Compulsory CSR: Indonesia takes a tough stance but clarity on definitions is lacking

For the last two decades Corporate Social Responsibility (CSR) has become an important issue in Indonesia. In this context one controversial issue is how CSR should be regulated. Should it be by the state, through code of conduct or self-regulated?  

The problem of distinguishing a CSR regulatory framework that is mandatory from one that is voluntary has also arisen in the Indonesian context due to the implementation of Law No.40 2007 on Limited Liability Company (UU No. 40 Tahun 2007 tentang Perseroan Terbatas) in addition to Law No.25 2007 on Investment (UU No. 25 Tahun 2007 tentang Penanaman Modal di Indonesia), which gives CSR in Indonesia an attribute of compulsion.  

According to Article 15 of Law 25 2007, every company must implement corporate social & environmental responsibility. The article contains two understandings, the first; that there is an obligation for all companies to carry out CSR; second, that obligation is inherent for all companies and in all business sectors without exception.   

The above Article contrasts with Article 74 of Law No 40 2007 on Limited Liability Companies, which only obligates CSR implementation for companies operating in certain business sectors related to natural resources. The article expresses CSR implementation as ‘A company obligation that must be budgeted and calculated as company operational cost’.  

In other words, a company in this category is obligated to allocate funds for CSR implementation, and the allocated funds are considered corporate operational expense.  Failure or neglecting this obligation carries with it sanctions.  On the other hand, CSR as understood in  Law No25 2007 on Investment, or ‘Investment Law’ for short, does not mention any form of sanctions for companies failing or neglecting to carry out CSR activities, which of course has long been considered  an activity that is voluntary.

Strong opinions

Thus it is understandable that the adoption of Article 74 Law No 40 2007 elicited strong opinions from elements of the public.  The general public reacted towards the mandatory implementation of CSR while the business sector reacted more towards the impact the regulation had on operational costs and on competitiveness.   As a result, the polemic of Article 74 Law 40 2007 found its way into a judicial review by the Constitutional Court (Mahkamah Konstitusi, or MK for short).

The Constitutional Court Judicial Review is a response from the business sector, represented by the Indonesian Chamber of Commerce and Industry (KADIN / Kamar Dagang dan Industry Indonesia). The review questions the legality of article 74 Law No 40 2007, which contradicts the Republic of Indonesia Constitution i.e., Article 28 D (1) UUD 1945 (related to legal certainty), Article 28 1 (2) on discrimination and Article 33 (1) on efficiency of economic justice.   

According to the plaintiff, Article 74 Law No. 25 2007 creates legal uncertainty, strongly in opposition to the spirit of CSR, which in principle is voluntary, and inclined towards discriminating a particular line of business.   All in all, it creates an additional burden on this particular line of business and will only bring negative impact to the economy at large.   

A flexible concept

Despite that, the Constitutional Court declared in April 2009 that Article 74 of the contended Law was correct. Meaning that the article in question was not discriminative, it was fair and therefore was not in violation of the constitution. The Constitutional Court also stated that CSR is a flexible concept which is open to interpretation by every state.   

Under that rationale, the Constitutional Court found and declared that the mandatory attribute of CSR is in line with economic, social and legal conditions in Indonesia.  Furthermore the Constitutional Court added that the mandatroy attribute gave certainty and clarity to voluntary CSR, considering how weak law enforcement is in Indonesia.  

Constitutional Court Judges also put forth that Article 74 is not discriminatory towards a particular business sector because it is based on the potential risk of damage that comes from the operations of companies on natural resources and environment. Therefore, the Constitutional Court further stated that it is natural and logical for companies that carry with them impact on natural resources to be mandated to bear the burden.  

Past neglect by MNCs

The rationale behind Article 74 Law 40, passed by the House of Representatives, with regard to the mandatory CSR attribute placed on companies because many multinational companies operating in Indonesia neglected their responsibility managing the environment.   Experience showed that many companies focused only on operational activities but were lacking in concern towards social interests: for instance, the Lapindo mud disaster in Porong, local conflicts in Papua with PT Freeport Indonesia, Aceh local conflict with Exxon Mobile which operates natural gas in Arun, etc. 

Another reason is CSR is already mandatory for State Owned Companies (BUMN).  BUMNs are obligated to provide assistance to third parties in the form of physical development. The obligation is regulated by BUMN Minister and Finance Minister Regulations since 1997. Therefore, it is time for companies in Indonesia to take part in concern for things related to the environment and surroundings of where they operate.   

Aside from that, the globalisation trend shows that things related to the environment have become an imperative to the interests of the human race. In the UK and Netherlands for instance, CSR has become a legal judgement under capital market authorities in addition to being a public judgment as well. Companies that never carry out CSR have seen their stock values decline on the stock market.   

A call for clarity 

In closing, for Indonesia to implement CSR as stipulated in the Law No. 40/2007, the government needs to draft a governmental regulation to clearly define CSR, to instill a stakeholder perspective that corporations can relate to and adopt as business practice that is essential to their survival, that CSR is a matter of good business practice, meaning that corporations should care about their stakeholders via a variety of interactions with them. 

A multi-dimensional approach is needed which includes seven dimensions of CSR: community and society, corporate governance, customers, employees, the environment, human rights and controversial business activities.

Seen from this further definition of CSR, a company that carries out a CSR program just to comply with Law No.40/2007 will be rated low in CSR performance as it overlooks its ethical obligation to protect its customer and employees.

This will make corporations obligated by the law to conduct CSR feel happy, since by conducting CSR they are regarded as implementing good business.


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The Author

Armand Maris

Strategic communications consultant Armand Maris is Executive Officer - Group Head, Inke Maris & Associates.

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