Mandatory Corporate Social Responsibility: A Multidimensional Analysis

Do corporations bear social responsibility? This fundamental question has been debated for decades. Some argue that corporations, as members of society, should actively assume social responsibilities. With the rise of Environmental, Social, and Governance (ESG) principles, the concept of corporate social responsibility (CSR) has evolved—premised on the notion that corporate profit-making can generate externalities, thereby necessitating corrective efforts through CSR initiatives. Conversely, others assert that a corporation’s social responsibility lies solely in generating profits for shareholders. From this perspective, companies fulfill their social obligations by paying higher taxes through increased earnings. This article examines the implications of codifying and mandating CSR from multiple analytical perspectives.

Is Mandatory CSR Akin to Taxation?

For example, India requires companies that meet specific thresholds to spend 2% of their average net profits on CSR activities. From this perspective, one may argue that mandatory CSR resembles a form of taxation. However, characterizing mandatory CSR as merely a tax equivalent oversimplifies the mechanism and requires more sophisticated analysis. The crucial distinction lies in the control and deployment of these resources. India’s regulatory framework grants companies substantial discretion in determining where and how to allocate their mandated CSR expenditures, provided they operate within prescribed categories. This discretionary element enables corporations to strategically align their CSR investments with their business objectives, stakeholder relationships, and operational footprint. Consequently, companies can potentially derive reputational benefits, operational synergies, and competitive advantages that conventional tax payments cannot provide.

Mandatory CSR as “Mandatory Advertisement”

CSR can function as public relations or advertising. From this perspective, mandatory CSR might be conceptualized as “mandatory advertising” or “mandatory public relations.” This characterization suggests that corporations could potentially reduce their conventional advertising expenditures following the implementation of mandatory CSR requirements. This advertising function further distinguishes CSR from traditional taxation. While paying an additional 2% in taxes would be unlikely to enhance a company’s public image, allocating the same 2% to CSR activities can generate significant reputational benefits and positive publicity. Thus, while CSR may exhibit quasi-tax characteristics to some extent, it differs markedly from taxation in important respects.

Substitution Effects of Mandatory CSR

Mandatory CSR may generate substitution effects as well. Without mandatory requirements, some corporations—whether voluntarily or under social and governmental pressure—may allocate more than 2% of their profits to CSR activities. Following a mandate’s implementation, however, these same corporations may limit their spending to exactly the required percentage, potentially resulting in the reduction in CSR efforts.

Mandatory CSR’s Impact on Consumers

When companies incur additional costs for CSR initiatives, these costs are ultimately passed on to both shareholders and consumers. From a shareholder’s perspective, mandatory CSR resembles an additional tax, since a portion of corporate profits is redistributed to society rather than shareholders. Regarding consumer impact, a few more points are worth analyzing. 

First, the more essential the product or service is to consumers, and the more difficult it is for consumers to find substitutes, the greater the cost burden that will be shifted to consumers. Second, companies with market power possess greater capacity to pass costs on to consumers. Therefore, among firms facing increased costs due to mandatory CSR requirements, monopolistic or oligopolistic companies are better positioned to transfer those costs to consumers, while companies operating under perfectly competitive conditions have limited ability to do so. Third, this dynamic implies that mandatory CSR could inadvertently enhance the market dominance and economic strength of monopolistic and oligopolistic firms.

Mandatory CSR and Controlling Shareholders’ Non-pecuniary Private Benefits

CSR arrangements benefit controlling shareholders, as they can determine, to a large extent, where CSR funds are allocated. By directing corporate funds toward CSR activities, controlling shareholders may gain non-pecuniary private benefits—such as enhanced personal reputation or public image. This situation reflects an agency problem: controlling shareholders use corporate resources to pursue their own non-pecuniary interests. The more deeply entrenched a corporation’s controlling minority structure (CMS), the greater the potential for controlling shareholders to extract such non-pecuniary private benefits.

For example, suppose a controlling shareholder holds only 10% of a corporation’s shares but exercises effective control through mechanisms such as pyramidal structures or dual-class equity structures. If the corporation spends $100 million on CSR initiatives, the controlling shareholder’s proportional cost can be estimated at $10 million (reflecting their 10% ownership stake). However, the controlling shareholder effectively externalizes 90% of the expenditure while internalizing 100% of enhanced personal image and reputation for them. Even without control-enhancing mechanisms, similar dynamics persist.

 Concealed Mandatory CSR

CSR codification through legislation remains relatively uncommon. Although not officially labeled as CSR, certain institutional frameworks exhibit characteristics that could reasonably be interpreted as CSR in nature. For example, in Korea, employers are responsible for covering a substantial portion of their employees’ four major social insurance contributions—the National Pension, National Health Insurance, Employment Insurance, and Industrial Accident Compensation Insurance. From the employer’s perspective, these contributions function as a quasi-tax burden and may be regarded as a mechanism that reinforces CSR or stakeholderism, particularly favoring employees. In other words, some countries beyond India are effectively adopting mandatory CSR or mandatory stakeholderism, even without officially mandating CSR. When analyzing mandatory CSR policies in a country or internationally, it is essential to account for such manifestations of concealed CSR mechanisms.

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Sang Yop Kang is a Professor of Law at Peking University, School of Transnational Law, a CFA and a FRM charter-holder, and an ECGI Research Member.

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This blog is based on a paper presented at the Asian Corporate Law Forum (ACLF). Visit the event page to explore more conference-related blogs.

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