The Opportunities and Challenges of Legislating Corporate Social Responsibility

Recent studies have shown that many companies are giving more generously to social causes than ever before. Some, like Unilever, Coca-Cola, GSK, and others, have begun to champion the notion that social and financial profit can be achieved simultaneously. But even the most progressive companies often sideline social investment and corporate social responsibility, using them more to increase a company’s brand image and awareness than to generate real social return.

In a survey of 26 multinational extractive companies, all but two said their company’s success depended on society, but most struggled to find ways to create a linkage between society and their business. The two biggest obstacles were corporate structure and the challenge of quantifying opportunity and cost—essentially bureaucracy.

Yet, even as social investment has risen, the amount most companies invest in social impact is well below one percent of net profit. Some governments have wearied of corporations’ inability to operationalize their commitment to meaningful social investment. Ghana, South Africa, and India—three of the world’s fastest growing markets—have legislated social mandates that force corporations to incorporate a minimum social impact contribution into their bottom lines. While CSR and local content laws hold promise of being able to deliver social value, they also come with drawbacks.

Ghana’s Jubilee Oil Fields Inspire Local Content Legislation

In 2007, Tullow Oil discovered West Africa’s largest offshore oil deposit. The subsequently christened Jubilee Oil Field is estimated to hold more than three billion barrels of light crude, extracted at close to 85,000 barrels a day.

As oil extraction got underway in 2010, the Ghanaian government published recommendations that asked foreign oil companies to prioritize local sourcing. But a year after operations were up and running, few international oil companies had made progress towards the government’s ambitious recommended targets. Undaunted, the parliament took action, converting its recommended guidelines into mandatory legislation.

The local content law, passed in 2013, lays out specific requirements concerning local ownership, local sourcing, and domestic employment. It requires oil companies to give locally owned businesses preference in procurement, even when those companies aren’t able to offer the lowest price. In Ghana, foreign corporate entities are required to meet specific local procurement and employment benchmarks over a 10-year period. While the legislation allows companies some leeway in local hiring in their first few years of operation, companies are expected to meet 80 percent of their staffing and procurement needs locally within 10 years.

Prior to the legislated requirements, oil companies tended to abandon their pursuit of local talent after a cursory search. Now, the legislation requires them to fill at least 10 percent of their supply chain locally in years one and two, reaching 80 percent local sourcing by year 10. It also requires that companies invest in developing talent where local abilities don’t meet demand.  Likewise, business owners were previously frustrated with the lack of opportunity. Through a USAID-funded Supplier Development Program, local businesses are building their capability and improving their systems and processes to win contracts, increasing local opportunity.

The legislation is part of a larger trend toward local content legislation in countries rich with natural resources. Equatorial Guinea, Kazakhstan, and Angola have all passed similar legislation, mandating the use of local suppliers in procurement.

South Africa BBB-EE Law Seeks to Overcome the Inequality of Apartheid

Unlike Ghana’s local content law, South Africa’s Broad-Based Black Economic Empowerment law was designed to overcome a history of internal inequality. For almost half a century, South Africa lived under an authoritarian regime that discriminated against and oppressed the country’s Black African, mixed race (Coloured), and Indian people. Under Apartheid, these populations had limited education and were eligible only for manual labor or domestic service jobs.

Even after the end of Apartheid in 1994, changes in Black African employment were painfully slow. In response, South African’s political leadership decided to further encourage companies to overcome the country’s discriminatory legacy. The subsequent 2007 law allows companies to apply for Broad- Based Black Economic Empowerment certification. To earn the certification, businesses are evaluated across seven empowerment indicators: ownership, management, employment, skills development, preferential procurement, enterprise development, and socio-economic development. Each category is weighted between 10 and 20 percent of the total score. The practice is referred to by the African National Congress, South Africa’s biggest political party, as “positive discrimination.”

Ownership evaluates whether or not a company is more than 51 percent Black-African owned. Management and employment evaluates the percentage of management positions filled and number of employees overall who are Black African, with “black” defined in the law to include Coloured and Indian as well. Preferential procurement acknowledges how much of a company’s product is sourced from Black-owned businesses. The scores for skills, enterprise, and socio-economic development measure the amount of money companies spend on contributing to these activities for their employees and others in the communities where they work.

BBB-EE certification is not mandatory for a company to operate in South Africa. But it is required to compete for any government contract, which are almost universally awarded on the basis of a Broad-Based Black Economic Empowerment score. This structure requirement has especially strong implications for multinational companies operating in South Africa. Subsidiaries of those companies would automatically receive a “0” for ownership, a loss of a full 20 points out of 100.

The law attempts to overcome generations of discrimination in schools and commerce. But because of this legacy of discrimination, many Black African, Coloured, and Indian employees lack the skills, training, and experience to serve as effective corporate leaders. While training may overcome some of these gaps, it will likely take time for the law to significantly affect the country’s most disadvantaged populations.

India Mandates Companies Spend Two Percent of Profit on CSR

In April 2014, India became the first country in the world to legislatively mandate CSR spending. The law requires all companies operating in India to spend two percent of their net Indian profits on CSR activities. It also specifies how funding efforts should be planned and coordinated, including the internal management committees companies should form to design and oversee their CSR investments. The law is an ambitious attempt to ensure that the financial returns of the country’s “tech boom” trickle down to the less fortunate. Though it is not yet clear how the law will be enforced, if all companies comply, it could triple the amount companies currently spend on CSR. As India’s economy continues to grow and the country forgoes bilateral funding from DFID, USAID, and others, private sector social investment will play an important role in improving the country’s social welfare. It is easy to argue that a dramatic increase in CSR spending is exactly what the country needs.

Forward thinking Indian corporations are eager to get onboard. In April 2015, PYXERA Global hosted an event in Mumbai designed to bring together private and social sector leaders together in a meaningful dialogue about the law’s implications. Dr. Mukund Rajan, Tata Sons’ Brand Custodian and Chief Ethics Officer, and a Member of the Group’s Executive Council, spoke about his deep belief in the power of companies to transform communities.

 “In a free enterprise, the community is not just another stakeholder in business, but in fact the very purpose of its existence,” said Dr. Rajan, quoting the Tata Group Founder, Jamsetji Tata. “Genuinely listening to the community needs is an important step in the process of purposeful engagement.” Dr. Rajan noted that his company for its part has embraced a number of ways to increase its social investment, including encouraging employees to use their skills to improve the operational capacity of nonprofits.

While the government has identified several key priorities, no structure has been put in place to strategically invest funds. Companies are on their own. What’s more, no systemization has been created to effectively leverage the expected increase. Without enforcement and strategic management, it will be difficult—if not impossible—for the government to effectively measure the law’s impact on India’s development. Some companies are critical of the law, claiming it essentially constitutes an exorbitant social-welfare tax, but without government administration and oversight, while others appreciate that the companies are able to determine how to invest their funds.

Some would suggest that all social impact legislation creates market inefficiencies, forcing companies to allocate resources in ways that are neither optimally efficient nor profitable. What’s more, insisting companies spend more on CSR, technical training, or talent development does not ensure the delivery of economic benefit, especially in cases like Ghana and India that lack sufficient oversight.

Still, legislating social good represents a new era of tri-sector cooperation in which government, companies, and nonprofits are incentivized in the strongest possible way to work together on mutually beneficial goals. Specifying requirements legislatively creates a clear business case that could reshape the business environment around the world.

Alicia Ness

Alicia Bonner Ness

Alicia Bonner Ness (@AliciaBNess) is the editor of the The New Global Citizen, where she seeks to showcase the impact of beneficiaries and implementers alike, empowering all those engaged in furthering social good to learn from one another. She is also the Communications Manager at PYXERA Global.

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