Corporate social responsibility (CSR) will remain mandatory for companies, after the Constitutional Court upheld a provision obliging such programs, dashing the interests of the business community.
The latter, represented by several associations, argued that CSR programs should be voluntary, depending on the size of the firms and in which sectors they operated, instead of mandatory as stipulated under the 2007 Law on Limited Liabilities Companies.
By making it compulsory, businesses fear it will not only serve as more of a burden to firms, but will also create legal uncertainty as there are other laws already regulating CSR, not to mention increasing potential for corruption.
Wednesday’s decision by the Constitutional Court, however, means the law will stand as it is, with judges saying it was important to make CSR mandatory as a way of getting companies to take part in rolling back environmental damage.
“Environmental damage in Indonesia has reached a critical level… It’s time for the state, along with society and businesses, to be responsible for the negative impacts of the damage,” said presiding judge M. Mahfud M.D.
“Investors, both domestic and private, have to build a harmonious relationship with society and their surroundings.”
The disputed provision was Article 74 in the law, which stipulates firms must allocate budgets for CSR programs, and the programs must be run according to government regulations.
Violation of the law is subject to sanctions depending on sectoral regulations.
“Companies will contribute more to the society and environment if voluntary CSR programs are made mandatory,” Mahfud said.
The broad definition of CSR, fear of potential corruption, and legal uncertainties caused by overlapping regulations led three judges to dissent, against six who favored the provision.
“The definition of CSR is based on each country’s culture… we need to develop our culture by enforcing mandatory CSR regulation. The regulation has more legal certainties than voluntary CSR. Regional regulations on CSR must not overlap with higher regulations to avoid legal uncertainties,” the court said.
The plaintiffs, consisting of the Indonesian Chambers of Commerce and Industry (Kadin), the Indonesian Women’s Business Association (Iwapi) and the Indonesian Young Entrepreneurs Association (Hipmi), expressed their disappointment with the court’s decision.
“The law is in contradiction to the spirit of inviting foreign and domestic investment, and disrupts small companies’ performance and expansion programs,” said Hipmi chairman Erwin Aksa.
He added there was no need to regulate CSR as mandatory, as there were sectoral rules already in place to regulate corporate responsibilities, such as the Environmental Law, the Labor Law, the Investment Law, and others.
“Generalizing the regulation can cause legal uncertainties. Which department will scrutinize thousands of firms affected by the law? Who will decide how much money should be allocated for CSR?” he said.
“The sanctions imposed on companies that fail to comply with the law will discourage people from doing business here.”
Kadin deputy chairman Hariyadi B. Sukamdani said mandatory CSR contradicted the very spirit of the CSR principle itself.
“Other countries define CSR as a company’s voluntary commitment. Indonesia is the only country that obliges CSR,” he said.
While the court’s decision is final and binding, he said he would continue to fight on.
“The law needs a government regulation before it is effective. We will try to propose a more reasonable government regulation,” he said. (fmb)
Find Article by Date