Richardson (2015), pp. 312, 315; for an extensive discussion on
whether CSR is purely voluntary by definition see Rühmkorf (2015), pp. 10–13; also see Walden
(2015), pp. 1, 15–16; for a differing view see Boor and Nowrot (2015), pp. 35–36.
56
Kort (2012), p. 926; Spindler (2012), pp. 1133–1134; Wehrmann (2015), pp. 57–61.
57
Walden (2015), p. 1.
58
In these fields, CSR rules could, at most, have a ‘supporting’ effect, particularly where hard law
exists but enforceability is problematic. For this view see Podszun (2014), pp. 51, 61.
59
This question has also been posed by Spießhofer (2016), p. 370; also see Nietsch (2016), p. 1334.
that national law alone cannot cope with. This is true despite the fact that, according
to the prevailing opinion in Germany, company directors are obliged to obey
foreign and international law as part of their compliance duties, at least to a certain
degree.60 But this obligation is of little use if the foreign jurisdiction in which a
German enterprise conducts its business sets significantly lower standards when it
comes to CSR issues (e.g. worker rights or environmental protection).61 In such
countries mere compliance with local laws may simply not be sufficient.62 This is
where CSR comes into play, and this area of its application may indeed present a
new dimension compared to historical precursors.63
Furthermore, even in jurisdictions that sufficiently regulate CSR aspects, a
corporation’s legal responsibility most of the time ends where it is neither the
corporation itself nor a subsidiary that violates the law, but rather a different
member of the supply chain.64 This area, where there is by law no attribution of
illegal behaviour, presents another possible new field of impact of CSR on
substantive law.
To be clear, this is not to say that we should assume that new obligations for
businesses exist in these unregulated areas (insufficient foreign law, lack of attri-
bution). Considerable arguments have been brought forth against such an approach.
Rather, this chapter attempts to discuss this very subject in detail later. For now it
suffices to realise that even for enterprises from highly-regulated jurisdictions, a
limited amount of gaps in responsibility exist that could potentially be filled by
additional CSR-related duties.
3.2 General Concerns Regarding the Creation of New CSR

Duties
Before turning to the specific ways in which new CSR-related obligations could
enter national corporate law regimes, it is appropriate to deal with some of the
general objections that have been raised against such a process.
60
See Kort (2012), p. 927; Walden (2015), pp. 1, 18–20.
61
This is pointed to by many authors, for example Boor and Nowrot (2015), pp. 35, 40; Rühmkorf
(2016), p. 395; Spießhofer (2014a), pp. 1281, 1282, 1287; Walden (2015), pp. 1, 7, 16.
62
Wehrmann (2015), pp. 57, 61. For an extensive look at the liability of German enterprises for
human rights violations in foreign jurisdictions see Weller et al. (2016), pp. 387–420.
63
Walden (2015), pp. 1, 7. This may indeed correspond with the assessment by Kort (2012), p. 928
who does not recognise any novel elements in CSR compared to business practices that have
existed for centuries; also see Nietsch (2016), p. 1334.
64
Rühmkorf (2016), p. 393; Spießhofer (2014a), p. 1287; Walden (2015), pp. 1, 22.
212 A. Scheuch
3.2.1 Voluntary Nature of CSR
Even if one considers CSR to encompass compliance as well,65 the areas that we
have just identified to be meaningful in the context of possible new duties are not
otherwise regulated by hard law (at least not by hard law that the enterprise in
question is obligated to abide by). Thus, acting socially responsibly in these areas
would currently be voluntary for enterprises. If one were to impose new obligations
for corporations in these fields, one would eliminate the voluntary nature of the
respective CSR activities.
What effect would this have? A significant one, some believe. It has been argued
that intensifying regulation and the ever-increasing imposition of additional obli-
gations on enterprises actually diminish the room for moral or ethical behaviour.
Behaving morally, so the thinking goes, requires managers to act on their own
initiative rather than to act to escape damage claims or sanctions.66 This almost
philosophical argument is certainly interesting, but, in my view, not crucial for the
questions at hand. As a matter of fact, some commentators even take the diamet-
rically opposite stance by arguing that adhering to laws is the fundamental basis for
enterprises acting morally and that moral behaviour only becomes effective if it is
transposed into rules that apply to everyone.67 And if one chose a more consequen-
tialist or utilitarian approach the impetus for the desired result—promotion of CSR
issues—would matter even less.68
The real problem, I contend, lies elsewhere. The crucial question is not if we can
still call an action ‘moral’ even when it is carried out to fulfil an obligation. Rather,
it is the tangible effect that novel CSR duties could have on the already existing
voluntary CSR activities by enterprises. It seems possible at the least that, in the
light of new requirements in previously voluntary fields of CSR, enterprises could
feel compelled to limit their CSR activities to these fields in the future and to
simultaneously discontinue all other CSR measures that are not mandatory.69 The
reason for this potential negative effect is a simple one: once corporate directors are
confronted with new duties, liability is looming on the horizon. And as this threat is
‘on the table’ it seems possible that directors will simply turn to a consulting firm
and buy a CSR solution ‘off the peg’ as a personal shield against liability.70 This
behaviour by itself could still be bearable, but we must fear that such a withdrawal
to avoid liability would have the additional effect of thwarting softer CSR activities
65
66
Strohn (2016), p. 5.
67
See Walden (2015), pp. 1, 15–16; Griss (2014), pp. 271, 272 refers to Georg Jellinek’s
designation of law as an ‘ethical minimum requirement’.
68
For instance, Podszun (2014), pp. 51, 65 considers the motivations for CSR activities as
‘secondary’.
69
Wernicke and St€obener de Mora (2016), p. 379 voice this concern as well.
70
This reaction has been vividly described by Saenger (2017), p. 266. We have already witnessed a
similar effect regarding CMS, see Hauschka and Herb (2016), p. 371.
that are non-mandatory but equally or even more important—for instance, devel-
oping a corporate culture, reaching a consensus on ethical values within the
enterprise, and educating managers and employees alike.71 Just as it has been
said that ‘bureaucracy is compliance’s biggest enemy’,72 fig leaf solutions to shield
against liability may be the major adversary of ‘real’ CSR.
Interesting insights could potentially be gained from psychology. Bringing
liability into the picture suddenly frames CSR as avoiding something negative
(i.e. punishment) rather than creating something positive. The psychological pros
and cons to such a re-framing are complex and cannot be explored further in this
chapter—particularly as aspects of principal agent theory73 would arguably also
have to be taken into account. It shall suffice to briefly mention that there is a ‘field
of tension’ here, as framing something as a potential loss rather than a potential gain
may create a stronger reaction, but at the same time loss aversion has been
diagnosed to create inertia and ‘pressing us to not make changes, even when
changes are very much in our interests’.74 There is simply no easy or general
answer to the question whether punishments or rewards are better suited to reach
a goal.75 For our purposes it is just important to keep in mind that expanding duties
in the field of CSR could ultimately have an adverse effect.
3.2.2 Sufficiency of Market Mechanisms?
While such potential adverse effects of increased CSR regulation are certainly a
legitimate concern, less weight should be given to the more general argument that
market mechanisms already sufficiently force enterprises to take action in the field
of CSR.76 Certainly many corporations have submitted themselves to CSR stan-
dards, especially for reputational reasons. Yet, effectiveness is questioned.77
Whether one deems the current state of CSR in German corporations to be sufficient
is predominantly a political question that is answered differently depending on
whom one asks. Unsurprisingly, economic associations assess the voluntary model
of CSR to be functioning well78 whereas NGOs refer to studies that have found
voluntary measures to be insufficient.79 The EU Commission has identified ‘both a
71
See Saenger (2017), p. 266; Wehrmann (2015), p. 82.
72
Hauschka and Herb (2016), p. 371.
73
See for example the groundbreaking work of Jensen and Meckling (1976), pp. 305–60.
74
For a brief introduction to these issues, see Thaler and Sunstein (2009), p. 40.
75
For some takes on the issue, see Kahneman (2012), p. 175; Hossain and List (2012),
pp. 2151–2167.
76
This argument is brought forth e.g. by Sch€ on (2016), pp. 284–285.
77
See Rühmkorf (2016), pp. 393–394 with further references.
78
Wernicke and St€obener de Mora (2016), p. 381.
79
Haan and Achten (2016), p. 396 (note 12).
214 A. Scheuch
market and regulatory failure’.80 The truth may well lie somewhere in the middle as
many family enterprises in particular still feel committed to the values of the
‘honourable merchant’ of former times, but individual virtuousness may not be
enough especially in larger enterprises.81 Rather than adding to this political debate
I would like to confine myself to one specific point: when, as part of the general
debate, the mixing of economic/market mechanisms and legal instruments is
criticised,82 I do not share this criticism. In my view there is nothing objectionable
per se to this mix, as this has been employed in countless other fields of
business law.
3.2.3 Lack of Democratic Legitimacy
In my opinion, for legal scholars the focus should not be so much on the political
dimension as on other fundamental challenges that potential new CSR duties would
present. As I have pointed out, we are referring to areas of law where no statutory
law exists. Rather, in order to establish said new obligations, one would have to
transfer the contents of ‘soft’ law CSR frameworks to the respective legal order.
Such an approach is, of course, bound to raise eyebrows from a constitutional law
perspective as it would indirectly create a liability arising out of non-binding soft
law.83 It cannot be denied that there is a potential conflict with the principles of
democracy and rule of law.84 One may argue with some entitlement that the
balancing of corporate freedom and social responsibility, which is required before
imposing new duties on enterprises, lies in the exclusive competence of the
legislature in democratic systems and may not be outsourced to NGOs or private
actors.85
Some deny that this is a problem arguing that soft law on CSR would only be
employed to interpret hard law and fill gaps in regulation and that in this regard a
reliance on soft law is preferable to a purely intuitive approach.86 This argument as
well as portraying constitutional concerns as ‘exaggerated’87 certainly seems fairly
naı̈ve. Rather, we are forced to take these concerns seriously and recognise them as
80
Proposal for a Directive of the European Parliament and of the Council amending Council
Directives 78/660/EEC and 83/349/EEC as regards disclosure of nonfinancial and diversity
information by certain large companies and groups, COM (2013) 207 final.
81
Spießhofer (2016), p. 367.
82
See Sch€on (2016), p. 284.
83
84
For an extensive look at these issues see Spießhofer (2016), pp. 367–370; also see Boor and
Nowrot (2015), pp. 47–48.
85
See Spießhofer (2016), pp. 369–370.
86
Grabosch (2016), p. 385.
87
Grabosch (2016), p. 385.
an impetus to later examine carefully whether even in democratic systems there are
ways for privately-created soft rules to have general consequences.
In the context of Germany, this is all the more relevant in light of a 2014 decision
by the German Federal Administrative Court.88 At the heart of the lawsuit was a
local statute governing the use of a city cemetery. This statute allowed tombstones
to be erected only if it could be verified that the entire supply chain did not involve
any child labour in the sense of the International Labour Organization’s (ILO)
Convention 182. The court found this requirement unconstitutional, inter alia on
the grounds that the city lacked sufficient authorisation to pass this statute. Because
the stonemasons’ fundamental rights were impeded this would have required an act
of parliament. So if even a local public authority is barred from implementing CSR
standards without parliamentary authorisation, can we confer such competence to
private actors and NGOs?
3.2.4 Doubts Regarding Legal Certainty: Vagueness and Lack

of Uniformity of CSR standards
The principles of democracy, however, are not the only factors to take into account
when looking at the constitutional dimension of the topic. There are also the
maxims of legal certainty and legal clarity that could be impeded by the metamor-
phosis of soft law CSR standards into hard corporate duties.89 Again, it seems quite
one-sided to simply maintain that legal certainty is not endangered while arguing
that existing soft law makes the application of (hard) law easier.90 Perhaps one
could still tolerate the problem that some of the terms used by CSR frameworks are
fairly vague and ambiguous91 as this is a challenge that we similarly encounter in
hard law contexts. We are faced with an additional serious issue, though: no clear,
uniform and comprehensive standards for CSR are in place. Existing frameworks
are heterogeneous92 as not just their scope, but also their methods differ consider-
ably. Many guidelines are process-oriented, thus complicating the deduction of
fundamental substantive standards.93 The CSR Directive does not solve this prob-
lem as the EU has refrained from prescribing a single standard to allow for ‘high
flexibility’.94 And the German legislator (in explaining why no single CSR standard
was implemented) has explicitly recognised the dilemma that only some
88
German Federal Administrative Court (Bundesverwaltungsgericht—BVerwG), 16 October
2013. Neue Zeitschrift für Verwaltungsrecht 33(8), p. 527.
89
See Spießhofer (2016), pp. 369–370.
90
This is the position taken by Grabosch (2016), p. 385.
91
This problem is pointed out by Spießhofer (2016), p. 369.
92
Spießhofer (2014a), p. 1285; Villiers and Mäh€
onen (2015), pp. 214–215.
93
Spindler (2012), p. 1148.
94
See Directive 2014/95/EU, recital 3; a high degree of flexibility is also stressed by the German
legislator, Government Draft for the Act Transposing the CSR Directive (2016), p. 46.
216 A. Scheuch
frameworks cover the entire spectrum of information that is relevant under the CSR
Directive whereas other guidelines have a narrower scope but are more precise at
the same time.95 According to the new rules in Germany’s Commercial Code,
corporations may even create the non-financial statement without any reference
to a certain framework (although at least a need to explain such an abstention was
added at a late stage of the lawmaking process).96
So if consistency and comparability are not even attained in reporting,97 how,
one may ask, should this be attained in corporate law? This is certainly a critical
point to keep in mind for further examination of this topic.
3.2.5 Fundamental Rights: Excessive Scope of Possible Duties
Lastly, a third constitutional aspect to take into account is the national and
European fundamental rights of the enterprise itself (e.g. the freedom to conduct
a business under Art. 16 of the EU Charter of Fundamental Rights98) and its
shareholders (e.g. the right to property under Art. 14 of the German Basic
Law).99,100 These rights must be kept in mind even if one renounces the idea of
pure shareholder primacy.101 They could mandate that enterprises are not charged
with a limitless responsibility for all negative effects as well as the actions of
independent third parties.102 Otherwise, this could potentially lead to incalculable
risks, especially for small and medium enterprises.103
3.3 Possible ‘Entry Points’ of CSR Obligations into German

Corporate and Private Law
At least some of the concerns that have been voiced regarding the deduction of new
CSR duties for corporations must certainly be classified as valid. This makes it
necessary to tread carefully when examining possible pathways of CSR obligations
95
Government Draft for the Act Transposing the CSR Directive (2016), pp. 52–53; also see Kumm
and Woodtli (2016), p. 224.
96
S. 289d HGB; explicitly stated by Government Draft for the Act Transposing the CSR Directive
(2016), p. 52. Regarding the obligation to explain, see Bl€
oink and Halbleib (2017), p. 189.
97
See Roth-Mingram (2015), p. 1343; Spießhofer (2014a), p. 1283.
98
Directive 2014/95/EU recital 22 refers to fundamental rights, in particular the freedom to
conduct a business.
99
Grundgesetz—GG.
100
Sch€on (2016), p. 288.
101
Regarding the controversy surrounding the corporate objective, see infra Sect. 3.3.1.
102
See Spießhofer (2014a), p. 1287.
103
Wernicke and St€obener de Mora (2016), pp. 375, 379.
into the system of hard law. For a better understanding I suggest a division into four
categories of possible ‘entry points’—while admitting at the same time that the
borderlines between these categories are to some extent fluid.
3.3.1 Influence on Corporate Objective
A first effect of the rise of CSR in general and the appreciation the topic has
received by the CSR Directive in particular could relate to the corporate objective
(Unternehmensziel, in German). This possible impact has been at the centre of
attention in Germany which is hardly surprising given that the corporate objective
or corporate interest (Unternehmensinteresse) has been a highly controversial
subject for decades. Essentially, the debate circles around the well-known question
whether a strict shareholder value approach is to be favoured over a more
stakeholder-oriented concept.104 Could the new developments in the field of CSR
tip the scales towards the latter?
A preliminary clarification seems appropriate. There is little doubt that the
shareholders can determine in the articles of association that the objective of their
corporation shall be a non-profit or charitable one.105 Instead, I will focus on
for-profit corporations. Does the CSR Directive show us that the corporate objec-
tive always includes socially responsible behaviour (i.e. a stakeholder orientation)?
There are commentators who assume that the Directive indeed has such a
‘revolutionary’ effect (which is supposedly merely obscured by its placement in a
reporting context).106 The Directive, so it is argued, ‘could change the corporate
objective in its core’.107 This, with all due respect, seems to be an obvious over-
interpretation of the Directive. Not least, the significant constitutional dimension of
the topic108 forces us to take the CSR Directive as what it is: reporting rules. The
Directive’s recitals themselves clearly describe its objective, ‘namely to increase
the relevance, consistency and comparability of information disclosed by certain
large undertakings and groups across the Union’.109 It is about ‘transparency’,
‘disclosure’, and ‘divulging information’.110 The same is true for Germany’s trans-
position of the Directive. The legislator has openly acknowledged that the imple-
mentation does not have any direct effect regarding the significance of CSR in
104
See e.g. Fleischer (2015), s. 76 r. 29–42; for an international perspective see du Plessis and
Rühmkorf (2015), pp. 52–54.
105
See Hommelhoff (2015), p. 292; Kort (2012), p. 930; Mülbert (2009), p. 772; Spindler (2012),
p. 1141. Whether a later change requires a unanimous shareholder resolution is a controversial
question, see Spindler (2012), p. 1141.
106
Hommelhoff (2014), pp. 140–141.
107
Hommelhoff (2015), pp. 291–292.
108
See supra Sects. 3.2.3–3.2.5.
109
Directive 2014/95/EU recital 6.
110
Directive 2014/95/EU recitals 1–3.
218 A. Scheuch
corporate law, but merely signals a certain expectation.111 For now, we must
assume that the decision on the ‘if’ of CSR activities is still within the competence
of the enterprise itself. The CSR Directive concerns solely the ‘how’ of reporting on
CSR.112
If the (European or German) legislator would intend to end the debate on the
corporate objective in favour of a CSR or stakeholder-oriented interpretation, the
constitutional principles would mandate express changes to substantive corporate
law. From an EU perspective this would require an open harmonisation of general
stock corporation law instead of a backdoor approach regarding reporting. For such
a venture, courage and prospects of success may be lacking just as much as the EU’s
legislative competence.113
As a secondary argument one can add that in light of the diversity of CSR
standards and the EU’s decision to abstain from implementing a uniform framework,
it is absolutely unclear what exactly the corporate interest would look like after an
inclusion of CSR. The danger to end up with an ‘incomprehensible or [. . .]
all-encompassing public interest’114 is real. This would add insecurity rather than
solve the riddle that the corporate interest has presented over the past decades. A
nebulous corporate objective could ultimately even provide directors with a ‘carte
blanche’115 to act in whichever way they see fit—an effect certainly unintended even
by those who argue that the CSR Directive has an impact on the corporate objective.
In the end, the debate on the corporate objective may be less relevant than it
seems at first glance, as Gerald Spindler has correctly pointed out116:
Even proponents of a pure shareholder value approach must concede that soft factors such
as customer perception also have to be taken into account by management (and it is hard to
put a precise value on measures like this) and even adamant proponents of a shareholder
value approach would arguably not require decision-makers to leave, e.g., human rights
concerns regarding child labour [in jurisdictions where it is allowed by national law] out of
the picture, claiming that it is hardly possible to assign an exact value.
The real test could arise in a crisis scenario. Are directors of a corporation
allowed to throw all voluntary CSR measures (of course, this does not encompass
compliance!) overboard to ‘save the sinking ship’? The answer, in the absence of
further legislation, must be yes.117 One could perhaps criticise this from a political
point of view, but from a legal perspective it is hard to argue against this result even
after the adoption and transposition of the CSR Directive.
111
112
See Roth-Mingram (2015), pp. 1343–1344; also see Kumm and Woodtli (2016), p. 219; Seibt
(2016), p. 2709.
113
See Sch€on (2016), pp. 282, 287–288.
114
See Saenger (2017), p. 265.
115
Spindler (2012), p. 1139 with further references; also see Mülbert (2009), p. 772.
116
Spindler (2012), pp. 1139–1140 [translated from German]. Walden (2015), p. 10 (note 41) also
states that the practical differences between the shareholder value and stakeholder approaches are
negligible.
117
This view is also expressed by Sch€ on (2016), pp. 286–287.
3.3.2 Influence on Defining the Applicable Standard of Care
Even though the CSR Directive does not provide a decisive argument in the
continuous debate on the corporate objective, it could nonetheless have an effect
on directors’ duties to take into account CSR factors outside of mere compliance
with applicable laws. The question we must answer here is not whether directors
may give precedence to CSR rather than to profit in specific instances118 but
whether a duty to do so exists as a consequence of the CSR Directive and the rise
of CSR frameworks. This, again, is different from the question whether such duties
can be integrated into the articles of association, bylaws or the directors’ employ-
ment contracts.119 Rather than that, we are exploring whether such obligations exist
even in the absence of such autonomous determinations.
In German law the general standard of care for corporate directors is set by
Section 93(1) AktG. Clause 1 requires them to exercise the care of diligent and
conscientious managers while clause 2 includes a codification of the business
judgment rule. Section 93(2) holds the directors liable jointly and severally for
breaches of their duties.
The German debate on whether certain CSR duties must be observed by direc-
tors closely resembles the controversy surrounding the corporate objective.120
Some argue that the CSR Directive could indirectly expand directors’ duties,
caused by a ‘spill over’ from the (supposed) specification of the corporate objective
through the EU’s reporting rules.121 And even opponents of such additional obli-
gations have voiced their understanding that a duty to report on CSR activities
assumes that there is also a duty to engage in CSR.122 This is countered by the
familiar position that mere reporting rules cannot, by contrast, define corporate
duties and lead to directors’ liability.123 Otherwise, it is argued, we would experi-
ence ‘creeping law’124 in the form of a liability for non-binding soft law.125
118
For a closer look at this question from a German perspective cf. Walden (2015), pp. 27–31; also
see Spindler (2012), pp. 1138–1142. In a common law context the question would likely be
associated with the discussion on shareholder primacy and judgments such as Dodge v Ford Motor
Co., 170 NW 668 (Mich 1919). However, oftentimes CSR and profit are not strict alternatives, as
will later be addressed.
119
See Wernicke and St€ obener de Mora (2016), p. 379 (note 46); this has been discussed especially
regarding a duty to follow the German Corporate Governance Code’s recommendations, see Bayer
and Scholz (2015), s. 161 r. 50; for the parallel issue of defining a corporate objective see supra
Sect. 3.3.1.
120
As indicated above (supra Sect. 3.3) it is hard to draw a definite boundary to the discussion
under supra Sect. 3.3.1. There are certainly points of contact to the corporate objective as directors
are obliged to pursue this objective.
121
Hommelhoff (2015), pp. 291–292, 98.
122
See Kort (2012), p. 927.
123
Sch€on (2016), pp. 287–288.
124
This term was coined by Birgit Spießhofer, see inter alia Spießhofer (2016), p. 370.
125
220 A. Scheuch
The latter arguments are, in principle, convincing—just as they are in the context
of the corporate objective. As demonstrated before, there is simply no indication
that the framers of the CSR Directive assumed the existence of a duty to engage in
CSR outside of mere compliance. Otherwise, the ‘comply or explain’ regime would
be pointless. And the premise of a change to the corporate objective which is then
extended to directors’ duties is, as has been explained, flawed from the outset.
However, one notable difference to the debate regarding the corporate objective
may exist. This concerns the question of democratic legitimacy of novel rules in the
absence of parliamentary legislation. It must be conceded that the German legal
system does not rule out the derivation of general duties of care from private
frameworks. This circumstance is brought up specifically as an argument in the
discussion regarding CSR duties.126 Even some of the observers who would find
such a result troubling do not outright discard this train of thought, but rather deem
it possible that national courts may allow soft law frameworks to enter hard law
through an interpretation of liability rules.127
Could the use of CSR frameworks to interpret the general standard of care in
corporate law really be a subtle way to integrate CSR duties? In order to answer this
question we must look at other examples where German courts have assumed an
influence of private frameworks. Most notably128 this has been the case with
standards set out by the Deutsches Institut f€ur Normung (DIN), the German Institute
for Standardization, a private registered association (and member of the Interna-
tional Organization for Standardization, ISO). Its safety standards have on numer-
ous occasions been employed to define, for instance, duties of care in tort cases.129
Similarly, in the context of corporate law, the German Corporate Governance
Code—a private framework—has been used as a source for legal interpretation.130
In order to determine whether CSR frameworks could have comparable effects
one must take into account the underlying reason for the described approach. For
instance, the German Federal Court of Justice has explicitly justified the use of DIN
standards by explaining that they, although not rules of law, reflect the ‘generally
accepted standards of practice’ and are thus exceptionally well-suited to determine
the duty of care that is expected in certain circles.131 The DCGK functions in a
similar way. The code commission is not authorised to change substantial corporate
law by setting new standards of care—rather, the code gains significance for
directors’ duties by being generally adhered to by the majority of comparable
126
Grabosch (2016), p. 385.
127
See, regarding the UN Guiding Principles, Spießhofer (2014b), pp. 2475–2476; see also
Wehrmann (2015), p. 65.
128
For other private frameworks see for example Schaub (2016), s. 276 r. 81; Grabosch
(2016), p. 385.
129
For an overview see F€
orster (2016), s. 823 r. 339–340.
130
See Saenger (2017), p. 265; du Plessis and Saenger (2017).
131
See BGH, 1 March 1988, 103 BGHZ 338, 341–342; also see BGH, 11 December 1979. Neue
Juristische Wochenschrift 33(22):1220; BGH, 3 February 2004. Neue Juristische Wochenschrift
57(20):1450.
corporations.132 In contrast, mere recommendations by private entities that are not

encountered by sufficient observance in practice do not have this effect. For
example, the German Federal Court of Justice has denied negligent behaviour by
bicyclists not wearing helmets. The court found that explicit recommendations by
traffic law organisations did not result in corresponding behaviour by the majority
of cyclists in practice.133 To summarise, the reason why DIN standards and other
private frameworks are used to identify duties of care is not their mere existence,
but the fact that they are assumed to reflect certain practices and conventions. For
our purposes this means that we should not attribute any hard law effect to CSR
guidelines and frameworks unless they are supported by an overwhelming adher-
ence in corporate circles.
Apart from this, there are considerable differences between DIN standards and
CSR frameworks. It has already been pointed out that the latter are often vague and
non-comprehensive.134 Furthermore, the variety of existing CSR frameworks
makes comparison to the uniform DIN standards problematic. Some observers
also contend that CSR frameworks differ from DIN standards in often reflecting
only the interests of ‘special groups’.135 In conclusion, there is certainly some merit
to the assessment that due to these factors it seems impossible to derive any specific
maxims for directors’ behaviour from existing CSR frameworks.136
Not inferring any new duties from CSR frameworks or the CSR Directive,
however, is not tantamount to denying directors’ duties in connection with CSR
altogether. Even in the absence of novel obligations, corporate directors are already
forced to take CSR into account to some extent. Their general duty to sustainably
increase the value of the enterprise may already make it necessary to include CSR
aspects in their decision-making, especially as this can be inevitable to protect the
enterprise from a loss of reputation and/or turnover.137 And the assessment that
acting socially responsible is often profitable138 is also true in other ways. As a
simple example, we can think of energy saving combining environmental protec-
tion with cost saving.139 In consequence, omission of CSR measures that are not
prescribed by (hard) law should be treated as a regular business judgement subject
to the familiar rules.140
132
Bayer and Scholz (2015), s. 161 r. 24; Spindler (2015), s. 161 r. 68.
133
BGH, 17 June 2014. Neue Juristische Wochenschrift 67(34):2495.
134
See supra Sect. 3.2.4.
135
Ohly and Liebenau (2014), pp. 205–206.
136
See Kort (2012), p. 927.
137
Walden (2015), pp. 10, 32; also see Hauschka and Herb (2016), p. 372. BGH, 6 December 2001.
Neue Juristische Wochenschrift 55(21):1586 has also stated that due to the solidification of
goodwill through CSR measures there is no sharp dividing line between altruistic and (long-
term) selfish actions.
138
Kort (2012), p. 930; the profit may, however, be hard to determine exactly, see Saenger (2017),
p. 262; also see Mülbert (2009), p. 768.
139
See Spießhofer (2014a), p. 1286; Spindler (2012), p. 1137.
140
Walden (2015), p. 26.
222 A. Scheuch
3.3.3 Consideration Under contra bonos mores or Anti-Competitive

Behaviour Standards
A third category under which CSR standards could potentially enter hard law is not
limited to corporate law: the standard of contra bonos mores. Under German law an
act that runs contrary to this standard not only leads to the nullity of the respective
contracts,141 but it can also give rise to a special tort claim for deliberate harm under
a violation of public policy.142 It is therefore self-evident that a conscientious
director must obey this standard when acting on behalf of the corporation.143 It is
even considered that a contract contra bonos mores always constitutes a violation of
directors’ compliance duties regardless of whether German law is applicable to the
contract at all.144
A special appeal of the contra bonos mores standard in the context of CSR lies in
the fact that the (justified) criticism directed at the perceived lack of democratic
legitimacy145 is not applicable to this standard. Rather, as the term ‘morals’ implies,
we are faced with non-legal standards from the outset. The provision referring to
public policy is specifically aimed at protecting the non-codified foundations and
ethical values of society.146 At the same time, however, due to this aim the
threshold for a non-legal rule to be considered part of the ‘good morals’ is very
high. It is well recognised that the contra bonos mores standard in German law
serves, in particular, the integration of fundamental rights (that would otherwise
only bind state authorities) into private law, a concept usually referred to as
‘indirect third-party effect’.147 To prevent this high standard from becoming
boundless it is almost inevitable to limit its application to closely defined groups
of cases.148 It is difficult to imagine how CSR standards could enter this ‘elitist
group’ of moral standards. Rather, we must assume that many harsh violations of
what we consider ‘CSR duties’ are already encompassed by public policy, for
example gross violations of human rights. The CSR Directive and CSR frameworks
do not change this, but at the same time they do not add new elements to this
standard.
Rather than reaching for the almost unattainable standard of public policy,
proponents of a strong influence of CSR frameworks on hard law could turn to a
141
German Civil Code (B€ urgerliches Gesetzbuch—BGB), s. 138.
142
BGB, s. 826.
143
Admittedly, the dividing line between this discussion and the one under supra Sect. 3.3.2 is
quite blurry as an undeniable link to directors’ duties exists, but as indicated under supra Sect. 3.3 a
division is attempted nonetheless to promote a useful categorisation for the sake of future research
and debate.
144
Walden (2015), p. 22.
145
146
Armbrüster (2015), s. 138 r. 11; Wendtland (2016), s. 138 r. 1–2.
147
See Armbrüster (2015), s. 138 r. 20–22; for the significance in the CSR context see for example
Boor and Nowrot (2015), p. 39.
148
See Armbrüster (2015), s. 138 r. 15.
more specific standard—that of anti-competitive behaviour under Germany’s Act

Against Unfair Commercial Practices.149 It does not seem unthinkable that com-
petitors could in the future challenge, for instance, low-cost foreign production
practices by German enterprises (or their respective suppliers) that, while observing
local laws, run contrary to recommendations in CSR frameworks.150 This has been
(unsuccessfully) attempted in the past with regard to asbestos protection under the
ILO’s ‘Convention concerning Prevention and Control of Occupational Hazards
caused by Carcinogenic Substances and Agents’ (no. 139). In its 1980 decision, the
German Federal Court of Justice denied the existence of a common global standard
regarding worker protection from asbestos, but this result was explained in part by
the fact that the convention had only been in effect since 1974 and only 15 ILO
member states had ratified it until that point of time. This leaves open the possibility
that more established international guidelines could be considered by the court.151
However, significant arguments have been brought forward against considering
CSR frameworks in determining the standard of ‘fair commercial practices’. In
particular the lack of democratic legitimacy which has already been emphasised in
this chapter is pointed to. The problem lies in the fact that these private frameworks
would—via the Act Against Unfair Commercial Practices—become binding on
parties that have in no way participated in their creation.152 But even if CSR
frameworks could not be used to define ‘fair commercial practices’, one could
still consider under the ‘unfair commercial practices’ standard whether certain
aspects of CSR (e.g. certain labour conditions in other countries) must be obeyed
regardless of existing frameworks; the constitutional protection of fundamental
rights could mandate such an interpretation.153 However, de lege lata this proves
to be difficult as the legislator of the Act Against Unfair Commercial Practices has
explicitly stated that the Act is not aimed at comprehensively serving the ‘common
good’.154
149
The Act has already been mentioned in this chapter, see supra Sect. 2.1. Note that under Sect.
2.1 it was evaluated whether false reporting on CSR constitutes a violation of the Act Against
Unfair Commercial Practices. In contrast, we are now considering whether certain ‘irresponsible’
business practices (especially in other jurisdictions) may be seen as a violation of the Act,
particularly UWG, s. 3(1) and s. 4 no. 11.
150
See Grabosch (2016), p. 385; for a detailed examination see Kocher (2005), pp. 648–651;
Podszun (2014), pp. 74–76; Weber and Weber (2008), pp. 899–906.
151
Grabosch (2016), p. 385 believes that a comparable case would arguably be decided differently
today.
152
See in particular, Ohly and Liebenau (2014), pp. 205–206.
153
Ohly and Liebenau (2014), p. 207.
154
For a more detailed discussion (also on whether commissioning the law on unfair commercial
practices to promote CSR would be advisable in the future) see Ohly and Liebenau (2014),
pp. 207–209.
224 A. Scheuch
3.3.4 Increasing Relevance Due to Practical Prevalence
It has been demonstrated that it is difficult to justify a more or less direct influence
of CSR frameworks or the CSR Directive on corporate duties outside of reporting.
Neither do these CSR rules decide the debate on the corporate objective nor do they
contain standards of care comparable to standardisation rules. It is also questionable
whether they add to the already-existing ‘good morals’ or could be used to further
define ‘fair commercial practices’. However, we have yet to discuss a more indirect
way in which CSR standards could enter the system of corporate law. I will refer to
this phenomenon as ‘mass observance’.
In the context of safety standards it has already been explained that duties of care
are inferred from these standards because they are assumed to represent the
prevalent practices.155 Using this thought as a starting point it is not hard to imagine
how CSR frameworks could indeed indirectly create duties for directors. If the
majority of other comparable enterprises observe certain CSR standards this behav-
iour may become the norm and thereby the new standard of care for a conscientious
director. This has been argued similarly in the context of compliance:
“Standardised compliance structures have become so established that they can
shape the usual standards in management”.156 The same could certainly happen
in some fields of CSR. And this process could even be accelerated by the influence
of proxy firms who may press for an observance of CSR rules in a wide variety of
corporations.157
In a related fashion, widespread adherence to certain CSR principles by the
majority of enterprises could make it necessary for the remaining enterprises to
follow this lead for reputational reasons. I have already emphasised in this chapter
that directors are under a duty to protect the corporation’s reputation as this can
create profits or prevent losses, respectively.158 An increasing attention to CSR
matters both in the business community as well as in society in general—possibly
even particularly due to the CSR Directive’s reporting rules—could make it very
hard to explain for an enterprise why it refrains from joining in this trend. This way,
the factual pressure exerted by the CSR Directive159 could indeed, albeit indirectly,
lead to an influence on the corporate directors’ scope of discretion: not taking
certain CSR aspects into account may—in the eyes of customers and business
partners alike—simply not be acceptable anymore. And thus, it may be necessary
to adhere to CSR principles, even if no other legal obligation to do so exists, in order
155
Supra Sect. 3.3.2.
156
Walden (2015), pp. 20–21 [translated from German]; see Koch (2016), s. 76 r. 15.
157
For the role of proxy firms regarding compliance with the DCGK’s recommendations, see
Bayer and Scholz (2015), s. 161 r. 7.
158
159
to protect the corporation’s public image.160 Arguably, this mediate effect is what
the creators of the CSR Directive had in mind, rather than more direct, yet
‘camouflaged’161 changes to substantive law. Ultimately, the depicted mechanism
resembles a self-fulfilling prophecy: directors, by following duties that do not exist
yet, may eventually create such duties through mass observance.
Despite this finding, some caveats apply. It has been correctly emphasised that
the portrayed mechanism does not require CSR issues to be observed for their own
sake, but rather as part of the directors’ general duty to protect the corporation’s
reputation.162 As a consequence, wherever the relevant market is not concerned
with certain CSR issues there would be no legal requirement for directors to take
them into account.163 Furthermore, directors may find some solace in the fact that,
even where the aforementioned indirect CSR duties arise, it turns out to be very
difficult to assign a precise amount of damages to a certain violation; also, it will
often be hard to determine the causal link between the omission and the damage to
the corporation.164
4 Conclusion
The duties that the CSR Directive directly creates for corporate directors are limited
to correct reporting. In particular, the Directive and its transposition into German
law do not force directors to create CSR policies as long as this abstention is
explained. In a similar fashion, the influence of the CSR Directive and CSR
frameworks on substantive corporate law is, at this point of time, a very limited
one. Taking into account constitutional issues such as democratic legitimacy, legal
certainty and fundamental rights of enterprises it currently seems impossible to
infer directors’ duties in connection with CSR from the Directive or frameworks
and guidelines. Also, the CSR Directive, if interpreted correctly, does not impact
the German debate on the corporate objective.
Nonetheless, one would be wrong to deduce from this result a lack of importance
of CSR in corporate practice. First of all, corporations must act socially responsibly
in all areas where social responsibilities have been transformed into hard law. As
has been demonstrated, in highly regulated jurisdictions the majority of relevant
CSR issues are covered in this way, that is, through mere compliance duties.
Secondly, it does not seem completely impossible that certain practices that exploit
160
Walden (2015), p. 23 correctly points out that a violation of non-legal obligations can constitute
a violation of directors’ duties if it leads to a loss of trust of business partners or a loss of public
reputation.
161
See Sect. 3 supra.
162
Kumm and Woodtli (2016), p. 219.
163
Kumm and Woodtli (2016), p. 219.
164
For the similar problem in case of a violation of reporting duties see supra Sect. 2.1.
226 A. Scheuch
low legal standards in foreign countries and/or the lack of attribution within supply
chains could be judged by courts to constitute unfair commercial practices. They
could consequently be challenged by competitors, although good counter-
arguments exist at least in the context of German law. And lastly, potential CSR
duties may indirectly work as a self-fulfilling prophecy. Directors themselves
could, by adjusting their behaviour to meet certain non-binding CSR standards
(when fearing liability165 and facing the factual pressure from reporting require-
ments), re-define what is viewed as the usual standard of care to be expected of a
conscientious manager.
In conclusion, I submit that the ‘paradigm shift’ referred to in the introduction
may slowly appear on the horizon, but it has not yet arrived. It seems possible that
the reporting rules introduced by the CSR Directive will at some point be followed
by the implementation of further obligations in connection with CSR.166 As a
matter of fact, new hard law rules on CSR are already demanded by many167 and
a trend away from pure private governance has been detected.168 For instance, a
possible next step could concern liability for entire supply chains unless sufficient
due diligence measures were in place.169 Resorting to hard law would certainly
solve the problem of democratic legitimacy,170 but could meet problems in the area
of fundamental rights of enterprises and shareholders. Furthermore, the psycholog-
ical effects171 of creating hard law CSR duties should be thoroughly investigated
before attempting legislation in this area. The EU commission’s review of the CSR
Directive’s effects, due to be published by 6 December 2018,172 as well as the
German government’s report (due 31 December 2021)173 could provide interesting
stimuli for an ongoing discussion on the subject.
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Anwaltsblatt 66(5):375
Alexander Scheuch Career, memberships and achievements: Habilitation candidate at the

University of Muenster. Fellow of the Young College of the North Rhine-Westphalian Academy
of Sciences, Humanities and the Arts. Member of the interdisciplinary Risk and Compliance
Research Center in Muenster. Organiser and lecturer in the Programme in European Private Law
for Postgraduates (PEPP). Founding member and former national chairman of student association
Weitblick that aims to improve education conditions around the globe and to promote interest in
social responsibility among university students.
Research: Corporate law and partnership law, law of civil procedure, sports law.
Teaching: Corporate Law, Civil Law, Commercial Law.
Analysing the CSR Spending Requirements
Under Indian Company Law
Umakanth Varottil
1 Introduction
Corporate social responsibility (CSR) has received considerable attention lately,

and has been a topic of study in various disciplines, including the legal academy.
While CSR was initially considered a matter of voluntarism to be exercised by
companies in the interests of stakeholders, it is increasingly acquiring legal status,
and generating several international efforts to formalise CSR obligations. Some
countries have incorporated facets of CSR in their basic corporate law as a way to
exhort companies to fulfill their obligations to non-shareholder constituencies.
However, nowhere has CSR acquired as much legal status as in India where recent
efforts to reform company law culminated in a legislation that is rather elaborately
prescriptive about the obligations of companies to act in a manner that benefits
society. Arguably, the developments in India have brought about a paradigm shift in
CSR considerations that require further analysis.
Indian companies are no strangers to social responsibilities. For well over a
century, many Indian corporate groups have been voluntarily involved in charitable
and other activities that benefit society. Enhancement of shareholder value was not
considered the sole goal of such companies. At the same time, until recent decades,
the trajectory of Indian company law pointed towards shareholder interests, and did
not recognise other constituencies. While stakeholder interests began receiving
attention since India’s turn towards socialist policies following Independence, it
is only with the enactment of the recent Companies Act 2013 that those interests
have been expressly (and elaborately) recognised. For example, section 166(2) of
the Companies Act 2013 states that a director of a company shall act ‘in the best
U. Varottil (*)
Faculty of Law, National University of Singapore, Singapore, Singapore
e-mail: v.umakanth@nus.edu.sg; http://law.nus.edu.sg/about_us/faculty/staff/profileview.asp?
UserID¼lawuv

232 U. Varottil
interests of the company, its employees, the shareholders, the community and for
the protection of the environment.’
More important for our present purposes, the concept of CSR has found its place
in the Companies Act 2013 whereby every company of a certain size must have a
CSR policy. India is one of the first countries to require large companies to spend a
stipulated amount—at least two per cent of average net profits made during the
three immediately preceding financial years, in pursuance of their CSR policy
towards specified activities. During the legislative process, there was intense debate
as to whether the spending requirements would be made mandatory, but in the end a
compromise was reached that resulted in a ‘comply or explain’ approach although
the wording of the statutory provision largely operates as a mandate.1 While there is
strident criticism against such a broad and overarching CSR policy on various
counts, the requirements are here to stay.2
In this context, CSR in India is largely concerned with companies contributing a
minimum amount of money towards social activities, thereby equating CSR with
corporate philanthropy. As mentioned above, due to certain legislative compro-
mises, a hybrid approach was adopted to regulate CSR activities in Indian compa-
nies. Hence, while there is no obligation to mandatorily spend two per cent of
average profits of the previous three years towards CSR, there is a requirement for
companies not fulfilling the same to explain the reasons for non-fulfillment. In that
sense, while spending is not entirely mandatory, disclosure is. These requirements,
enshrined under section 135 of the Companies Act 2013 and in the Companies
(Corporate Social Responsibility Policy Rules) 2014 (the ‘CSR Rules’), came into
effect 1 April 2014, such that companies (to which these provisions applied) were
required to comply with the CSR spending requirement commencing the financial
year 2014–2015 (i.e. ending 31 March 2015).
The purpose of this chapter is to examine the CSR spending requirement in terms
of the dichotomy between the mandatory and ‘comply or explain’ approaches by
utilising the recent experience of the implementation of the CSR requirements in
India over the last two financial years, namely 2014–2015 and 2015–2016. The
experience informs us (at least partially) of the utility of the hybrid approach that
has been determined by the legislators in devising and enacting the provisions of the
Companies Act 2013, and hence would be helpful in making any mid-course
corrections to fully utilise the benefits of the CSR provisions under company law.
In undertaking this study of the recent experiences, this chapter relies upon
existing empirical studies relating to CSR spending in India both before and after
the enactment of the Companies Act 2013, and also on a series of hand-collected
data involving CSR reporting by companies in the Nifty 100 index maintained by
1
Varottil (2011), showing that the law provides a way for companies to explain why they did not
spend the required amounts under CSR.
2
For a growing body of academic literature on CSR in India, see Afsharipour (2011), Van Zile
(2012), Afsharipour and Rana (2014), Gopalan and Kamalnath (2015), Dharmapala and
Khanna (2016).
Analysing the CSR Spending Requirements Under Indian Company Law 233
the National Stock Exchange of India, which ‘is a diversified 100 stock index
accounting for 38 sectors of the Indian economy.’3 The hand-collected data
containing CSR reporting covers two financial years, namely 2014–2015 and
2015–2016, the first two years in which the new CSR provisions in Indian company
law were implemented.
Such a study indicates that CSR expenditure by Indian companies has gradually
increased over the years. CSR expenditure has spiked in the years after the CSR
provisions were implemented, which is indicative at the outset that these provisions
have had a positive impact in motivating companies to incur CSR spending. At the
same time, a large number of companies have not complied with the two per cent
minimum spending requirement, with several of them not incurring any spending at
all towards CSR activities. This much is understandable given the nature of the
hybrid approach adopted by the Companies Act 2013. But, what is striking is that
non-compliant companies have been rather lackadaisical about disclosure of
non-compliance, with most of them engaging in boilerplate disclosures and some
even failing to make any disclosure at all. A qualitative assessment of the reasons
for non-compliance suggest that the ‘comply or explain’ rules have not operated in
the manner the hybrid approach may have intended. Unless the disclosure norms
are strengthened by a combination of measures such as elaboration in the disclo-
sures required, robust enforcement thereof and through other measures such as third
party verification, the CSR spending requirements are unlikely to achieve their
desired goals. In all, while the CSR spending requirements have engendered a wider
culture of corporate philanthropy in India in comparison with the period prior to the
enactment of the Companies Act 2013, they have arguably failed to achieve the
goals set by the legislation. At one level, it may be argued that a 2-year period may
be too premature to determine the efficacy of the legislation, but analysing initial
trends may encourage course-correction at an early stage and help achieve the
objectives sooner rather than later.
Section 2 of this chapter explores the evolution of Indian company law relating
to CSR by examining the legislative and regulatory developments that culminated
in the enactment of the Companies Act 2013 and the CSR Rules. Section 3 analyses
the empirical evidence available thus far on CSR spending in India, which both
predates the Companies Act 2013 and also reviews the immediate impact of the
legislative provisions. Section 4 discusses the trends in CSR spending and disclo-
sure in the 2-year period following the implementation of the CSR legislation
through a discussion of the available surveys in the literature, and analysis of a
hand-collected dataset using annual reports of the Nifty 100 companies for the
financial years 2014–2015 and 2015–2016 to draw out some preliminary conclu-
sions. Section 5 discusses the lessons from the available data and trends in order to
consider the impact of mandatory and ‘comply or explain’ approaches, and Sect. 6
briefly concludes.
3
The Nifty 100 Index represents about 77% of the free float market capitalisation of the stocks
listed on NSE as on 31 March 2016: NSE (2016).
234 U. Varottil
2 CSR in India: Evolution of the Legal Framework
In order to analyse the existing legal framework on CSR and its implementation, it
is necessary to delve into the evolution of such a framework. While Indian company
law was historically shareholder-centric, the seeds of the broader nature and
purpose of a company were sown in the 1970s and 1980s to the then prevailing
Companies Act 1956. In several circumstances, companies and their directors were
required to take into account the interests of non-shareholder constituencies such as
employees, creditors and the ‘public interest’ in general.4 However, since India’s
economic liberalisation in 1991, the focus turned back towards investor protection
given the need for Indian companies to raise capital from foreign investors, for
whom such protection was crucial. It was only in the run up to the enactment of the
Companies Act 2013 that stakeholder interests and its specific manifestation in the
form of CSR came to the fore. The legislative developments that led to the CSR
spending provision in the Companies Act 2013 are therefore of utmost importance.5
But, before dealing with such developments, it would be useful to consider the
several voluntary exhortations of CSR that were burgeoning prior to the enactment
of the Companies Act 2013.
2.1 Voluntary Efforts
Given that the corporate sector was facing a critical juncture owing to the global
financial crisis of 2008 and also India’s own corporate governance crisis in 2009
(as mentioned in Sect. 2.2 below), the Government of India introduced a set of
voluntary guidelines requiring companies to establish CSR policies and also to
allocate specific amounts in their budgets for CSR activities.6 The guidelines also
called upon companies to disseminate information on their CSR policies in a
structured manner to all stakeholders. Although the Government was keen not to
impose any mandatory rules relating to CSR, it expected that a large number of
companies would voluntarily embrace the guidelines, and that those who were
unable to comply would provide reasons for the same.
The 2009 guidelines were followed up with a comprehensive set of voluntary
guidelines on the social, environmental and economic responsibilities of business.7
These were not intended to be prescriptive, but were aimed at incorporating and
adapting global business practices to the Indian context. One of the significant
aspects of these guidelines was the establishment of a business responsibility
reporting framework that contained a standard disclosure template that could be
used by businesses to report on their performance in specific areas.
4
For a detailed analysis of such legislative evolution, see Varottil (2016).
5
See Afsharipour (2017).
6
Ministry of Corporate Affairs (2009).
7
However, as the nomenclature suggests, both the above sets of guidelines were
only voluntary in nature, and ‘there has been little indication of widespread
adoption’ by Indian companies.8 Hence, a relatively stronger framework was
introduced by India’s securities regulator, the Securities and Exchange Board of
India (SEBI). In 2012, SEBI issued a circular that mandated business responsibility
reporting for the top 100 listed entities based on market capitalisation at the
Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) on
31 March 2012.9 SEBI made this circular applicable from the financial year ending
on or after 31 December 2012, and introduced a detailed framework and provided
formats for business responsibility reporting. While the SEBI circular introduced a
mandate for the top 100 companies, it related only to reporting and disclosures.
There was neither a stipulation nor any encouragement whatsoever for companies
to undertake any specific form of CSR activity, let alone spending any part of their
profits towards CSR. While this step resulted in greater disclosures among top
Indian companies regarding CSR, it is unclear whether it had a direct impact on
shoring up CSR spending among Indian companies. However, this was to change
through a somewhat radical effort implemented in parallel through legislative
reforms to Indian company law, which spurred a vigorous debate on the possibility
of introducing mandatory CSR spending by Indian companies.
2.2 Legislative Efforts in Company Law
Since the 1990s, several efforts had been made to reform company law by way of an
overhaul of the preexisting Companies Act, 1956. Although several Bills had been
presented in the Indian Parliament, none fructified into legislation. The immediate
origin of the Companies Act 2013 can be attributed to an Expert Committee on
Company Law established under the chairmanship of Mr JJ Irani. Its report
suggested streamlining company law and was indeed market-friendly, but at the
same time it subscribed to strict norms of corporate governance.10 However, the
norms were largely focused on shareholders, with some brief mention of the need to
consider employee interests. Based on this report, the Companies Bill 2008 was
presented in Parliament. The Bill, however, did not make any references to
non-shareholder constituencies or to the concept of CSR.11
In the meanwhile, a major corporate scandal involving a leading information
technology company, Satyam Computers, shocked corporate India. In January
2009, the chairman of the company confessed to a fraud to the magnitude of over
US $1 billion.12 The Satyam episode triggered renewed calls for strengthening the
8
9
Securities and Exchange Board of India (2012).
10
Irani (2005).
11
Naniwadekar and Varottil (2016).
12
Varottil (2009).
236 U. Varottil
corporate law and governance norms in India. However, when the Companies Bill
2009 was presented in Parliament following the outbreak of the scandal, no changes
were forthcoming to the proposed draft legislation compared to the previous
version of the Bill.
What was to occur in the next phase of the lawmaking process defined India’s
transition in the direction of providing greater legal recognition to the interests of
non-shareholder constituencies and towards legislating on CSR. The Companies
Bill 2009 was referred to the Parliamentary Standing Committee on Finance under
the chairmanship of Mr Yashwant Sinha, which issued its report after a series of
consultations and hearings.13 Although the Companies Bill 2009 appeared to turn a
blind eye to the fateful occurrences of scandals that rocked corporate India, the
Standing Committee undid the effects of those deficiencies by recommending
detailed provisions in corporate law to prevent such failures in the future.
Specific among the Standing Committee’s recommendations were heightened
standards of corporate governance, measures to rein in company managements and
reliance on gatekeepers such as independent directors and auditors. However, it is
another set of measures introduced by the Standing Committee that is of immense
significance to the present discussion as it redefined the nature and purpose of the
company in the Indian context. While the Companies Bill 2009 was shareholder-
oriented, in that directors owed duties to carry on the business of the company ‘for the
benefit of its members as a whole’ (clause 147(2)), the Standing Committee focused
on a broader stakeholder approach to corporate law, insisting that directors have a
duty ‘to promote the objects of the company in the best interests of its employees, the
community and the environment as well.’14 Most significantly, the Companies Bill
2009 introduced a provision necessitating mandatory spending by large companies
towards social causes. This required companies to have a corporate social responsi-
bility policy, which ensured that companies spent ‘at least 2% of its average net
profits during the three immediately preceding financial years’ on CSR activities.15
Apart from requiring suitable disclosures on the CSR spending, the Standing Com-
mittee also discussed the possibility of requiring companies who do not have
adequate profits or who are not in a position to spend the required amounts to provide
suitable disclosures regarding the same along with reasons for the non-spending.
Based on the Standing Committee Report, the Government introduced the
Companies Bill 2011 in Parliament, which naturally contained significant changes
from the Companies Bill 2009. Under the 2011 Bill, companies to which the CSR
provisions applied were required to constitute a CSR committee of the board of
directors to formulate a CSR policy and to recommend expenditure to be incurred
for CSR activities to be approved by the board. When it came to CSR spending,
clause 135(5) of the 2011 Bill stipulated that companies covered by the provision
‘shall make every endeavour to ensure that the company spends two per cent of the
13
14
15
Ministry of Corporate Affairs (2010), para 49.
average profits of the previous three years on CSR activities.’ This, however, came
with a proviso that in case of failure to spend the amount, the company must
disclose the reasons for not spending.
This represents a hybrid situation that was arrived at by way of a compromise. At
the initial stages of discussion by the Standing Committee, there was an indication
that the CSR spending would be mandatory, in that every company would be liable to
incur the expenditure at the risk of penal consequences.16 However, such a sugges-
tion received significant push back from industry, which was vehemently against any
legal mandate.17 The vociferous criticism of industry led to the quasi-mandatory
approach whereby companies are pegged to the two per cent rule without being under
any obligation to incur the expenditure. Disclosure of reasons for non-spending was,
however, made mandatory.
The 2011 Bill was referred back to the Standing Committee for review of the
revised provisions, particularly because it contained significant changes from the
previous version. During this review, clause 135(5) of the Companies Bill, 2011
was modified by substituting the words ‘shall make every endeavour to ensure’ with
the words ‘shall ensure’ enhancing the mandatory feature of the CSR obligation.
The Standing Committee issued another report,18 following which the Companies
Act 2013 was passed by both Houses of Parliament and received the assent of the
President of India on 31 August 2013. This legislation has been brought into effect
in stages, with nearly all of its provisions having become effective as of this writing.
Section 135 of the Companies Act 2013, which is a game changer of sorts, is
applicable to every company having a net worth of at least Rs 5 billion (approxi-
mately US$73.99 million), a turnover of at least Rs 10 billion (approximately US
$147.98) or a net profit of at least Rs 50 million (approximately US$739,000).19 Each
such company must establish a CSR committee of the board consisting of three or
more directors, of which at least one must be an independent director. The CSR
committee is required to formulate and recommend to the board a CSR policy that
must indicate the activities to be undertaken by the company as specified in Schedule
VII to the Companies Act 2013. The board is required to disclose the contents of the
CSR policy in its report and place this policy on the company’s website.
Relevant for our purposes is the requirement that companies to which the CSR
provisions apply as above must ensure that they spend at least two per cent of the
average net profits made during the three immediately preceding financial years in
pursuance of their CSR policy. Preference must be given to local (and surrounding)
areas where the company operates. Moreover, only CSR activities carried out
within India would be recognised for the purpose of the law. In the event that the
company fails to spend the amount required, the board must include in its report the
specific reasons for not spending the same.
16
CNBC-TV18 (2010).
17
TNN (2011).
18
19
The exchange rates have been considered as of 12 December 2016.
238 U. Varottil
This legislative provision has been supplemented by the CSR Rules issued by the
Ministry of Corporate Affairs in 2014 (and subsequently amended). These Rules
stipulate the details of the manner in which companies must undertake CSR
spending. For example, activities undertaken in pursuance of the normal course
of business of a company are excluded from CSR. This somewhat paradoxical
situation arises because of the Companies Act’s focus on CSR as a matter of
corporate expenditure rather than one of corporate conduct or behaviour. In other
words, this conception of CSR does not go beyond mere spending, and does little to
promote responsible and sustainable business practices. Similarly, programs under-
taken for the benefit of employees are also not considered as CSR for the purposes
of the Companies Act.
The Ministry of Corporate Affairs has also specified the list of activities that are
permissible under Schedule VII of the Companies Act, 2013 to be counted towards
CSR spending.20 They include:
• eradicating hunger, poverty and malnutrition
• promoting education
• promoting gender equality
• ensuring environmental sustainability
• protection of national heritage, art and culture
• measures for the benefit of armed forces veterans
• training to promote rural sports
• contribution to the Prime Minister’s National Relief Fund
• contributions or funds to technology incubators
• rural development projects.
As this suggests, the CSR spending requirements are quite prescriptive, and
companies have no flexibility to deviate from these focus areas.
The CSR Rules also prescribe disclosure requirements that companies must
follow in relation to CSR. The board’s report must include an annual CSR report
in the format specified in the Rules. These include:
• a brief outline of the company’s CSR policy
• the composition of the CSR committee
• average net profit of the company for the last three years
• prescribed CSR expenditure (i.e. 2% of the above)
• details of CSR spend during the financial year:
– total amount to be spent for the financial year
– amount unspent, if any
– manner in which the amount is spent during the financial year (in a tabular
form containing various details).
20
The Ministry of Corporate Affairs issued a notification amending Schedule VII by adding to the
list originally contained in the Companies Act 2013. See Ministry of Corporate Affairs (2014).
In case of failure to spend the stipulated amount, the company must provide
reasons for the failure in its board report. In case of non-compliance with the
requirements of section 135 of the Companies Act, the company as well as its
officers will attract penal consequences. Under section 460, the company and every
officer of the company who is in default shall be punishable with a fine which may
extend to Rs 10,000, and where the contravention is a continuing one, with a further
fine which may extend to Rs 1000 for every day after the first during which the
contravention continues. Contextualising this to the CSR spend requirement, the
penalty is not attracted for a failure to spend two per cent of the profits, but only for
failure to make appropriate disclosures, particularly the reasons for not spending the
amount.21 Hence, the Government does possess enforcement powers in case of
non-compliance with the reporting requirements, and also in case of a failure by
companies to establish CSR policies and CSR committees, although the magnitude
of the penalties is arguably insignificant.
Although the Companies Act 2013 became law on 31 August 2013, the pro-
visions relating to CSR were not made effective until the following year. In
February 2014, the Ministry of Corporate Affairs issued a notification appointing
1 April 2014 as the date for effectiveness of section 135 and Schedule VII of the
Companies Act 2013. Hence, companies were required to be in a state of prepared-
ness to implement the CSR mandate commencing the financial year 2014–2015.
Given this unique legislative mandate regarding CSR that is unparalleled else-
where in the world, the next section in this chapter examines the impact of the CSR
provisions in the Companies Act 2013 from an empirical perspective, then exam-
ines the implementation of these provisions in the 2 years following the enactment
of the legislation.
3 Evidence of CSR Activities in India
Before CSR requirements were introduced by legislation, voluntary CSR activity

among Indian companies was patchy in nature. While some of the leading business
groups took CSR very seriously, the vast majority of companies paid scant regard to
the concept. This related to matters such as designing a CSR policy, introducing
transparency regarding CSR activities through appropriate disclosures and finally
undertaking CSR spending (determined as a percentage of profits). Several studies
indicate that while CSR in the run up to the Companies Act 2013 was less than
desirable, there was gradual increase among Indian companies in their focus
towards CSR.
21
There is a higher penalty for failure to make appropriate disclosures regarding CSR in the
board’s report to the shareholders. See Companies Act 2013, sections 134(3)(o) and 134(8).
240 U. Varottil
3.1 Prior to the Companies Act 2013
Some early studies trace CSR activity among Indian companies since the turn of the
century. For example, a study of CSR communication undertaken by the top
100 information technology (IT) companies in India on their corporate websites
indicates that the number of companies with CSR information on their websites is
strikingly low and that Indian companies would do well to develop more compet-
itive standards for CSR practice and communication.22 In this study, Chaudhri and
Wang found that ‘more than 30% of the global IT companies in India have no CSR
information on their India sites, and among those that do, two thirds have only one
page of information.’23 Similarly, other studies have reported the lack of uniformity
in CSR reporting practices. For instance, Gautam and Singh found that ‘reporting
practices range from the very sophisticated and well-established system to ‘a brief
mention of CSR in the annual report.’24 Baxi and Ray found that most listed
companies did not have a stand-alone CSR report, and that even where they existed,
they were qualitative rather than quantitative25, making comparisons rather diffi-
cult. Finally, a study by Jain and Winner of the CSR and sustainability reporting
practices of the 200 largest state-owned and private companies in India suggests
that while the climate for CSR and sustainability are showing promise in the Indian
context, there is room for improvement when it comes to communication of any
such initiatives on corporate websites.26
Moving to the quantitative aspects of CSR spending, studies show that prior to the
enactment of the Companies Act 2013, the amounts involved were quite minimal. A
study of CSR spending between 2001 and 2012 among the thirty companies
included in the BSE Sensex showed that the spending has been very low as a
percentage of revenue and profits.27 Another study with a larger sample that
examined the CSR behaviour of the 500 listed Indian corporates over the period
2003–2011, showed that the percentage of large listed companies that engaged and
reported CSR rose steeply from 7% to about 62%.28 Looking at the period closer to
the enactment of the Companies Act 2013, one study found that during the financial
year 2012–2013, 51 companies included in the Sensex or the Nifty 50 indices spent
on average 1% of the average profit before tax of the preceding 3 years, which is less
than the stipulated requirement under the new legislation. Judging by the slow, but
steady, growth of CSR activities in India, both in terms of spending and disclosures,
the introduction of a legislative mandate appears to be the main catalyst for further
growth in CSR activities, and hence has been welcomed by commentators.29
22
Chaudhari and Wang (2007).
23
Chaudhari and Wang (2007), p. 244.
24
Gautam and Singh (2010), p. 50.
25
Baxi and Ray (2009), p. 356.
26
Jain and Winner (2016), pp. 36, 50.
27
Verma and Kumar (2014), p. 82.
28
29
Sarkar (2014).
3.2 Impact of the Companies Act 2013
In the most comprehensive empirical analysis of the impact of the CSR provisions
in the Companies Act 2013, Dharmapala and Khanna examine the effects of the
legislative change along a number of different dimensions including firm value,
CSR spending, and other outcomes.30 Through an event study based on the first
announcement of the possibility of a mandatory CSR requirement in India (that
ultimately took shape in the form of section 135 of the Companies Act 2013), they
find a negative effect on the value of companies that were subject to the require-
ment. Those companies faced a decline in firm value of 2.5–3.3%, which exceeds
the 2% CSR spending requirement.31 Dharmapala and Khanna also examine the
voluntary CSR spending prior to the Companies Act 2013 and the changes brought
about by the legislation. They find a substantial increase in CSR activity among
companies subject to section 135,32 which is an indication that the legislation has
had a positive impact on CSR spending. Consistent with this, they found that among
a small sample size of the top 100 companies, those initially spending less than 2%
of their average profits increased their spending, while those that were initially
spending in excess of 2% reduced their CSR spending towards that number. This
suggests coagulation around the 2% limit prescribed by legislation. As to compli-
ance and enforcement, Dharmapala and Khanna found that explanations for
non-spending of CSR amounts were ‘not very detailed and often not particularly
compelling’.33
In terms of implementation of CSR requirements following the effectiveness of
section 135, a KPMG study explores various facets of CSR in India.34 Through a
study of the top 100 listed companies by market capitalisation, it found that of
92 companies reviewed, only 87 have CSR disclosures in the prescribed format.35
Of those 87, only 38% have spent 2% or more towards CSR. And of the remaining
62% that spent less than the said amount, 30% have spent less than 1%.36 The
KPMG survey was based on the annual reports of the company as of 31 March
2015, being the first year of implementation of the CSR requirements under the
Companies Act 2013.
The Government of India too has put out data on the implementation of CSR
provisions in their first year of introduction.37 Out of 10,475 eligible companies,
only 7334 have reported on CSR as of 31 January 2016, indicating compliance by
30
Dharmapala and Khanna (2016).
31
Dharmapala and Khanna (2016), p. 3. Another study, which adopts a different methodology,
arrives at somewhat similar results. See Manchiraju and Rajgopal (2015).
32
33
34
KPMG (2015).
35
KPMG (2015), p. 7.
36
KPMG (2015), p. 7.
37
242 U. Varottil
about 70% of the companies. Out of these reporting companies, only 3139 (or about
30% of all eligible companies) have incurred some CSR spending. Out of the total
prescribed CSR spending of Rs 118.83 billion by these 3139 companies, Rs 88.03
billion (or 74%) was actually spent.
In its very first year of implementation of the legislative CSR requirements, the
Government began undertaking measures to improve the implementation of CSR
efforts by Indian companies. In February 2015, the Ministry of Corporate Affairs
constituted a High Level Committee to suggest measures for improved monitoring
of the implementation of CSR policies by companies under section 135 of the
Companies Act 2013.38 The Committee examined the ‘comply or explain’
approach for CSR spending, and found that it was generally operating in a satis-
factory manner with no compelling reason for reform.39 Although there were
questions regarding the nature and extent of disclosures, particularly those relating
to failure to comply with the 2% CSR spending mandate, the Committee adopted a
rather indulgent approach by stating that ‘leniency may be shown against the
companies for non-compliance in the initial two/three years to enable them to
graduate to a culture of compliance’.40 The Committee also felt that its constitution
was premature considering the insufficient track record regarding the implementa-
tion of the CSR provisions in the Companies Act 2013, and that it would be apt to
revisit the situation in a few years when more robust evidence should be available
regarding the implementation.
Despite its quite recent enactment, the CSR mandate under the Companies Act
2013 has attracted a great deal of attention from researchers. The current evidence
indicates that the legislative provision has had an impact in enhancing CSR activity
in general and CSR spending in particular. However, it is now opportune to begin
extrapolating trends from the implementation of the CSR provisions given that two
financial years have elapsed in the meantime, namely 2014–2015 and 2015–2016.
The slightly longer period enables us to understand the situation regarding the early
implementation of CSR spending in India. More importantly, the current studies
analyse quantitative data, but only a few examine the qualitative data available
from CSR disclosures, particularly those relating to reasons that explain
non-compliance with the minimum 2% CSR spending requirement. The next
section seeks to fill this gap in the existing literature, and to throw additional light
on the empirical evidence relating to the implementation of the CSR provisions in
the Companies Act 2013.
38
Ministry of Corporate Affairs (2015a).
39
Ministry of Corporate Affairs (2015b).
40
Ministry of Corporate Affairs (2015b), p. 28.
4 CSR Spending and Disclosures, 2014–2016
A number of surveys have sought to analyse CSR spending by Indian companies in

the 2-year period following implementation of the Companies Act 2013. All of
them report a strong upturn in CSR spending in the second year compared to the
first year of implementation, which suggests that the legislation has had an impact
in driving CSR activities. But an analysis of the disclosures, particularly on reasons
for non-spending, present a somewhat bleak picture.
4.1 Trends in CSR Spending
One study of 250 big companies in the financial year 2015–2016 indicates substan-
tial improvement in CSR spending among them, rising from 79% of the required
spending in the financial year 2014–2015 to as high as 92% in the financial year
2015–2016.41 Other surveys report similar trends. A study of data compiled by
Prime Database suggests a 28% rise in actual CSR spending by Indian companies in
the second year of implementation as compared to the first, which is also attribut-
able to a rise in corporate profits,42 while another study by a CSR management firm,
NextGen, shows a rise of total CSR spending among top 100 NSE-listed companies
from Rs. 47.6 billion in 2014–2015 to Rs. 60.33 billion in 2015–2016.43
In order to supplement the above surveys, and to extrapolate trends across the first
2 years of implementation, this chapter carries out a preliminary analysis of CSR
spending among a sample representing the Nifty 100 companies based on hand-
collected data containing disclosures made in the annual reports of the companies as
required by section 135 of the Companies Act 2013 as well as the CSR Rules.44 For
the financial year 2014–2015, out of these top 100 companies, a total of 98 were
analysed.45 Of these, seven further companies were excluded.46 Among the 91 com-
panies for which data are available, 37 (40.65%) complied with the 2% CSR
spending requirement, while 54 (59.35%) did not meet the requirement.47
41
NGOBOX (2016).
42
Burugula (2016).
43
Manku (2016).
44
I thank Abhishek Vaidyanathan for excellent research assistance, especially in collating and
analysing the hand-collected data discussed in this section. Errors or omissions remain mine.
45
Two stocks were excluded, one being shares with differential rights issued by a company, which
is represented separately in the list, and another, whose first annual report was published in the
financial year 2015–2016 by virtue of the recent listing of its shares on the stock exchange.
46
In respect of two companies, their financial year started as of January 2014, thereby excluding the
applicability of the CSR provisions for their first year. Five other companies were excluded as they
suffered losses during the period, thereby keeping them outside the purview of the CSR mandate.
47
Of these, two companies provided no CSR disclosure whatsoever, and hence are being
categorised as non-compliant.
244 U. Varottil
Moving on, for the financial year 2015–2016, a total of 99 companies were
analysed, from which 10 were excluded.48 Among the remaining 89 companies for
which data are available, 49 (55%) complied with the 2% CSR spending require-
ment, while 40 (45%) did not meet the requirement. This suggests a perceptible
increase in the number of companies that complied with CSR spending in the
second year as compared to the first (Table 1).
This data suggests that out of a total CSR spending obligation of the Nifty
100 companies across both years aggregating Rs 122.75 billion, a sum of Rs 100.02
billion, representing 81.5% was in fact incurred by these companies. In terms of the
individual financial years 2014–2015 and 2015–2016, the status is as follows: Of
the 89 companies surveyed in financial year 2014–2015 (excluding those who
provided no disclosure, those exempt due to loss, and those not reporting), there
was an aggregate CSR spending requirement of Rs 61.33 billion, of which Rs 45.22
billion were spent, totalling 73.7%. Of the 89 companies surveyed in financial year
2015–2016 (excluding those who provided no disclosure, those exempt due to loss,
and those not reporting), there was a Rs 65.23 billion aggregate spending require-
ment, of which Rs 57.36 billion were spent, thus totalling 87.9% of total CSR
requirement spent. Therefore, between financial years 2014–2015 and 2015–2016,
there was a total increase of 14.2% in spending (Table 2).
This data indicates a robust level of compliance among the top 100 companies
given that the two per cent spending requirement itself is not mandatory.
Table 1 CSR spending among Nifty 100 companies

FY 2014–2015 FY 2015–2016
Companies analysed 98 99
Companies excluded 7 10
Companies for which data are available 91 89
Number of companies compliant with 37 (40.65%) 49 (55%)
the two percent CSR spending (and %)
Number of non-compliant companies 54 (59.35%) 40 (45%)
Table 2 Amounts spent on CSR among Nifty 100 companies

FY 2014–2015 FY 2015–2016 Total
Total CSR spending requirement Rs. 61.33 bn Rs. 65.23 bn Rs. 122.75 bn
(2% of average profits)
Total CSR spending (actual) Rs. 45.22 bn Rs. 57.36 bn Rs. 100.02 bn
Percentage of actual spending 73.7% 87.9% 81.5%
48
Of these, eight suffered losses during the year, and for two there were either no CSR disclosures
or annual report available.
4.2 Trends in Disclosure of Non-Spending
When it comes to disclosure of non-spending, the picture is rather different. While

some companies among the Nifty 100 provide detailed disclosures, most companies
show scant regard for disclosures. Some do not provide any disclosures at all, while
others either do not follow the format provided for non-spending disclosures or
provide vague and generic reasons without much substance. This section analyses
some of the disclosures from a qualitative perspective in order demonstrate the lack
of proper disclosures.
The following example, extracted from the annual report of one company for the
financial year 2015–2016, could be considered a model of an adequate disclosure:
1. [Social Innovation Acceleration Programme (SIAP)]:

The fees to be paid to the Consultants was budgeted but was not paid as the services of
the Con-sultants was not taken. During the year under review, the SIAP model underwent a
change from an outsourced model to an in-house intervention with the pro-bono efforts of
Marico Mentors and Ex-CEOs as Senior Mentors. Due to the cost optimization as aforesaid,
the budget was under-utilized.
2. Thought Leadership:
(a) The Thought Leadership was a new project that was started during the year.
(b) A series of 6 videos was showcased and due to the better commercials availed, the
amount to be initially paid to the service provider was brought down thereby
resulting in under-utilization of the budgeted amount.
3. Hackathon:
A better deal was availed from the budgeted amounts due to change in exchange rate as
the disbursal was slated to be made in USD.
4. Educate Girls:
Underspends towards the Educate Girls project were mainly due to the concept of
enrolling a high number of ‘out of school children’. Due to the change in the concept as
aforesaid, the expenditure on the administrative cost had a deficit as compared to the
budgeted amount.
5. Sesame Workshop India:
(a) There was a delay in initiating the program. In June 2015, a Sesame Workshop India
team visited the location for intervention (i.e. Kanpur, Dehat and Unnao District)
and found that most of the Anganwadi centres were dysfunctional and were open
intermittently due to various reasons.
(b) It was then recommended to focus in western Uttar Pradesh specifically districts in
Shahjahnapur, Farukkhabad, and Kannuaj which caused a quarters delay in starting
the project, which in turn led to the underspends under the project.
6. Underspends in the CSR activities of the Company for the financial year 2015–2016 was
mainly due to extraneous factors and due to better negotiation by the Company with the
service providers/external agencies which resulted into savings and ultimately could not
be spent as budgeted. The Company has been however extremely committed towards
exercising its social responsibilities and is dedicated to spend, to achieve better results.
The Company is confident about its work in the social space and has been always in the
forefront and is sensitive to the requirements of the Companies Act, 2013. In view of the
same, your Company is confident of a turnaround as far as the CSR numbers are
concerned in the next financial year.
246 U. Varottil
Apart from a few examples of adequate disclosures such as that extracted above,
a qualitative analysis of the Nifty 100 companies indicates a high level of
non-compliance. For example, four companies that did not meet the minimum
two per cent spending requirements did not provide any disclosures at all in both
the financial years under study. In one case, disclosure was provided for the
financial year 2014–2015, but not for 2015–2016, signaling a deterioration in the
disclosure standards.
In several cases, disclosures were not only too generic, but the reasons given and
the language used mirrored across both years, indicating a standardisation of the
disclosure using boilerplate language. The following are two examples of this
phenomenon:
Example 1
FY 2014–15
The company has been voluntarily carrying out CSR from Financial Year 2011
onwards. The actual spend of the Company on the CSR for this Financial Year was less
than 2% of the average net profit for the last 3 years. The company endeavours to increase
the expenses in the coming years as more of its CSR projects are implemented.
FY 2015–16
The Company has been voluntarily carrying out CSR from Financial Year 2011
onwards. The actual spend of the Company on the CSR for this Financial Year was less
than 2% of the average net profit for the last 3 years. The Company endeavors to increase
the expenses in the coming years as more of its CSR projects are implemented.
Example 2
FY 2014–15
As we continue our involvement in these projects with active employee engagement,
Six Sigma methodologies, structured processes, community need assessments and a
detailed road map, there is a potential to increase our spend for such high-impact projects.
Spends are directed towards projects that are scalable, sustainable and which have the
potential to be replicated across locations, in the larger interests of the community. As
detailed in above table, the projects worth [Rs.] 24 Crores have already been identified and,
reasonable and judicious spends are made as per the project requirements. In fact, we
strongly believe that your Company plays a very significant role in improving the quality of
the society within which it operates and the Company can flourish only if it operates in a
society that is healthy, orderly, just and which grants freedom and scope to individuals and
their lawful enterprises. Your Company is committed to spend recommended amount over
a period of time as it scales up its initiatives and the supporting infrastructure. Your
Company will continue to spend its resources very judiciously as it does in all areas, and
will focus on leader and employee engagement on high impact community improvement
projects well beyond simply donating money.
FY 2015–16
As we continue our involvement in these projects with active employee engagement,
Six Sigma methodologies, structured processes, community need assessments and a
detailed road map, we are committed to scale up our employee engagement and spend
for such high-impact projects.
Spends are directed towards projects that are scalable, sustainable and which have the
potential to be replicated across locations, in the larger interests of the community. As
detailed in the above table, the projects worth [Rs.] 14 Crores have already been identified
and, reasonable and judicious spends are made as per the project requirements. In fact, we
strongly believe that Your Company plays a very significant role in improving the quality
of the society within which it operates and the Company can flourish only if it operates in a
society that is healthy, orderly, just and which grants freedom and scope to individuals and
their lawful enterprises. Your Company is committed to spend the recommended amount
over a period of time as it scales up its initiatives and the supporting infrastructure. The
Company will continue to spend its resources very judiciously as it does in all areas, and
will focus on leader and employee engagement on high impact community improvement
projects, well beyond simply donating money.
A further 12 companies in the Nifty 100 provided exactly the same or highly
similar disclosures across both years. Among valid justifications for non-spending,
the most common during the period was that companies making such disclosures
were putting in place policies, systems and mechanisms for CSR activity given the
relatively recent implementation of the legislation, and that they expect to spend the
full two per cent of their average profits in the future. This is understandable and
consistent with the findings of the High Level Committee appointed by the Gov-
ernment.49 On the other hand, it may be argued that companies had adequate time to
implement the CSR norms. The legislative provisions were notified in February
2014 and came into effect on 1 April 2014, and companies had an entire financial
year until 31 March 2015 to establish their policies and systems in order to incur the
expenditure. To that extent again, more specific disclosures would be necessary as
opposed to general disclosures regarding the novelty of the CSR requirements.
Finally, from a compliance perspective, the hand-collected data show that at
least 15 companies in the sample have spent exactly two per cent of their profits
(or within a range of 0.50% of that number) in both years. While this may be
indicative of compliance, it might also suggest mechanical adherence equivalent to
a ‘tick the box’ attitude. This is consistent with earlier evidence that most compa-
nies, no matter how much they were spending on CSR prior to the enactment of the
Companies Act 2013, have begun to incur expenditure closer to the two per cent
mark.50
Overall, the hand-collected data discussed in this section relating to the 2-year
period following the enactment of the CSR provisions in the Companies Act 2013
provide mixed evidence as to the impact of the legislation. On the one hand, there is
strong evidence of the increase in CSR spending across the 2-year period. This is
also consistent with the previous periods prior to the enactment of the legislation
where increases in CSR spending have been reported by earlier studies.51 On the
other hand, when it comes to disclosure of non-spending, the quality of disclosures
is found to be sub-standard. Barring honourable exceptions, the disclosures are
boilerplate and inadequate and do not reveal any material information to investors
and other stakeholders. If this is the true state of affairs for a small sample size of
the top 100 listed firms in India, it is reasonable to assume that the situation is likely
49
Ministry of Corporate Affairs (2015b). However, it is also the case that the Government has
already begun initiating enforcement measures by issuing warnings to some companies over
non-disclosure or improper disclosure of CSR spending. Arora and Sikarwar (2016).
50
Dharmapala and Khanna (2016).
51
See Sect. 3 above.
248 U. Varottil
to be even more acute among the broader corporate population, especially among
small and medium-sized firms. As of now, the Government has failed to take notice
of the patchy disclosures. Even where the issue has come to the fore, the High Level
Committee has preferred to adopt a ‘wait and see’ approach and to offer more time
to companies to increase their levels of compliance.
The aforesaid evidence might reveal some lessons regarding the utility of the
hybrid approach adopted in the Companies Act 2013—that of voluntary spending
(set to a two per cent benchmark) with mandatory disclosures.
5 Analysing the Implementation of CSR Spending

Requirements
The studies discussed so far reveal significant challenges to the successful imple-
mentation of the CSR requirements under the Companies Act 2013. These chal-
lenges arise mostly due to the inadequate treatment of disclosures, particularly
those relating to failure to spend the requisite amount prescribed under law.
A stern critique of the disclosure requirements is that there are no clear criteria
by which to judge their adequacy and appropriateness. For example, the generality
of the formats prescribed allow for companies to provide broad disclosures. More
importantly, there is no formal mechanism for a review of the disclosures either by
the Government or by the regulator.52 For example, it has been noted:
India’s CSR disclosure regulation is in a nascent stage, and unlike securities markets, it
remains to be seen whether consumers with the power of the purse will drive enough interest
in the sector to support an array of analysts and rating agencies to comb through the
forthcoming CSR reports and synthesize them into actionable and comparable data. Without
an independent view of companies’ CSR initiatives the disclosure of program data will not
be useful and has the opportunity to purely “green-wash” the business sector, as opposed to
actually affecting the social changes that much of India so desperately needs.53
Even in developed markets, the ‘comply or explain’ approach is not without

problems. For example, in the context of corporate governance in the UK, it has
been found that although the trend is increasing for compliance with applicable
corporate governance norms, it is accompanied by a frequent use of standard
explanations in cases of non-compliance.54 Moreover, researchers have found
that ‘companies that do not comply with corporate governance standards and do
not explain the reasons have the lowest profitability, whereas companies that
comply and those that do not comply but give informative explanations perform
better than other companies.’55 Such findings suggest that ‘companies that deviate
52
53
McArdle (2015), p. 506.
54
Arcot et al. (2010).
55
Arcot and Bruno (2011), pp. 5–6.
from governance practices and are less transparent about their governance choices
do not adopt different governance practices because of their different characteristics
but they exploit the flexibility of the governance system to extract private
benefits.’56
If the ‘comply or explain’ approach faces difficulties in countries such as the UK,
these observations would hold even stronger in the context of CSR disclosures in
India as the jurisdiction is riddled with enforcement problems.57 Moreover, as
Dharmapala and Khanna point out, ‘the CSR mandate may give rise to corrupt or
fraudulent forms of spending, for instance where the firm directs funds towards a
fraudulent organization that then returns most of the money.’58 Anecdotal evidence
suggests the existence of such conduct already in the early stages of implementation
of the CSR spending requirements.59
Finally, there has been strident criticism regarding the hybrid approach adopted
for CSR spending in India. In relation to the CSR provisions in the Bill that finally
led to the enactment of the Companies Act 2013, Karnani argues:
The proposed law does not even discuss, let alone define, an enforcement mechanism or
penalties for non-compliance. The law would be an enforcement nightmare, exacerbating
an already bad situation where many laws are poorly enforced in India and further
undermining respect for law. Curiously, the law even includes a loophole. If the 2 percent
allocation is not made in a given fiscal year, the CSR committee has to submit an
explanation to avoid being penalised. There is no discussion of what explanations would
be legally valid, opening up much room for corruption and extortion [. . .] Without a
coercive enforcement mechanism, it is unlikely that the law will result in widespread
compliance. In other words, ‘mandatory’ CSR will remain largely voluntary.60
While the incidence and volume of CSR activity has increased substantially with
the introduction of the CSR provisions under the Companies Act 2013, the recent
experience in implementation clearly indicate that the above prognostications
regarding disclosures have been largely true.
Even though the High Level Committee has taken a broad-brush approach in
stating that the compliance requirements and penal provisions in the Companies
Act 2013 are adequate, the available empirical evidence discussed here suggest
otherwise. This demands a rethink of the implementation of the legislation. There is
a strong case not only for greater enforcement of the disclosure provisions by the
government and the regulators, but also for the Rules to provide stricter guidelines
and formats for disclosures that might steer them away from standardisation and the
use of boilerplate language. At the same time, it might be imprudent to rely
extensively on the government’s enforcement of the CSR spending disclosures
56
Arcot and Bruno (2011), pp. 5–6.
57
58
59
Narayanan (2015), indicating that some companies may be using on-hire trusts to fabricate CSR
spending and also to launder money due to the lax disclosure and vetting processes for such
spending.
60
Karnani (2013).
250 U. Varottil
given the excessive burden it may impose on regulatory authorities in India that are
already overstretched. Hence, one may consider the possibility of relying on third
party verification of CSR disclosures so as to ensure the completeness and enhance
the credibility of the disclosures.61 In such a model, an external auditor (appointed
and paid for by the company) would verify the CSR disclosures to ensure compli-
ance with the regulatory norms, both in form and substance.62 Such third party
verifiers would generally be private entities that are registered with, or accredited
by, the relevant regulatory authorities. This effectively results in privatisation of the
government’s efforts to enforce regulation and ensure compliance thereof. Such a
method has been used in jurisdictions such as the US to enforce laws such as
environmental, labour standard and food safety legislation.63 Its existing use in
sustainability legislation can be extended to the more specific situation of CSR
compliance and disclosures in the Indian context.
These proposals can be further supplemented by the possibility of intermediaries
(that are independent from the disclosing companies) interpreting and extracting
information from companies to enhance the quantity and quality of disclosures.
Similar to proxy advisory firms that currently perform the role in the interests of
shareholders, either such firms themselves or other CSR consulting firms or inter-
mediaries operating for the benefit of stakeholders in general could take up this task.
Unless some or a combination of these efforts are carried out in a timely manner,
the CSR provisions in the Companies Act 2013 cannot be exploited to realise their
full potential.
6 Conclusion
In 2013, India embarked on a bold experiment by introducing legislative provisions

in the Companies Act 2013 that require certain large companies to spend at least two
per cent of their average profits (for the three previous financial years) towards
certain specific CSR activities. While it was initially intended to be a mandatory
requirement, significant resistance from industry resulted in its enactment as a hybrid
provision (quasi-mandatory of sorts) whereby such companies are expected to incur
the CSR spend, but have the flexibility of explaining away any non-spending with
appropriate reasons. While there has been a great deal of debate regarding the utility
and design of the CSR requirements, the hybrid approach is a fait accompli. Hence,
attention has been focused on the manner of implementation of the provisions in their
initial years of introduction—a focus to which this chapter contributes.
This chapter finds, based on several empirical studies as well as hand-collected
data comprising CSR spending (and disclosures) by Nifty 100 companies, that
61
I thank Afra Afsharipour for her suggestions on this point.
62
McAllister (2012), pp. 2–3.
63
McAllister (2012), p. 6. See also Roberts (2011), p. 106.
while there has been a significant rise in CSR spending in absolute terms, the track
record is far from the overall two per cent limit. While there are robust compliance
levels among the larger companies (including the sample studied for this chapter),
the same cannot be said of companies across the board. In any event, even among
the top companies, disclosure levels are unsatisfactory and need considerable
improvement. While companies themselves may have incentives to improve their
disclosure levels, it may be too optimistic to witness such improvements without
regulatory sanctions. Hence, it is up to the Government to turn to greater stringency
in prescribing the disclosure standards and, more importantly, in enforcing them
strictly. Other measures such as third party verification may be considered to
supplement governmental efforts. Given that the rest of the world is keenly follow-
ing the Indian experiment, its lessons may extend far beyond Indian shores.
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Umakanth Varottil Career, memberships and achievements: Co-authored two books on Sin-
gapore law and practice and published chapters and articles in international journals. Founded the
Indian Corporate Law Blog (http://indiacorplaw.in). Taught on a visiting basis at law schools in
Australia, India, Italy, New Zealand and the United States. Prior to joining academia, was a partner
at a pre-eminent law firm in India, and at the time ranked as a leading corporate/mergers and
acquisitions lawyer in India by the Chambers Global Guide.
Research interests: Corporate law and governance, mergers and acquisitions and cross-border
investments. While generally comparative, focuses particularly on India and Singapore.
Teaching: Company Law, Mergers and Acquisitions, Indian Business Law.

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Jean

ISBN 978-3-319-69127-5 ISBN 978-3-319-69128-2 (eBook)

Library of Congress Control Number: 2018930249

© Springer International Publishing AG 2018

Printed on acid-free paper

This Springer imprint is published by Springer Nature

Part I Introductory Overview

Part II Corporate Social Responsibility: Conceptual Frameworks

Part III Board Structure and Accountability

Part IV Corporate Social Responsibility Legislation and

Jean Jacques du Plessis Career, memberships and achievements: Admitted as

Umakanth Varottil Career, memberships and achievements: Co-authored two

Jeroen Veldman Career, memberships and achievements: Has held appointments

Jean J. du Plessis, Umakanth Varottil, and Jeroen Veldman

J.J. du Plessis (*)

© Springer International Publishing AG 2018 3

2 Part II: Corporate Social Responsibility: Conceptual

2.1 Well Governed, Sustainable and Socially Responsible

2.2 The Role of Employee Voice in Promoting Corporate

2.3 Responsibility and the Modern Corporation: Jeroen

3 Part III: Board Structure and Accountability

stakeholder-oriented model, culminating in the passage of the Companies Act 2013.

3.2 Regulation of Corporate Social Responsibility in the Lens

stakeholders, empowering stakeholder groups and rewarding the board members

legal framework should be steered by Chinese Company Law through information

4 Part IV: Corporate Social Responsibility Legislation

4.1 Corporate Social Responsibility in European Union Law:

4.2 From Transparency to Due Diligence Laws? Variations

Andreas Rühmkorf’s chapter focuses on attempts to address the high prevalence of

assessment reveals significant differences in the scope, legislative design, strin-

4.3 Soft Law Requirements with Hard Law Effects? The

Alexander Scheuch’s chapter focuses on German corporate law. He explains that

4.4 Analysing the CSR Spending Requirements under Indian

regulation as opposed to ‘softer’ voluntary mechanisms to seek compliance forms

the context of India, a jurisdiction ‘riddled with enforcement problems’. Moreover,

5 Some Concluding Remarks Regarding Corporations’

information to investors to ensure they invest in responsible corporations and that

Acknowledgements We would like to thank Jacqui O’Leary (Email: joleary@netspace.net.au),

© Springer International Publishing AG 2018 27

events, without support from public sources.13 These enhancements would be

2 The Basel Capital Framework

3 Responsible Lending Standards and Rules

residential mortgage market, including greater consistency in underwriting stan-

4 Framework Around Systemically Important Financial

The aims of the incremental measures applying to SIFIs appear to be largely

Kodres L, Pritsker M (2002) A rational expectations model of financial contagion. J Finance 57

Cindy A. Schipani, Terry Morehead Dworkin, and Junhai Liu

C.A. Schipani (*)

© Springer International Publishing AG 2018 51

2 CSR and Employee Voice

A number of platforms are available for organisations to report their socially

2.1 The Costs of Lacking CSR and Employee Voice

2.2 Economic Costs and Benefits of CSR

2.3 Economic Costs and Benefits of Employee Voice

2.4 Significance to Chinese Businesses

Focusing on the unique position of Chinese business as a global leader in growth, to

2.5 Social and Human Costs and Benefits

which whistleblowing could be facilitated. The law is an improvement from the

3.1 Legal Regulations and Protections

The latest updates to Chinese whistleblowing regulations in 2016 added several

Whistleblowers can earn up to RMB 500,000 (~$80,000) US in reward money,

3.2 Whistleblowing in Practice

4 Worker Voice in the Chinese System