Springer 2010

Journal of Business Ethics (2011) 98:455466

DOI 10.1007/s10551-010-0587-x

The Mandatory Corporate Social

Responsibility in Indonesia:
Problems and Implications

ABSTRACT. The adoption of the 2007 Indonesian Law

No. 40 has created significant debate over the nature of
Corporate Social Responsibility (CSR), namely, whether
it is voluntary or mandatory. On the one hand, the
adoption of such a law represents a legal recognition of
the existence of CSR, and this clarification on the legal
nature of a concept is necessary for understanding the
obligation and responsibility. On the other hand, it has
created much confusion surrounding its substance and
procedures. This article tries to analyze the development
and consequences of CSR under 2007 Indonesian Law
No. 40, through the discussion of mandatory versus
voluntary dichotomy. It is argued in this article that the
mandatory nature of CSR is legitimate and therefore
encouraged; however, in practice, this is problematic, as it
not only requires a precise concept of interpretation of
CSR and identification of the duty bearer and beneficiaries, but also an effective implementation mechanism
and a means of verifying the impact.
KEY WORDS: Corporate Social Responsibility, Indonesia, mandatory, voluntary, regulation

Introduction
Corporate Social Responsibility (CSR) has become
an important issue over the last two decades. Lawyers, practitioners, economists, and civil society have
contributed to defining, developing, and analyzing
the content, nature and implementation of CSR.
One of the controversial issues in this context is how
to regulate CSR. Should it be a legal norm, ethical
norm, or something else? The question can be further elaborated: Should CSR be regulated through
state regulation, code of conduct, or self-regulation?
Should it be regulated in a voluntary way or an
obligation to corporations? These questions have

Patricia Rinwigati Waagstein

dominated the debates over regulatory approach;

but, thus far, there has been no clear consensus.
The problem in distinguishing between mandatory and voluntary CSR regulatory frameworks has
also been faced in the context of Indonesia due to
the adoption of 2007 Indonesian Corporate Law
No. 40 as well as the 2007 Indonesian Investment
Law No. 25, which give CSR a mandatory nature.
Under Article 15 of the 2007 Investment Law No.
25, every corporation is obliged to implement
corporate social and environmental responsibility,
defined as
[a] responsibility mounted in every investment company to keep creating relationship which is in harmony, in balance and suitable to the local communitys
neighbourhood, values, norms, and culture.

In contrast, Article 74 of the 2007 Limited Liability Corporation Law No. 40 only requires companies conducting their business activities in and or
related to the field of natural resources to implement
CSR, which is elucidated as the obligation of the
company which is budgeted and calculated as the
cost of the Company. In other words, a company is
obligated to allocate and spend an obligatory
funding for implementing CSR which can be
considered as a corporate cost. Sanctions can be
imposed for failure to comply with such an obligation. This differs from the 2007 Investment Law No.
25, which does not impose any sanction.
Unlike the 2007 Investment Law No. 25, the
adoption of Article 74 of the 2007 Corporate Law
No. 40 has invited strong reactions from various
actors. While civil society is primarily concerned
with the implementation of such regulation, the
business community is more concerned with their

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Patricia Rinwigati Waagstein

impact on corporate costs and their competitive

disadvantages.
As a response, the business interests represented by
the Indonesian Chamber of Commerce (KADIN)
and several corporations brought a case before the
Constitutional Court questioning the legality of
Article 74 of 2007 Laws No. 40. The applicants
argued that this article violated the Indonesian
Constitution, particularly with respect to Article 28
D (1) on legal certainty, Article 28 I (2) on discrimination, and Article 33 (4) on efficiency of
economic justice.1 According to them, Article 74
creates legal uncertainty as it is not in accordance
with the CSR movements voluntary emphasis; it is
unjust and discriminatory, particularly toward certain corporations, and as creating an additional
burden for these corporations will have negatively
impact the economic situation, in general.2
The Court, whose mandate is to review various
laws alleged to violate the Constitution, ruled in
April 2009 that Article 74 is correct, non-discriminatory and just, and therefore not in conflict with
the Constitution. In their deliberations, the Court
held that CSR is a flexible concept which is subject
to the interpretation of each country. For that reason, the mandatory nature of CSR is compatible
with the current social, economic, and legal nature
in Indonesia. Moreover, the Court confirmed that
this mandatory nature gives legal certainty to voluntary CSR and Indonesias weak law enforcement
system. The Judges also argued that Article 74 does
not discriminate against particular corporations, as it
is based on the potential risks posed by corporate
behavior to natural resources. Thus, according to
them, it is logical for those parties impacting natural
resources to be the ones to bear the burden.
With this background, this article aims to critically
evaluate the evolution of and progress made by
Article 74, and how it has been reconfirmed by the
Court in the process of institutionalizing CSR in
Indonesia. It will start by discussing the concept of
CSR (implicit and explicit CSR) as a point of
departure. Then, the development of CSR before
and after the adoption of 2007 Laws No. 40, and
the impact of the mandatory nature of CSR in the
Indonesian context will further be elaborated in the
later sections. It is argued that to not seriously jeopardize the efficacy of this mandatory component,
Article 74 requires much more detailed consideration.

Defining CSR: explicit or implicit?

Any comparative discussion of CSR must begin
with a working definition of the concept. Yet, this is
difficult due to the number of terminologies and
definitions that apply. Whether one is more relevant
than another depends on ones purpose, approach,
semantic intent, and the institution concerned. The
specific historic, cultural, and political factors of the
region and country in question also contribute to
this degree of diversity (IISD, 2004, p. 1; Matten and
Moon, 2008, pp. 407409).
Given the number of forms that CSR can take,
one may wonder how to distinguish between them
and how to explain this diversity. Matten and Moon
(2008) offer a broad interpretation, arguing that it
should be perceived both as a social imperative and
social consequence of business success. Accordingly,
two forms of CSR, implicit and explicit, are introduced. Implicit CSR is embedded in various relationships among business, society, and government
within the political system, and is represented by
strong values, norms, and rules or regulations which
require corporations to address stakeholder issues
(Matten and Moon, 2008, p. 409). Hence, it commonly has a mandatory or customary nature. Explicit
CSR, meanwhile, refers to voluntary corporate
programs and strategies driven primarily by selfinterest, that address issues of CSR (Matten and
Moon, 2008, p. 409). The predominance of one
concept over the other depends on factors in a
particular country, including its capitalist institutions,
markets, social welfare system, and industrial relationships, all of which shape the environment in
which the corporation operates (Matten and Moon,
2008, pp. 407409; Wolff and Barth, 2005, p. 27).
To frame CSR from this perspective begs several
points: First, it is by no means a novel concept. Some
corporations have been using different terminologies,
or simply implementing it in the course of obeying
laws. Some countries also claim to follow CSR policies at least implicitly in regulating their corporations to conduct business responsibly. In these cases,
the issue becomes one of semantics rather than substance (Matten and Moon, 2008). This also implies
that CSR is not an isolated concept; it overlaps with
some policies and is synonymous with others (Matten
and Moon, 2005, p. 335). Hence, it can be said to lie
both within law and beyond law (law plus).

The Mandatory CSR in Indonesia

Second, the distinction between implicit and explicit CSR should be regarded as being relatively
dynamic. The idea is not to choose one over the
other but is rather one of emphasis, since most cases
fall somewhere in between (Matten and Moon,
2005, p. 342). The stricter the regulatory controls in
a particular country, the less room that exists for
corporations to develop voluntary policies. However, if regulation plays a more minimal role, then
there is more leeway for corporations to express
CSR in the form of self-driven initiatives (Matten
and Moon, 2005, pp. 341347). In these cases, a
certain degree of overlap or redundancy in the
institutionalization of corporate responsibility is
inevitable. It is true that explicit CSR has been
gaining momentum in a number of countries,
according to research (Angus-Leppan et al., 2010;
Matten and Moon, 2008). However, this does not
mean that there has been an overall shift from
implicit to explicit CSR; in both the USA and
Europe as examples, issues of great social importance
such labor rights or trade union or environmental
protection, still tend to be more effectively institutionalized through regulation (Matten and Moon,
2005, pp. 341347).
The dynamic nature of CSR also implies that its
content evolves and shifts over time depending on
changes in the degree of risk, regulation, reputational challenge, and standards of desirable behavior,
which redefine the boundaries of what is acceptable,
feasible, and profitable (Baxi, 2005, pp. 2021). Such
content is, therefore, best understood in terms of
stakeholders and issues that concern them.
Third, CSR can be either voluntary or mandatory
in nature, or even both, depending on a countrys
specific preference and the issues at stake. Traditionally, implicit CSR is perceived as mandatory or
customary, and explicit CSR as voluntary. However, in the course of a shift from reliance upon
government authority toward the endorsement,
facilitation, partnership, and soft regulation of CSR
(Matten and Moon, p. 417), one may find a mixture
of the two forms without a clear distinction.
In sum, this approach, with emphasis on practical
over theoretical considerations, helps reduce the
complexity of CSR and makes it easy to comprehend,
involving a unified model which simultaneously takes
into account the diversity characterizing different
national systems. It further creates room for CSR to

457

be unique, flexible, and contextual: not merely a nod

to Western customs.
Such diversity can also be problematic, resulting
in a lack of conceptual clarity regarding its nature
and content. On the contrary, the advantage of using
relatively flexible language is to open up valuable
space for a dialogue concerning the minimum level
of social responsibility and legal nature of that
responsibility, amid a myriad of actors, principles,
and webs of influence (Baxi, 2005, p. 21). At best,
such an approach represents a multiple strategy
rather than one size fits all (Baxi, 2005, p. 21).

CSR in Indonesia
Prior to 2007 Corporate Laws No. 40
Identifying the relative influence of implicit and
explicit CSR in Indonesia would necessitate a separate study. The purpose of this article, instead, is
simply to describe the difficulties faced by both
models, on the assumption that each is, at least,
somewhat applicable in that national context.
Indonesia has mandatory and customary norms
pertaining to work safety, labor rights, limited welfare, countering corruption, environmental protection, and consumer protection. These regulations
provide boundaries regarding what corporations
should or should not do, although their implementation is often problematic. In practice, weak law
enforcement mechanisms including the unavailability of judicial mechanisms to hold corporations
responsible, prevalent corruption, and legal uncertainty due to overlapping norms on social and
environmental issues undermine this implementation. Moreover, conflict between economic interests and the protection of stakeholders in areas such
as labor rights or environmental issues is common.
Wishing to attract direct foreign investment, Indonesia, like any other developing country, often offers
preferential treatments to corporations, such as reduced taxes or less strict environmental standards.
Such behavior undeniably impacts societal standards
and the behavior of MNCs.
While the presence in Indonesia of norms to
govern corporate performance may represent the
classical model of implicit CSR as described by
Matten and Moon, it is not certain whether these

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rules carry the same weight as in the other developed

countries. The original distinction of implicit and
explicit derives from an empirical comparative
study focused on the USA and the UK, where both
formal and informal institutions are more highly
developed than in Indonesia or other developing
countries. Hence, there is a growing concern that, in
order to ensure that companies behave responsibly,
explicit CSR should be added to existing regulation
as a way of complementing CSRs application at the
national level in Indonesia.
At the same time, explicit CSR policies relying
on voluntary corporate engagement or acknowledgment has been a popular topic during the last
10 years. However, this type of CSR in Indonesia is
still in its early stages, despite encouraging signs
(Uriarte, 2008, p. 5). Its application is rather patchy
and sector-based. Primarily only multinational or
large corporations have fostered the adoption of
CSR policies, which mostly derive from their
headquarters or pressure from various elements of
society, whereas for the small or medium corporations, CSR is implemented in only a very limited
sense or still perceived as a foreign concept.
Moreover, the notion of explicit CSR is more
highly developed in sectors which have a direct
relationship to natural resources, and in the manufacturing industry as opposed to the service sector,
since the former received more negative attention
and pressure from society due to high-profile lawsuits and cases; particularly human rights cases
involving corporations. This requires more corporations to make CSR more explicit.
The voluntary policies currently being implemented are carried out either by individual corporations, in cooperation with NGOs or public
institutions, or supported by various initiatives/
standards on an ad hoc basis (Wowoho, 2009,
pp. 45). Only several corporations have adopted
CSR initiatives into their daily corporate policy.
Moreover, its implementation is primarily concentrated in the areas of charity, education, research,
health, and natural disaster assistance (Wowoho,
2009, pp. 79). Very few cases are directed toward
issues of the environment, security, human rights,
and other social matters (Maemunah, 2007). However, in the areas of ethics and governance, CSR
initiatives are likely to play an increasingly significant
role; this trend is reflected in the recent investment

allocated in this area (Sedyono, 2007). This short

explanation signifies another face of CSR implementation focusing on explicit CSR.
The sluggish reception of this type of CSR in
Indonesia is very much the function of two major
issues:
Lack of knowledge regarding CSR: The understanding of CSR as a concept in Indonesia is still
poor and inconsistent. The CSR is often perceived
as a western concept associated with philanthropic
acts, cause-related marketing, or public relations.
The general misperception that CSR ultimately
represents a net cost, as opposed to an investment, is
still very common; this, in turn, has discouraged
companies from adopting CSR in their corporate
policies.
However, even if the corporations have both the
proper intentions and the expertise to successfully
implement their CSR policies; this is not a simple
task, due to the diversity of definitions and approaches as mentioned earlier. Hence, understanding
and implementing CSR requires certain expertise
and resources which many companies do not have.
This lack of information about CSR in Indonesia
also applies to government and society in general,
further slowing its reception. Only during the last 10
years have the issues of business and human rights, or
CSR, become main issues for various NGOs
there. Some NGOs have started to cooperate with
corporations by adopting initiatives such as Indonesia Business Link or Business Watch Indonesia;
others have taken a more oppositional stance,
exerting pressure through public opinion, particularly against corporations such as WALHI, Jatam,
etc. However, very few of them use social responsibility as a concept in their advocacy strategies.
The situation is similar at the governmental level.
While the concept has been introduced in some
departments, it is still in its early stages of awareness when it comes to implementation. Preventive
initiatives have begun to emerge in certain sectors, including the issuance of Ministerial Decision
No: Kep-236/MBU/2003 which requires all state
corporations to allocate part of their profit for
implementing social community and environmental programmes, the establishment of the National
Committee on Corporate Governance, which works
mainly on establishing a code for corporate governance, and the establishment of several corporate

The Mandatory CSR in Indonesia

forums on CSR that were inspired by specific social
issues and natural disasters; nevertheless, these initiatives are patchy, sector-based, and not especially clear
with respect to their impact and implementation.
Indeed, it could be said that a general lack of
knowledge represents the primary hindrance to the
reception and implementation of explicit CSR in
Indonesia. Hence, there is a real need for continuous
efforts to educate and train business leaders,
employees, and other stakeholders, including government and NGOs, to make larger commitments to
achieving these ends.
Social and legal problems in Indonesia: As mentioned
earlier, poor legal enforcement, corruption, and
excessive overlap among different laws have been
problems common to all sectors particularly business. This results in legal uncertainties regarding
substance, additional administrative costs, and bureaucracy. In addition, there is also a problem related to
the lack of operational standards for corporations in
community and business development or corporate
governance, which encourages the adoption of
corporate international standards to be adapted for a
specific national context (Koestoer, 2007). While
applying these international standards as a part of
corporate policies can fill the gap in the absence of
national standards, there may be conflict between
the two levels which results in legal uncertainty.
One example of this is the British Petroleum (BP)
Tangguh Project in Papua. In this case, BPs commitment to employing civilians as security guards is
in conflict with the policy of the Indonesian central
government, which requires a military deployment
for security in all sectors crucial to the life of the
country, including extractive operations. Hence, the
question is whether strong voluntary initiatives
which provide more protections to stakeholders
such employers or affected society should supersede
weak national regulations. While this question is
beyond the scope of this article and, therefore,
requires a separate study, it highlights the complexity
of relationship between implicit (law) and explicit
CSR (corporate initiatives) in developing worlds.
In the ideal scenario, the former provides an effective foundation for the latter by setting limitations on what corporations may and may not do.
In the less desirable scenario, these two forms of
CSR come into conflict, or there remains only an
arbitrary explicit CSR in which corporations can

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set policies purely according to their interests,

without limitations.
In sum, these two big problems signal that any
review of CSR in Indonesia is bound to be very
multifaceted due to political issues, cultural differences, and the aforementioned lack of understanding
and expertise. This causes frustration to corporations with good intentions. Meanwhile, companies
exclusively focused on profit will find the voluntary nature of CSR, coupled with the weak law
enforcement that currently exists in response to
ethical misconduct, to easily facilitate their avoidance
of obligations and implementation related to CSR.
However, certain developments point to positive
signs for the successful incorporation of CSR
marked by new initiatives in the government and
private sector by NGOs, and even multi-stakeholder
initiatives. The Corporate Forum for Community
Development (CFCD), founded by 15 corporate
managers to develop competence and skills as well as
an information network in the field of CSR/CD;
the National Round Tables on CSR, initiated by
KADIN (Indonesian National Chamber of Commerce); the Indonesian Textile Manufacturers
Association; and the Ministry of Trade Industry, are
a few examples of such voluntary initiatives.

CSR in 2007 Law No. 40

The 2007 Law No. 40 on Corporate Law is the new
version of the previous law, which governed the
establishment of corporations as legal entities, their
responsibilities, and their dissolution. One of the
major controversial features of this Law is the
inclusion of CSR under Article 74:
(1) Companies doing business in the field of
and/or in relation to natural resources must
put into practice Environmental and Social
Responsibility.
(2) The Environmental and Social Responsibility contemplated in paragraph (1) constitutes
an obligation of the Company which shall
be budgeted for and calculated as a cost of
the Company performance of which shall be
with due attention to decency and fairness.
(3) Companies who do not put their obligation
into practice as contemplated in paragraph

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Patricia Rinwigati Waagstein

(1) shall be liable to sanctions in accordance

with the provisions of legislative regulations.
(4) Further provisions regarding Environmental
and Social Responsibility shall be stipulated
by Government Regulation.
This Article was controversial even during the
original drafting process. It had been absent from the
earlier draft law proposed by Indonesian government, having been only first proposed by members of
the Parliament during the Parliamentary negotiation
process and remaining until the final parliamentary
decision. As several members of Parliament argued,
its inclusion stemmed from the various environmental and human rights cases involving corporations, which have failed to be resolved. The rationale
was that assigning such an obligatory component
could be regarded as a preventive action, which
would help offset any detrimental effects upon society from the behavior of corporations. In the end, it is
expected to push forward the implementation of
good corporate governance (Lesmana, 2007).
The discussion during the negotiations was not
centered on whether or not CSR should be
imposed, nor whether it should be mandatory or
voluntary, but rather on who should bear this obligation: all corporations or only certain types. Here,
the primary concern was the various smaller corporations not generally subject to corporate law,
such as a family-owned corporation not having legal
status and separated liability, or other serviceoriented corporations such as in insurance or banking. It was later decided that such an application to
CSR be specifically limited to companies which
have an impact on natural resources. Ultimately, this
law was adopted following six Parliamentary hearings involving 23 institutions representing society,
but lacking any participation from the business
community and academia.
Despite the surrounding controversy, Article 74
has played a very significant role in the goal of
institutionalizing CSR in Indonesia, from at least
four different perspectives. First, the mandatory
nature of CSR strengthens its position as a legal
obligation to corporations; not just a statement of
goodwill or charity whose implementation depends
upon their willing cooperation. It provides a consensus on standards that should be applied throughout Indonesia. This, indeed, addresses the problem

of diversity of standards and the questionable efficacy

of the soft voluntary mechanism.
Second, the adoption of CSR into law enhances its
reception and implementation in Indonesia, by different stakeholders at different levels. At the corporate
level, while the primary target may be corporations
that directly or indirectly impact natural resources,
such a mandatory nature at the very least promotes a
degree of awareness among other corporations to
look beyond motives of profit maximization. It is not
inconceivable that in the future, the same regulation
could be applied to all types of corporations and in all
sectors. Moreover, the adoption of CSR as a legal
norm would require all governmental organizations
to incorporate it into policy. At the grassroots level,
the mandatory CSR would encourage society to
focus more attention on the monitoring of corporate
behaviors and CSR mechanisms.
Third, the mandatory nature can serve as a preventive mechanism that keeps companies from
unduly benefiting as a result of the system. In other
words, making CSR obligatory is one way of
ensuring that there is no free ride for corporations
(Priyono, 2007). Moreover, mandatory CSR can be
a complement, not a replacement, to other remedial
mechanisms. For example, in the event that victims
of corporations lost a case or were given no financial compensation for damage to their living environment, they may still benefit from the CSR
mandatory fund, which should be allocated by corporation, through various services. In this case, such
CSR may have the effect of actually strengthening
and empowering these victims.
Fourth, while a mandatory form of CSR is
probably not a favorable approach among states, it
does lay down a precedent for other countries to
take similar steps toward institutionalizing CSR in
the form of legal obligations. The case of Indonesia
also signifies an example of the shift from implicit
explicit model to implicit model of CSR.
While acknowledging all of these advantages, it is
also important to observe that Article 74 leaves some
pragmatic and conceptual questions: First, there is a
lack of clarification on how to determine which
corporations are connected with natural resources in
such a way that they should be duty bearers. The
elucidation of Article 74 states that companies doing
business in the field of natural resources means companies whose business is managing and exploiting

The Mandatory CSR in Indonesia

natural resources. The term companies doing
business in relation to natural resources means companies which do not manage and do not exploit
natural resources but whose business activities have
an impact on the functional capacity of natural
resources. Here, it is not really clear whether Article
74 only applies to extractive companies, or other
companies such as insurance or banks which provide indirect assistance to extractive companies, for
instance, by providing loans or insurance. Moreover,
the wording natural resources is also ambiguous as
to whether it refers to environment in a specific
sense, such as forest or protected area, or whether it
refers to environment in general including the
quality of human life. The question of impact is also
problematic as the Law is silent on determining what
degree of impact required triggering responsibility.
Second, there is a question of which institution
should be the one responsible for implementation:
corporations, the central government, or the local
government. According to the governmental plan
outlined during the Constitutional Court hearing,
the size of CSR fund and fine, its purpose, and its
beneficiaries will be determined by the local government depending on the needs of that particular
region. This is in line with the Indonesian Laws on
Autonomy, whereby the provincial government is
given authority to manage its own province. Hence,
it is assumed that the local government will decide
the amount/percentage and the means of implementation. There is another question, however, of
which standard the corporation should be subjected
to when it operates in different regions. This is one
problem which results from leaving all decisions to
the local government.
Moreover, a question of who should keep and
distribute the fund is not clear. Should it be the
corporations which keep and use it for their CSR
programs or should the governments collect and
distribute it for any CSR programs? An additional
question is who should impose the sanctions in the
case of violation, and how these sanctions will be
imposed: through mediation, or a legal process. For
each of these questions, there is no clear answer.
Third, in order for such measures to be effective,
there should be a monitoring mechanism which is
transparent and accessible, and involves the participation of different elements of society. The aim
would be to prevent corruption and ensure that the

461

necessary funding would go to the community or

further the goal of environmental protection. Thus
far, however, there is no clear direction from the
central or local governments as to how to implement
and monitor such a fund, or how this implementation and monitoring mechanism would function.
Here, it is suggested that the primary targets of the
funding, and even the level of implementation,
should be decided together among concerned parties, corporations, and government.
The various issues discussed above should be
tackled and elaborated in the forthcoming governmental regulations intended to implement the 2007
Laws No. 40. Unfortunately, so far such a regulation
has not been issued by the government, effectively
rendering impossible the Laws implementation at
the present time. This large time lag between the
adoption of Law No. 40 and the issuance of executing regulations raises another question regarding
the lack of seriousness of Indonesian government in
its goal of implementing CSR. Without the clear
clarification that such a regulation would provide,
Article 74 is more inspirational in character than it is
any kind of operational regulation.

Implications
Legitimacy question: does the mandatory nature of CSR
violate its essence?
The business community in Indonesia has argued that
to give CSR a mandatory nature would be to violate
its very essence: that CSR was originally intended to
be voluntary, relying on the will of corporations.
This argument was supported by Maria Radyati, an
economist acting as an expert at the Constitutional
Court hearings, who argued that CSR derives from
corporate governance which in turn is based on
corporate acceptance. Nevertheless, she admitted
that the way in which CSR develops in a particular
country is dependent on the special characteristics of
that country. The voluntary model for CSR is also
supported by state practices in which this approach is
preferred, according to Juwono, an international law
professor, who likewise has served an expert during
the hearings. These two experts, despite their differences, share similarity in which they admit the
possibility of imposing mandatory responsibility,

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provided that this is permitted by states. This point

has been used by the Court to argue that CSR should
be mandatory in Indonesian context.
Is CSR, then, specifically designed to be voluntary?
Framing the argument on the implicit and explicit
CSR, it is difficult to determine whether the concept
should be mandatory or voluntary as the legal nature
of each case may vary depending on its characteristics,
context, and the legal system involved. The whole
discussion highlights the fact that CSR is not static in
either its concept or its nature. For this reason, it is
difficult to defend the position that the CSR is always
and is designed as a voluntary concept.
It is true that currently, voluntary or soft regulation is preferred in the context of regulating existing
economic, scientific, or even human rights problems requiring urgent action, since these problems
respond better to the more progressive, flexible, and
informal approach found in voluntary regulation.
However, this does not mean that such a type of
regulation is the only alternative. Voluntary regulation has also significant problems, such as lack of
sanction and implementations which erode its
effectiveness; hence, many elements of society particularly NGOs call for imposition of mandatory
nature of CSR. Moreover, many states have developed innovative regulatory techniques involving
mandatory and voluntary approaches, such as the use
of self regulation, incentives, awards and accreditation systems, market based initiatives, disclosure
obligations, publication of league tables, allocation
of private statutory rights, statutory compensation schemes, publicity, government-sponsored
information, and education campaigns (Zerk, 2006,
pp. 3642). This signifies that the regulatory trend is
no longer on the choice between either mandatory
or regulatory but rather on the combination of both.
Hence, the dichotomy of obligatory and voluntary
regulation should be viewed as merely a matter of
procedures or tools rather than substance, in which
the goal is to achieve an effective corporate responsibility through differing mechanisms (Szell, 2004).

Will a mandatory nature ensure the effectiveness

of CSR?
The relationship between the legal character of a
norm and compliance-effectiveness is complex; a

mandatory norm does not necessarily coincide with

corporate compliance. What constitutes a voluntary
or obligatory norm is a matter of compromise and
acceptance, and is dependent on the subject and
context. To be voluntary does not imply nothing
binding, since many such norms function effectively
to reshape, implement, interpret, or even substitute
for mandatory norms (Chinkin, 2003, pp. 3031).
On the other hand, to be mandatory does not mean
that the norm is automatically enforceable, since it
may be imprecise or lack a monitoring mechanism
(Chinkin, 2003, pp. 3031). Article 74 serves as an
example of the problems associated with such a
norm, which may actually jeopardize its efficiency.
As this implies, neither designation guarantees either
effectiveness or ineffectiveness; instead, this is determined by other social and political factors such as
legal and business culture, customer sentiment, and
democratization. Hence, mandatory legal requirements will not necessarily lead to higher standards of
corporate behavior and transparency.
Another question which has implications for
effectiveness of CSR in Indonesia is the relationship
between a mandatory regulation and other voluntary
initiatives. Will CSR that is mandatory obstruct
other voluntary initiatives? This is a difficult question. The rationale is that such mandatory nature
should serve to actually complement the voluntary
mechanism or visa versa, as both have different
functions and roles. Hence, in theory, the application of a mandatory CSR fund should not put a stop
to voluntary initiatives, such as community development, where the company is operating. However,
there is the risk that imposing legal obligations with
threat of sanctions, rather than making enterprises
more socially responsible, would to the contrary
place them on the defensive and discourage them
from embracing that responsibility. As a consequence, there is the possibility that a corporation
may cease other efforts at community engagement
once it has fulfilled its CSR obligation under the
Article 74 through the payment to the government. In such a case, mandatory engagement would
ultimately limit the application of voluntary CSR,
since such payment would represent the end of the
process rather than an ongoing one that can be
further developed and refined. This scenario might
occur if the government was given power to distribute the CSR funds. On the contrary, if the

The Mandatory CSR in Indonesia

corporations were the one which could allocate and
spend the CSR funds, they could use the fund for
continuing their current voluntary engagements.
Unfortunately, this relationship between voluntary initiatives and mandatory regulation was not
taken into consideration during the drafting and
adoption of Laws No 40. It is not entirely clear what
Article 74 wishes to achieve, and what it leaves to be
achieved by other regulatory initiatives. There remains a need to clarify the direction that Article 74
wants to take. Until then, the decision will be left to
corporations.

Will the mandatory nature of CSR increase

corporate cost?
Before answering the question whether the mandatory nature of CSR will increase the corporate cost, it
is important to answer another question: Does social
responsibility of corporation require expenses? In
some cases, it may cost money and require the
planning, recounting, and redistribution of sources,
including profits. In other situations, it may cost very
little, particularly in the context of energy saving.
While the responsibility of publishing corporate
profiles, planning, and designing corporate policy, or
becoming engaged in community development may
appear inexpensive, the responsibility to set up
monitoring mechanisms within corporate organizations or provide remedies for the victim of corporate
violation may demand a greater number of resources.
Moreover, while participation in CSR initiatives
may not be so costly per se, the implementation of
such commitment may require more resources. Sethi
notes that the costs of implementing these voluntary
mechanisms is a major concern, which could discourage corporate participation in any collective
approach (Sethi, 2005, p. 17). Aside from the direct
cost of improvement, monitoring compliance through
these standards additionally involves administrative
costs, as well as external auditing and certification.
This points to the risk that only large companies will
be willing to participate in many external voluntary
initiatives.
On the other hand, will implementing this type of
CSR increase profits? Although many scholars,
economists, and business actors point to the mutual
relationship between CSR and profits, there is no

463

definitive evidence regarding this relationship

(Vogel, 2005, pp. 1718). We are left with the
question of whether such responsibility should still
be required, if this effort has the effect of obstructing
business and creating additional burdens to corporations and shareholders? From a normative perspective, the answer is yes, based on two arguments.
First, if these costs are a simple consequence of
obeying the law, then the reduction of profits should
be accepted. Areas such as competition, product
quality, employee safety, and environment are commonly covered by regulations requiring a company
to pursue goals that might and often will work
against the profit-making goals of the individual
company (Broberg, 1996, p. 161). Second, if costly
and in some cases destructive actions are necessary to
achieve that profit, then social responsibility must
also be taken into consideration by managers and
directors. Here, CSR is perceived as investment.
In sum, this description above signifies that CSRs
relative cost does not necessary depend on its legal
nature, but rather on the activities in question and
the degree of commitment from each corporation.
Hence, the argument that a mandatory form of CSR
will create additional burdens to corporations is not
in itself necessarily correct.

Will the mandatory regulation of CSR result competitive

disadvantage?
The relationship between domestic regulation and
competitive disadvantage has been mentioned in a
number of contexts by scholars and practitioners.
The concept of competitive advantage or disadvantage is a complex notion based on varied
assumptions, which allow it to be used for apparently
contradictory ends (Deva, 2004b). The disadvantage
hypothesis seems to hold an argument that any type
of mandatory regulation will impose unnecessary
burdens on their multinationals and lead to competitive disadvantage; accordingly, this has been used
by various states as a reason to avoid proposals to
regulate CSR.
It is argued in this article that there exist two
primary conditions by which such regulations may
lead to a competitive disadvantage. The first is where
competitive advantage is solely associated with
financial gain. The protection of human rights or the

464

Patricia Rinwigati Waagstein

environment is considered to represent a separate

concern that exists beyond the sphere of business.
Where corporations are involved, it is thus necessary
to reconceptualize the meaning of profit to include
the protection of human rights or environment.
From a costbenefit perspective, a corporation that
invests in human rights or environmental protection,
regardless of the form this takes, can view it as a
long-term investment that has the potential to
eventually recover any competitive advantage that
was temporarily lost.
In the second case, disadvantage arises where not
all corporations are legally mandated to observe
CSR norms in their operations (Deva, 2004a, p. 60).
Such inconsistency in the degree of responsibility
among corporations has resulted in discrimination
toward certain companies. In reality, all corporations, regardless of size, type, or degree of power,
must equally subject to CSR. The Australian, the
US, and the UKs drafting of bills that apply only to
firms employing above a certain number of
employees exemplify how such regulations may
discriminate against large companies, in subjecting
them to obligations from which smaller firms are
exempt (Deva, 2004a, pp. 58 & 60).
This begs the question of whether Article 74
discriminates against certain companies; particularly,
companies specifically working with or having impact to natural resources. The Constitutional Court
argued that Article 74 is not discriminatory, based on
the potential risk of business activities to have a
future negative impact upon natural resources and
the lives of citizens. Here, the Court views CSR as a
preventive effort aimed at maintaining natural
resources. However, there are two weaknesses to
the Courts reasoning in this case. First, it limits the
interpretation of CSR to anything connected to
the goal of preserving natural resources, whereas the
common understanding of CSR is considerably
broader. This implies that other issues, such as
employment, access to medicine, security, etc., can
only fall under Article 74 if they will have direct or
indirect impact to the natural resources. Unfortunately, as mentioned earlier, the Law does not give
additional clarification as to what natural resources
specifically designates. Hence, it is not really clear
who is the duty bearer of this obligation.
Second, the Courts decision rests on an
assumption that only certain types of corporations

are subject to CSR. While the Court acknowledged

that CSR applies to all corporations, its obligatory
component is only imposed to certain corporations
working with natural resources. Yet, as mentioned
earlier, this Article lacks sufficient clarity regarding
the exact definition of natural resources, impact,
and duty bearer. Should this situation refer only to
extractive corporations? Should banks or insurance
companies, which provide loans or guarantees to
mining operations, be free of these mandatory
obligations? Should a computer manufacturer or
furniture store be exempted from CSR, if they are
indirectly polluting water? Here, it is difficult to
distinguish one issue from another, or one product
from another, without impacting the entire chain of
production. While the Courts judgment is not
without merit in that it prevents further damage to
natural resources by extractive companies, it neglects
the fact that many other corporations adversely impact these resources in an indirect way. Here, impact
is a matter of degree. Thus, in order to ensure that
Article 74 does not discriminate against particular
business actors, the duty bearers and scale of impact
must be better elaborated in the forthcoming regulations. In the absence of such clarity, Article 74 may
potentially have the effect of creating additional
burdens for certain corporations, and thus become
discriminatory.

Conclusion
Despite their operational problems in certain
national contexts, using the concepts of implicit and
explicit CSR facilitates a better understanding and
overview of CSR in general, while paving the way
for a discussion of related problems, including
determining its nature namely mandatory versus
voluntary.
Assigning CSR a mandatory nature, while having
partly resolved the problems related to diversity of
standards and providing a greater degree of certainty
than the practice of voluntary initiatives, also opens
up new problems with respect to substance and
procedure. In order to be effective, a law imposing
sanctions in the absence of CSR compliance must be
precise and unambiguous, clearly stating the aim,
beneficiaries, and duty holder, as well as how to
implement the measures in an effective, transparent,

The Mandatory CSR in Indonesia

cost-efficient, and speedy manner. These are the
core issues when it comes to creating a regulatory
framework for CSR. In addition, it is important to
take into account the impact of mandatory CSR
upon corporations, as well as society. In other words,
an effective regulatory framework for CSR requires
that all stakeholders think holistically.
In this light, the case of Article 74 is no exception.
The adoption of this Article, which imposes sanctions for non-compliance, should be given credit
where it is due. It serves to push forward the
implementation of CSR in Indonesia, and moreover, may act as a preventive tool to keep corporations from further irresponsible behavior. While
Article 74 offers hope to those trying to improve
corporate practices in Indonesia, its successful
implementation is still in doubt, for a number of
reasons. First, the substance is too general, insubstantial, and ambiguous. Second, it currently fails to
provide any implementation mechanism, and provides little clarity on how the Article would be
implemented and monitored. Third, there is a lack
of research on the potential negative impacts of
Article 74: for example, unequal treatment toward
different corporations. Fourth, there is no clear
direction from either the drafters or government as
to exactly what this Article is intended to achieve, in
which direction to bring the field of CSR, and how
to go about attaining these goals. In short, Article 74
faces a crisis of vision.
This challenge will be overcome only through the
innovative use of laws, other legal institutions, and
societal organs. It also requires the dissemination of
information and active education of business actors and
the business community as a whole, as well as a fully
democratic process, to safeguard transparency and
accountability. Without a greater degree of clarification
with respect to all of these details, a more concerted
effort to disseminate CSR policies, and sufficient support and commitment from stakeholders, Article 74
will create more problems than it will offer solutions.

Notes
1

2009. Judicial Review of 2008 Laws No. 40.

Judgment, Case No. 53/PUU-VI/2008. Indonesian Constitution Court.
2
Ibid.

465

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Faculty of Law,
Uppsala University,
Uppsala, Sweden
E-mail: prwaagstein@gmail.com

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