Corporate Social Responsibility and the Constitutional Court

The fact that the new Company Law (Law No. 40 of 2007) codified an obligation on companies to undertake corporate social responsibility (CSR) activities drew the ire of many companies. This was particularly the case for companies who could not see the need to legislate a matter that most developed nations have not had cause to do so (see ILB No. 640 24/7/2007).

This ire was almost certain to manifest itself as a constitutional challenge and this is how it transpired. Ultimately, the Constitutional Court reaffirmed the provisions by rejecting the application of the petitioners, although this was not unanimous.

The petitioners, among others, were represented by the Indonesian Chamber of Commerce and Industry (KADIN) and a number of companies. KADIN, the Indonesian Young Entrepreneur Association, and the Indonesian Women’s Entrepreneur Association were deemed not to have legal standing however the three companies (PT Lili Panma, PT Apac Centra Centertex, and PT Kreasi TIga Pilar) who were part of the six petitioners of this claim were deemed to have legal standing.

The basic premise of the petitioners arguments were that the offending Article, Article 74 and the Elucidations to that Article, were in material conflict with the Constitution, and formally with the procedures stated in the Law on Legislation Drafting, No. 10 of 2004.

The petitioners argued that the Constitution provides principles of legal certainty, non-discriminatory treatment, and equal efficiency (prinsip efisiensi berkeadilan). These principles are considered to be the substantive elements of Articles 28D(1), 28I(2), and 33(4). These principles also constitute core rights for citizens of the Republic of Indonesia and it is the contention of the petitioners that it is these rights that have been breached by the existence of Article 74 and the Elucidations to that Article.

The substance of Article 74 and the Elucidation to that Article oblige companies, in particular those within the Natural Resources sectors, to conduct their CSR obligations at their own expense. Any failure to undertake the required CSR is to result in the imposition of sanctions on the offending companies.

The legal reasoning of the Constitutional Court turns on the prevalence of local conditions in Indonesia that render what the Court considers in essence a voluntary CSR obligation into one that must be codified into law. The Court addressed each element of the petitioners claim and then rejected them. For example, the claim to legal certainty was dismissed as the codification of the provision in fact provides legal certainty. Furthermore, the Court held that the provisions could not be deemed discriminatory because they applied equally to companies, cooperatives, and other entities. The Court merely stated with respect to equal efficiency that the petitioners have not made out their claim on this point.

Interestingly, this was not a unanimous decision by the Court. There were three dissenting opinions. The dissenting opinions address in greater detail the idea that the CSR initiatives of companies should be voluntary and not compulsory under legislation.

Generally, once the Constitutional Court has heard arguments on a particular Article of any law then this article cannot be subject to further judicial review unless the claim relies on different substantive matters. Therefore, despite ongoing concerns and objections to the compulsory nature of the CSR provisions in the Company Law it would seem that the Constitutional Court has resolved this matter in favor of the law.