An Definition Of Corporate Social Responsibility Law Company Business Partnership Essay

Published Date: 02 Nov 2017

Seminar Group: 2

Tutor: A/P Joyce Lee

Date of Submission: 11th March 2013

Student Name

Matriculation no.

Liew Kar Voon

U1110181E

Introduction

The discussion of corporate social responsibility (CSR) is not new and has been debated in various contexts including strategic management and law. CSR is more commonly known in business as companies "doing well by doing good". This report seeks to discuss the definition of CSR and review how existing legislations on corporate capacity and directors’ duty fits into the objectives of a socially responsible company.

Definition of Corporate Social Responsibility

Although there are many interpretations on what CSR should be, there are common attributes among them. I feel that the most appropriate definition would be that CSR is "a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis" (Commission of the European Communities, 2011). This definition has addressed several dimensions of CSR, namely stakeholder, social, environmental, economic and voluntarism.

Firstly, should the companies consider the interests of other stakeholders? The traditional view, as supported by Berle, is companies are accountable to their owners, i.e. shareholders who have invested their capital. On the other hand, Dodd has contended that a company is "an economic institution which has a social service as well as a profit-making function.

In my opinion, I agree with Dodd and feel that the company has to, in its decision-making, consider the implications on the stakeholders beyond profit-maximisation. This is because of the prevalent expectations that company directors are trustees of stakeholders and ought to act ethically and balance often conflicting objectives of shareholders and stakeholders.

Secondly, companies are to take into consideration their impact on people who have a stake in the business. The duty of care should be extended to those whom the companies reasonably foresee may, in one way or another, be affected by the company’s policies. They are generally inclusive of creditors, consumers, employees and society at large.

Next, the three domains (economic, social and environmental) signal that besides generating profits for the shareholders, companies are to generate positive non-financial outcomes such as improve the quality of life for stakeholder. Lastly, being socially responsible should be voluntary and beyond its legal obligations.

Reconciliation of fulfillment of social responsibilities with its corporate capacity

Corporate capacity, as provided for in Section 23 CA, defines whether the company has the capacity or is allowed to carry on any activities, business or enter into transactions. Accordingly, the company is given full legal capacity in respect of the above, subject to object clause (if included) in Section 23 (1A) and provisions in the memorandum or articles of association under Section 23 (1B) that might limits its capacity to do so. The provision would then include the power to make donations for charitable purposes.

In any case, the Singapore Courts has adopted a narrow interpretation of Rolled Steel Products Ltd v British Steel Corp and held in Bruxelles Lambert v Puvaria Packaging Industries (Pte) Ltd that the transaction is not ultra-vires, even though it was exercised outside of the company’s objects or used for improper purpose.

Section 25(1) CA also states that no act is invalid because of the lack of capacity of the company to carry out the act. Therefore, such philanthropic acts are valid by virtue of the section and it is possible for companies to use its power to fulfil its social responsibilities.

Reconciliation of fulfillment of social responsibilities with existing directors’ duty

However, corporate capacity does not answer whether directors are entitled to consider interests of stakeholders in exercising their powers, without being held in breach of his directors’ duties. This is established in the case of Rolled Steel case that an act which is in itself within the company’s capacity may be authorised by the directors in breach of their duty to the company.

Under the Companies Act, directors have the duty to act in the interests of the company. The basic principle is that the interests of the company are generally those of its members. However, shareholders cannot give direct orders to the directors in the way they run the companies or challenge the directors’ exercise of discretion.

To devote resources for charitable purposes instead of generating profits can be seen not acting in the interests of the company. As such, directors can be held in breach of their fiduciary duty to act in the company’s interests.

Despite that, the business judgment rule seeks to protect directors who make business judgments in good faith and for a proper purpose, having honestly believes that the decision is in the best interest of the corporation. In such cases, the court is unlikely to interfere with directors’ business decision since they are best place to manage their business. Therefore, shareholders generally cannot bring an action against directors’ decisions to give undertake philanthropic acts unless he/she can show prove that the directors acted in bad faith.

Although the Companies Act does not explicitly reconcile with the directors’ duties, it does provide in Section 159 CA that interests of the company’s employees should not be neglected.

Since the existing laws are inadequate to address the evolving definition of socially responsible company, we should look at whether the laws should be changed to include the interests of other stakeholders.

Implications

There are several obstacles caused by the extension of directors’ duties. Firstly, if directors are tasked to consider the interests of various parties, which often have conflicting interests, it is difficult to be equally fair to all parties and such law is pointless to the extent that it will reduce the effective control of the shareholders over the management. Unintended consequences would include private claims by force or threats by various groups.

Secondly, it is also difficult to enforce these duties as other stakeholders do not have direct recourse or remedy against the directors and company under the existing frameworks of company law. Remedies provided are probably injunction to get the directors reconsider their decisions. Likewise, since shareholders are not given the right to hearing, employees should not be given the right as well. The substance of the remedy is not present.

Lastly, under the Companies Act, members are the proper persons to ratify any breaches of duty as they are ultimately the owners of the company. That leaves no room for any ratification by other stakeholders. Decisions by shareholders to ratify must also be more open to scrutiny by the courts.

Conclusion

In conclusion, there is a need to view the company as a corporate citizen rather than membership. The law has provided companies with the capacity to undertake philanthropic acts. However, directors might still be in breach of directors’ duties for not acting in the interests of the company.

I do not think that legal obligation is the way to go. Are these sets of interests really conflicting with each other? If companies were to take the view that CSR can help business to build goodwill and in turn, lead to higher profitability, which will be beneficial to the owners of the firms in the long run, then these interests can be reconciled without the interference from the law.

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