February 5, 2021

Lessons from India's struggle with corporate purpose

By Afra Afsharipour

[Cross-posted from the CLS Blue Sky Blog]

The escalating debate over corporate purpose is not confined to developed economies in the West. Rapidly developing economies in nations like India are similarly grappling with how to define and develop a legal framework around corporate purpose. Corporate social responsibility (CSR) and a re-examination of corporate purpose have been at the centerpiece of discussions about corporate governance reforms in India. In a new book chapter, I discuss the lessons that can be learned from India’s experience with corporate purpose.

For over a decade, India has taken a multi-pronged approach toward redefining corporate purpose. Voluntary guidelines issued by the Indian Ministry of Corporate Affairs (MCA) have approached stakeholderism, CSR, and sustainability as part of corporate strategic planning and a company’s business policies under the oversight of the board of directors. In 2013, India enacted the new Companies Act. The act altered the fiduciary responsibilities of boards of directors, with Section 166 providing 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.” The act also imposed mandatory CSR responsibilities on corporate boards with a comply or explain approach toward CSR spending. More recently, there have even been efforts to make this approach mandatory. And in 2019, the MCA issued yet another set of National Guidelines for Responsible Business Conduct to encourage Indian businesses to reflect on their purposes and to contribute towards wider development goals while seeking to maximize their profits. In addition to the MCA, the Securities and Exchange Board of India (SEBI), the nation’s securities regulator, has also required substantial additional sustainability disclosures by the largest listed companies.

The success of India’s multi-pronged initiatives has been mixed. The CSR provisions of the Companies Act have led to a large increase in philanthropy. However, philanthropic spending is unevenly distributed. Moreover, the promise and future of the CSR requirement of the Companies Act is uncertain, particularly considering the economic impact of the COVID-19 pandemic. Similarly, the stakeholder provisions of the Companies Act suffer from lofty rhetoric unmatched by either practice or legal remedies for stakeholders. SEBI’s disclosure rules have significantly increased transparency for the largest Indian companies. With greater disclosures, stakeholders are positioned to engage with companies more effectively and meaningfully about their social responsibilities beyond profits. Nevertheless, mandatory CSR, a stakeholder-oriented approach to corporate law, and additional sustainability disclosures have made little dent in India’s massive inequality, poverty, corruption, or pollution.

It is not surprising that India has struggled so intensely with a stakeholder-oriented approach to corporate purpose. The ownership structure of Indian firms plays a significant role in challenging the stakeholder-driven corporate purpose efforts in India. Controlling shareholders (referred to as promoters in the Indian context) are the most powerful players in corporate India. For many promoter families, shareholder wealth maximization aligns directly with their own interests. In addition, the philanthropy approach of India’s CSR provisions provides promoters with a philanthropic glow that aligns with the promoter’s self-interest.

Concentrated ownership can also create opportunities for stakeholderism to transform into mutually beneficial relationships between the government and powerful promoters. In the Indian context, the government has used private firms to promote its policy objectives of development and growth. But private firms have also been used as an instrument of rent extraction for political purposes. For example, companies are increasingly contributing CSR funds into the Prime Minister’s Relief Fund, but there is little transparency in how such funds are spent. Furthermore, there are concerns that contributions to government-controlled funds undermine the work of non-governmental organizations.

Many experts argue that promoter power has expanded significantly post-economic liberalization with greater links between political and business elites. Powerful promoters are often the biggest funders of political campaigns. Business elites are deeply involved in political decisions and policy making, serving on a variety of parliamentary committees that recommend important policy decisions for the government. Furthermore, a number of prominent industrialists have entered politics, primarily through serving in the upper house of Parliament (Rajya Sabha). In controlled companies, companies’ CSR policies may inevitably reflect the interests of promoters, including their political interests and aspirations, as well as their views on social reality and values.

The Indian experience presents an important perspective to the corporate purpose debate from a country where firms are dominated by controlling stockholders. In a country where politics and business are deeply intertwined, and where powerful controlling stockholders have an outsized role, stakeholderism may make little headway. Instead, the Indian approach to stakeholderism provides an environment where corporations can use their CSR efforts and corporate purpose rhetoric to curry political favor with the state, while the state can use stakeholderism to politically signal that it values society, even in the face of rising inequality, pollution, and persistent poverty.