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29 Dec

COMPANY LAW 1.12 CSR, CORPORATE GIFTS AND POLITICAL DONATIONS

CSR, CORPORATE GIFTS POLITICAL DONATIONS

CORPORATE SOCIAL RESPONSIBILITY.

Defined by the European Union as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with stakeholders on a voluntary basis”.

With modernisation and advancement, people began to feel that (beyond complying with statutory obligations) companies should behave responsibly and empathetically to the stakeholders[1], environment and immediate community. In addition to furthering the interest of members and investors (to make profit), the CSR believes that the company should include the interest of the public… that companies should have some responsibility to the society beyond making profits.

In theory, we have the antagonists and protagonists/proponents.

The Protagonists argue that CSR would eventually be in the interest of the company in the long term. That businesses are inextricably linked to the society which determines their very survival in the long term.

The Antagonists argue that CSR distracts the company from its fundamental economic and business role. That CSR seeks to give the companies functions which the government ought to perform. The Laissez-faire proponents note that the main aim of the company is to make profit. Milton Friedman also posits that the social responsibility of business is to increase its profit.

Historical Evolution of CSR.

Began in 1930 and expanded over the ages. Worthy of note is the Adolf A. Berle and E. Merrick Dodd debate over whom the directors should serve. Prof Berle posited that they should serve the shareholders while professor Dodd argued that the corporate powers were held in trust for the entire community. The argument was settled in favour of Professor Dodd.

Vance Packard in The Hidden Persuaders[2], William H. Whyte in the Organization Man[3]. Theodore Levitt, in The Dangers of Social Responsibility[4] David Millon In Communitarians, Contractarians and the Crisis in Corporate Law[5]… and a host of other writers have advocated for social responsibility and the public role of a company[6].

CSR IN NIGERIA.

In Nigeria, it is arguable that the primacy of shareholder’s interest still holds sway. In fact some go as far as establishing and registering shareholders association’s to further ensure their primacy. The CAC and SEC seldom utilise their power to inspect the companies for recklessness or non-conforming practices.

A worldwide research carried out by Market Trends Nigeria Ltd in collaboration with Environics International Limited Toronto, Canada reveals that in the near future, the goals of corporate establishments would be social in nature bordering on improving access to healthcare, fighting diseases, reducing crime and violence. The research admonished companies to make a difference in the society. THE CSR BILL was introduced to the National Assembly by Senator Uche Chukwumereije. The Bill seeks to establish an Act which mandates companies to (set out 3.5 percent of their profit before tax to) contribute to sustainable development of host communities[7]. The end is to achieve confidence and mutual trust between the enterprises and societies in which they operate. Not yet law.

The CSR practice in Nigeria usually focuses on philanthropy, charity, donations, sponsorship of events and so on. This is only one aspect of CSR in the real sense. This CSR practice in Nigeria may be linked to our agrarian mode of livelihood and family/kinship pattern of production. Less focus is placed on employee relations, improvement of product and processes, environmental improvement and so on.

THEORIES OF CSR.

Classical Theory: Milton Freidman proposed that the main aim of business is to make profit… profit maximisation. This classical theory notes that since the shareholders invested money, they should get the profit. Provided there is no illegal, fraudulent or unhealthy practice. Applying the money to social and other charitable endeavours would amount to taxing the shareholders again. It can be justified on the basis that the taxes collected from the companies by the government should be used to provide public and other social services. Marianne Jennings and Jon Entine[8] added that companies should just make profit without going the extra mile to care for the communities… but they should not harm the customers, employees and communities.

Stakeholders Theory: emerged as an improvement to the classical theory due to the variety of interests associated with businesses today. It posits that the company should cater for the interest of those who have a stake in the enterprise. They include, shareholders, employees, customers, suppliers, the local community, and so on. Proponents of this view include, MacLeod. If one of the stakeholders are ignored, the business may fail and be wound up. E.g. if the company decides to ignore its supplier, it would not be able to meet demand. If it ignores customers, there would be no one to purchase its products or employ its services, and so on.

Social Contract Theory: That a company has certain features accorded to it by the State like perpetual succession, separate legal personality, Limited Liability, and so on. This requires the company to have a moral obligation to the State and society. It should work for the betterment of the, Society, State, regions and indeed the world in which they conduct business. Environmental Rights Activists support this view and advocate that companies should not pollute the environment and should help in funding research into alternative means of eradicating pollution.

CRITIQUE OF CSR THEORIES.

No company is ethically perfect: therefore, expecting them to be CSR motivated may be erroneous-Marianne Jennings and John Entine both note that we should ask the following 8 questions:

  • First of all: Does the company comply with the law of the land?
  • Does the company have a sense of propriety? After complying with the law, the funds of the company should be ethically applied to their objects or intended purpose. E.g. some companies are producing genetically modified foods, media companies beginning to air sex scenes and so on are considerations under ethics.
  • How honestly do product claims match with reality? And where they do not match, are customers’ complaint treated appropriately?
  • How forthcoming is the company with information? Does it disclose to the stakeholders? Most failed banks did not disclose that they were failing when customers were investing. Such banks should be regarded as socially irresponsible.
  • How does the company treat employees? Some Chinese factories in Lagos despise their workers’ safety and welfare. Some new generational banks give their employees certain herculean “targets” to meet or face dismissal.
  • How does the company handle third-party ethical issues? E.g. is the company committed to human rights, labour relations, etc?
  • How charitable is the company? Although sometimes eye-service may predominate.
  • How does the company react when faced with negative disclosures? Do they say nothing or respond immediately or do they attempt to cover up the problem or charges. How well does it respond to stakeholder’s fears and anxieties?

Prospects for CSR.

In 2005, the UK government laid down a framework of CSR that all its companies should adopt. This seeks to ensure responsible business practice and sustainable development. It proposes that companies should:

  • Be aware of the impact of their activities and operations around the world.
  • Adopt best practices and improve existing processes.
  • Be in active partnership and engagement with all stakeholders.
  • Support CSR activities of international organisations.
  • Promote CSR principles to governments.

The United Nations came up with the “UN Draft Norms on the Responsibilities of Transnational Companies and other Business Enterprises with regard to Human Rights” which is to establish an international framework for mandatory standards of CSR. It provides that no business shall benefit from international crime and must guard against bribery and corruption. Environmental protection, consumer protection, international business standards and the likes are also advocated.

In July 2001, The European Commission published a Green Paper to open the debate on promoting a European framework for CSR. This was followed by a Stakeholder Forum on CSR which brought together various businesses and NGO’s for deliberation on ways to forge ahead.

In 2006, the European Commission issued a Communication on CSR which announced a new European Alliance for CSR. In 2009, the EU reiterated their commitment to CSR and a world in which companies’ drive for profit is balanced by the interest of the society at large and respects, social, human and environmental rights.

In The United States of America, the fight for CSR has been relatively successful when compared to other countries. Following the industrial revolution and industrial boom in the mid 20th century. The US government established the “big four” regulatory agencies viz:

  • Occupational Safety and Health Administration.
  • Equal Employment Opportunity Commission.
  • Consumer Production Safety Commission.
  • Environmental Protection Agency.

Various Acts[9] were also enacted. These and many others ensured a socially responsible corporate regime and business practice. “Constituency Statutes” allow the BOD to take into account the interests of non-shareholders.

Ironically, in Dodge V Ford Motor Co[10], Henry Ford used the excess profit of the company to lower sales price of vehicles and hire new workers rather than share the profit among the shareholders. The court held in favour of the shareholders noting that the foremost aim of the company is to make profit and distribute same to shareholders. However, in Smith Manufacturing Co V Barlow, the directors of the co decided to donate $1,500 to Princeton University. The Supreme Court upheld the decision of the co and noted that it conforms with present day realities. In Unocal Corp V Mesa Petroleum Co, the court held that the BOD[11] must protect the public interest. Same position was taken in Kats V Oak[12]. Professor Stout has noted that placing the interest of shareholders as paramount is an error. Also Professor Greenfield opines that firms should service the interest of the society as a whole. Professor Mitchell[13] notes that it is for their own good. Professor Clark takes a middle-ground. Mr Sundaram and Inkpen defend the shareholders approach. It however appears that the Legal Regime in America is in favour of stakeholders rather than shareholders.

CORPORATE GIFTS

The issue here is whether a company can make gratuitous payments from its assets.

A lot of people see it as mandatory for a company to support events, promotions, programmes, and so on… in essence, companies must “drop money”.

Perhaps the first case is Hutton V West Cork Railway Company[14] a general meeting passed a resolution to pay E1500 out of the company’s asset to the directors for their past services. It was held to be invalid. As Bowen LJ noted in the case: “The law does not say there should be charity… unless it is for the benefit of the co. It is not charity sitting at the board of directors because as it seems to me, charity has no business to sit at the board of director qua charity…” A similar position was maintained in Re Lee Behrens[15] where (three years before it was wound up), the company approved payment of pension to the widow of a former MD. It was held that such payment was not allowed by the articles and was not for the benefit of the company. The court noted that we must ask the following:

  • Is it reasonably incidental to the object of the co?
  • Is it bona fide?
  • Is it done for the benefit and to promote the prosperity of the co?

Where the answer is no, then the gift is invalid.

In essence, you must show how that the charity is in the interest of the company.

In Park V Daily News Ltd, payment to employees who had become redundant was held to be ultra vires not being within the object of the company nor in the interest of the co.

In Re W and M Roith[16] pension for life for the widow of majority shareholder was held to be unlawful.

However, if such charity is authorised by the memorandum, then it may not be invalid. The way out is thus for a company to include a clause in the memo allowing charitable donations[17]. If there is nothing in the memorandum, the common law position (discussed above) would govern-Rolled Steel Products Holding Company V British Steel Corp[18].

THE DOCTRINE OF STATE CAPTURE (POLITICAL DONATIONS)

Big corporations try to donate (in fact political parties approach them to donate) to the State and other political endeavours. This may endear them to the political party and may even translate to them dictating to the government of the State. Dr Sanni notes that if someone contributes immensely to your success and you collect it, you would owe some obligation. So also, if a corporation/person contributes immensely to the campaign funds of a governor or the accounts of a State, it follows that the State should owe it/him some reciprocal obligation.

Should political donations be allowed or prohibited or at least controlled? Dr Sanni remarked that Nigeria is playing the ostrich in this regard.

In Simons V Heffer[19] Two donations to the labour party to prevent cruelty to animals. The first donation was to advance freedom of animals and the other was for them to do anything with the money. The second donation was invalidated. Thus, this is not an absolute bar.

In Nigeria, the law is clear: Section 221 of the 1999 Constitution No association, other than a political party, shall canvass for votes for any candidate at any election or contribute to the funds of any political party or to the election expenses of any candidate at an election. Section 229 defines the word “association” to include unincorporated entities. A similar provision can be found in Section 38(2) [20] of CAMA.

Also, Section 93(3) Electoral Act (now Section 91(9) of the 2010 Electoral Act) forbids individuals and other entities from donating more than 1 million Naira to a political candidate. It seems like the Electoral Act contradicts the Constitution. The constitution fully prohibits while the electoral act is saying a limit of 1 million. You know what should happen.

In Nigeria, there is lack of enforcement. E.g. in Obasanjo V Yusuf, it was alleged that 2bn naira was raised at a dinner at the instance of the Nigerian Stock Exchange (it is an NGO). Yusuf and his political party told the court that they are fully prepared to prove this. Both Obasanjo and INEC denied the issue. Although it is arguable that in the Present condition of Nigeria, even a hundred million naira is not enough to run a campaign governorship campaign talk less of a Presidential campaign.

Although Prof Bolodekun in Corporate Speech in a Democracy; What Can Nigeria Learn from Abroad?[21] Notes that we should try to balance the need for companies to do whatever it considers can be done in the interest of the company. This is equated to freedom of expression of a company being a natural person.

 

[1] Members, shareholders, customers, employees, and so on

[2] Penguin Books, 1981.

[3] University of Pennsylvania Press, 2002

[4] 36 Harv. Bus Rev. Sept Oct, 1958, at 42.

[5] (1993) 50 Wash. and Lee L. Rev 1373.

[6] Although R.H. Coase in The Nature of the Firm advocated the contractarian theory of the firm. This sees the firm as a “nexus of contracts” between the employees, shareholders, creditors, managers. It threatened to eliminate the underpinings of CSR movement. This nexus of contracts approach regards the company as a mere legal fiction with no fiat or disciplinary action.

[7] Communities where they are located or which are affected by the company’s activities.

[8] Business with a Soul: Reexamination of what Counts in Business Ethics. [1998] 20 Hamline Journal of Public Law and Policy.

[9] Like Community Reinvestment Act, Clean Air Act, Foreign Corrupt Practices Act, Investor protection Act, and so on.

[10] 170 N.W., 668, 684 (Mich, 1919)

[11] Board of Directors.

[12] 508 A.2d 873 (Del. Ch. 1986).

[13] Mitchell, L.E., La FirmeIrresponsable, Paris, France, Economica (2003).

[14] [1883] 23 Ch. D, 654.

[15] [1932] 2 Ch 46. Also Parke v Daily News [1962] Ch. 927.

[16] 1967 1 WLR 432

[17] Although this is quite precarious as there is a tendency that the directors or other members of the company may be extravagant.

[18] 1986 CH 246.

[19] 1983 DCL C 298.

[20] (2) A company shall not have or exercise power either directly or indirectly to make a donation or gift of any of its property or funds to a political party or political association, or for any political purpose; and if any company, in breach of this subsection makes any donation or gift of its property to a political party or political association, or for any political purpose, the officers in default and any member who voted for the breach shall be jointly and severally liable to refund to the company the sum or value of the donation or gift and in addition, the company and every such officer or member shall be guilty of an offence and liable to a fine equal to the amount or value of the donation or gift.

[21] 13 Cardozo J8 International and Comparative Law, 61, 2005 Journal.

Isochukwu

Quite eccentric really

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