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					        Southern African Grant Makers’ Association (SAGA)
The King Report 2002 and Corporate Social Investment in South Africa


Background
This summary briefing paper has been developed by SAGA to facilitate understanding of the
potential implications of the King Report 2002 on corporate social investment (CSI practices) in
South Africa. This understanding will inform and support the ongoing development of SAGA’s
policy, in terms of dialogue and interaction with its members and other stakeholders going
forward.

Principles of best governance practice for South African companies are found in the King Report
on Corporate Governance for South Africa 2002 (the “King Report 2002”) and the Code of
Corporate Practices and Conduct (the “King Code 2002”) that it contains.

The King Report 2002 identifies social responsibility as a primary characteristic of good
governance. This is in part reflective of a growing international emphasis on the importance of
corporate citizenship and the responsibility, from a sustainable development perspective, that
corporate organisations are deemed to owe the communities in which they operate.


Introduction
A useful distinction can be drawn between corporate social responsibility and corporate social
investment, although the terms are often used interchangeably when discussing corporate
citizenship and governance.

Corporate social responsibility implies corporate concern regarding the legal, ethical,
environmental and social management practices applied in an organisation’s operations and
activities – in effect, conduct as a good corporate citizen. The King Report 2002 provides the
definition developed by Business for Social Responsibility: “Business decision-making linked to
ethical values, compliance with legal requirements, and respect for people, communities and the
environment…[evidenced by]…a comprehensive set of policies, practices and programs that are
integrated throughout business operations, and decision-making processes that are supported
and rewarded by top management.”1 As such, corporate social responsibility can be seen as
relating to aspects of any organisation’s behaviour and “the way it does business”.
Corporate social investment, on the other hand, relates to direct or indirect financial investment
in socially responsible initiatives and activities. Investment is directly financial when it involves
the transfer of money and indirectly financial when it involves a contribution in kind (e.g.
resources, material, free service provision). A crucial element of corporate social investment is
the understanding that corporate assets are involved and that management should seek to provide
– and shareowners are entitled to expect – a return on such investment. This return may not be
strictly financial in the conventional sense, but a connection must be drawn between the
investment made and the return, in terms of a contribution to the realisation of corporate goals
and strategy. This means that investment strategies must take into consideration the return
expected, in terms of the value created.

It is estimated that South African corporate social investments have reached approximately R4
billion including non-cash contributions. Manufacturing, mining, agriculture, construction and
financial sectors lead in CSI initiatives while banks, insurance companies and parastatals follow
close behind. The technology sector is identified as needing more encouragement in adopting
realistic CSI practices. Presently, CSI expenditures focus mostly on education and training
accounting for a combined total of 49%, job creation (10%), health (9%); welfare (7%), sports
and recreation (6%), community rural development (5%), environment (4%), arts and culture
(4%), housing (3%) and safety and security (3%).2

A third closely-related concept is emerging, namely that of socially responsible investment. This
relates to the investment policies adopted by organisations, as a means of ensuring that corporate
investments in the context of mainstream business activities include consideration of social and
environmental impact. Thus, for example, Philip Watts, Chairman of the Committee of Managing
Directors of Shell: “I do not approve new investments unless they address the key sustainable
development aspects of the project”3. Some corporate vision and mission statements also reflect
this concept, for example SAB-Miller, whose mission statement refers to fulfilling “…our goals
of business growth and maximised long-term shareholder value, while behaving in a socially
responsible and progressive manner.”4 And the investment guidelines of some institutional
investor fora, such as the Association of British Insurers and the International Corporate
Governance Network, cover the need for disclosure by listed companies (i.e. entities in which
their members would seek to invest) on social, ethical and environmental risks and management
practices.5


International developments
International focus on the role of corporations in socio-economic development and environmental
stewardship is significant and is increasingly influencing corporate behaviour. This is due to a
number of factors, including:

•   The fact that more and more people in the developed world are living longer and increasingly
    obliged to provide financially for their own futures. The investment strategies of institutional
    investors must focus on consistent, long-term value creation.

•   The growth in social, ethical and environmental awareness, leading to concerted and well-
    organised lobbying campaigns by special interest groups focusing on aspects of corporate
    behaviour, leading to the sometimes violent public protests witnessed at international
    gatherings (e.g. World Summit on Sustainable Development (“WSSD”) in Johannesburg in
    2002, the G8 meeting in Genoa in 2001, the IMF meeting in Prague in 2000, the World Trade
    Organisation meeting in Seattle in 1999).
•   The free flow and widespread accessibility of information, facilitated by the growth in mass
    communication technology, not least the Internet.

•   Growing legal and regulatory pressure.

There is growing pressure from stakeholders, including shareowners, to ensure that companies
behave in ways that ensure sustained social and environmental benefits for stakeholders and
society at large. Companies themselves are aware of the need to manage their reputations,
particularly within the context of the electronic information age. Environmental, health and social
concerns such as global warming, HIV/AIDS, joblessness and unequal distribution of wealth
represent potential risks (e.g. operational and/or reputational) requiring innovative risk
management strategies.

Corporate governance, good corporate citizenship and corporate social investment are based upon
this notion of sustained value creation. Leadership and control in a governance context must
include ongoing assessment and monitoring of corporate activity and behaviour in social and
environmental contexts, such as the effect of products and services on stakeholders, communities
and the environment. This is because they have a potentially direct effect on the value of
monetary returns to shareowners and social returns to stakeholders.


The King Report 2002
The King Report 2002 demonstrates the willingness of the South African business community to
join the international business community to promote good governance, not least as a contribution
to socio-economic development in South Africa. It also acknowledges the challenges that
corporations will face as they shift not only their thinking, but how they have always conducted
and defined business.

The King Report 2002 advocates a stakeholder-inclusive approach to governance in which
companies recognise the importance of stakeholder motivation and involvement to their
commercial success. Thus, for example, companies should understand the motivation of the
customers who buy their products and services, the employees on whom they rely for product
and/or service delivery and communities which provide labour, location and “licence to operate”.
Simultaneously, shareowners are increasingly mindful of the long-term, sustainable value that
their investments represent. As a result, they now appreciate the value of companies whose
products and services have minimal negative impact on the environment and social development
more than before.

The concept of sustainability strongly underlies CSI and CSR. Corporations are increasingly
looking for ways to better ensure long-term value creation prospects, which may at times mean
missing out on opportunities which would prove financially rewarding in the short-term. As the
King Report 2002 states: “In a corporate context, “sustainability” means that each enterprise
must balance the need for long-term viability and prosperity - of the enterprise itself and the
societies and environment upon which it relies for its ability to generate economic value - with
the requirement for short-term competitiveness and financial gain.”6

The King Report 2002 also seeks to address business concerns that attention to non-financial
issues will negatively impact the financial bottom line. It does so by highlighting the fact that,
while continued focus on the financial bottom line and the duty of performance to shareowners
remains paramount, embracing the concepts of social and environmental responsibility as an
integral aspect of their operations is a fundamental aspect of sound and sustainable business
management practice. Importantly, there is value for companies to demonstrate how they fare in
their pursuit of the so-called “triple bottom-line”, comprising economic, social and environmental
performance and impact. Reporting is even more important in light of increasing shareowner,
consumer and broader stakeholder insistence on and expectations of, corporate transparency,
accountability and responsibility.

Current business climate in South Africa
The concept of good corporate citizenship – and the implicit notion of corporate social
responsibility – is currently very topical in South Africa. Organisations want to be identified as
good corporate citizens. Initiatives such as the King Report 2002 and the development by the JSE
Securities Exchange of a Social Responsibility Index are both reflective of the changing mood
and serve as a catalyst for it. 7

This implies that corporations need to address issues that affect their “licence to operate”, issues
such as board governance, ethical standards, wider stakeholder involvement and indeed financial
viability. The King Report 2002 also advances the notion of Ubuntu, or “humanness” as a
specifically African concept applicable to any consideration of corporate citizenship and social
responsibility. The concept of Ubuntu embraces recognition of the inter-dependence of
relationships that the stakeholder-inclusive approach to governance actively represents and
encourages.

South African corporations are increasingly integrating and strengthening their approaches to
corporate governance. In this respect, they are particularly motivated both by the King Report
2002, which clearly draws the link between increased value creation and adoption of good
corporate citizenship, and recent high-profile incidences of corporate scandals and collapses,
notably at US-based entities Enron and WorldCom, which were largely blamed on inadequate
governance processes. Furthermore, while South African consumer activism may lag behind its
international counterparts, investor activism is growing and government continues to be
outspoken and sometimes prescriptive in its approach to stimulate good corporate citizenship
practices.8 It can be reasonably anticipated that South African consumers and other stakeholders
will become increasingly vocal on matters of corporate citizenship, particularly in the post WSSD
environment.

While business’ intentions are generally positive, embedding the concept of good corporate
citizenship in day-to-day operations – and reporting on performance related value creation in a
meaningful and transparent manner - remains a challenge for many corporate entities. An
approach to business management must be developed that recognises that financial performance
depends on identifying and understanding non-financial value drivers and therefore, requires
effective management of non-financial risks, for example in social and environmental
considerations. Non-financial value drivers refer to those variables that are not directly financial
in nature, but which influence the ability of any company to operate profitably. As the King
Report 2002 states, “”Non financial issues” have financial consequences for a business.” Thus,
in South Africa, risks such as those posed by HIV/AIDS might be expected to feature largely in
any responsible approach to governance. While there is clearly a social benefit to be obtained
from addressing the HIV/AIDS pandemic, there is also a real economic impact. HIV/AIDS will,
if left unchecked, cost business significantly, on both the supply (i.e. employment) and the
demand (i.e. consumer) side.
The tenor of the King Report 2002 suggests that a more strategic approach to social investment
by South African companies is required. The concept of return is implicit in the concept of
investment. CSI initiatives should therefore, by definition, take into consideration the return
generated by the investing entity to enhance its overall value. This return need not necessarily be
directly financial. Thus a positive effect on key stakeholder constituencies and the impact
correspondingly generated in their interactions with the entity could constitute a meaningful
return, because of the implied value to shareowners that results from it, not least in terms of
maintained confidence in the company’s ability to create reasonable financial returns on their
capital investment. The return could therefore, for example, take the form of improved
educational standards and therefore a wider potential base for skilled employees; or improved
general healthcare and therefore a more productive workforce; or an economically diverse and
therefore more productive and supportive local community. And so on.

This suggests that companies must proactively integrate CSI into core business practices in ways
that allow it to function as a driver of business sustainability. Inherent in the King Report 2002 is
the fact that CSI departments, which currently operate more as “add-ons” than core business
components, must be integrated into business strategy, precisely because they are central to
sustainable value creation. Ultimately, this means that qualified, knowledgeable and trained
senior-level staff must be retained to run CSI departments.


Implications and challenges for the South African business community
(i) Re-strategising CSI in business
    CSI is institutionalised in many companies and, to that extent, is not a concept to which much
    introduction is needed. Where, perhaps, the influence of the King Report 2002 will be most
    felt in this context is in refocusing – or “re-strategising”- CSI in the corporate mindset. The
    prevailing attitude in the South African business community towards CSI is to an extent to
    treat it as a component set apart from mainstream business activities, the benefits of which
    are often seen more in a public relations, than a commercially relevant light. Responsibility
    for related activities often lies in the Human Resources or Marketing departments and falls to
    relatively untrained, junior or inexperienced staff. The challenge for CSI managers is to show
    that CSI adds sustainable value for shareowners and stakeholders alike. It is consequently as
    essential for business prosperity as other traditional business components. Just as a focus on
    sustainable business management is a key aspect of sound governance practice, so CSI is a
    key component of the “mosaic” that is sustainable business management.

    Through their CSI departments, companies have an opportunity to play a larger role in
    influencing the implementation of, if not shaping the development of, aspects of public
    policy. The South African government is actively promoting a social development agenda,
    while at the same time legislating in a way that means the business community assumes much
    of the responsibility (i.e. the financial burden) for social development.9 South African
    business’ assumption of CSI responsibilities presents it with an opportunity to leverage its
    role in shaping public policy in ways that benefit itself and the broader national community.
    Furthermore, a proactive, effectively self-regulatory stance by the corporate community in
    embracing the governance principles laid out in the King Report 2002 will strengthen its
    voice in the development of any government policy and/or legislation that may be prompted
    by the King Report 2002. The opportunity therefore exists to pre-empt potentially restrictive
    or burdensome legislation. The government might for example, as has been the case in other
    countries, impose statutory requirements for more onerous non-financial corporate reporting
    (e.g. a French decree published in February 2002 has introduced obligatory reporting
   requirements for listed French companies in relation to their social and environmental
   management practices, both for the entities themselves and their sub-contractors).10
   Demonstrable moves by the corporate community in this direction in line with the principles
   of the King Report 2002 would go a long way to obviating any such need on government’s
   part.

   While the importance of philanthropic social investment activities will endure, the focus - or
   “re-strategising” - of corporate social investment activities can be expected to integrate more
   with mainstream business activities and therefore align more with a need to demonstrate a
   return on investment for the investing body. Such return may not necessarily – indeed, is
   unlikely to – always be directly financial in nature, but it is likely to form part of a broader
   picture. The King Report 2002 espouses the concept of socially responsible investment, in
   terms of advocating an understanding at an organisation’s Board level of social investment
   policies operated by investment managers – and particularly pension fund managers – on its
   behalf. It also recognises that corporate social investment can take different forms, covering,
   for example: focused investment policy that ensures screening of potential investment
   vehicles for appropriate social, ethical and environmental management practices; investment
   in community-based initiatives to contribute to ongoing socio-economic development at local
   level; and active shareowner involvement in the governance of organisations in which
   investment is made, to effect meaningful changes in their social, ethical and environmental
   practices.

(ii) CSI and Black Economic Empowerment
   Black economic empowerment represents another area where social and economic
   responsibilities meet. The corporate community’s contribution in this respect is largely
   focused on means to deliver on employment equity commitments (i.e. in terms of human
   capital development practices) and to strengthening commercial equity (i.e. in terms of
   procurement practices). Development of the role of the Small and Medium Enterprises
   (“SME”) sector is vital in this respect.

   The government and trade unions have played an influential role in promoting the notion of
   black economic empowerment. The relationship between the SME sector and established
   business is to a certain extent based on dependence and driven by government policy, a factor
   that inhibits focus on long-term returns. As a result, many companies still approach
   empowerment from a philanthropic or from a public policy perspective, rather than in terms
   of building partnerships that can deliver sustained capacity. However, the greater the inter-
   dependence (i.e. mutual benefit), as long-standing relationships built on service quality,
   reliability and mutual benefit develop, the stronger the potential impact on broader issues of
   sustainable socio-economic development. Corporate contribution to addressing the
   conceptual – and public policy - issue of black economic empowerment will also ensure the
   viability and sustainability of the South African market economy for future generations.

   The emergence of a strong middle class from the previously disadvantaged communities is
   essential if the tax base is to be widened, widespread unemployment to be reduced through
   job creation and a larger proportion of the population to be brought into the economic
   mainstream. However, for this to happen, companies themselves must recognise the value of
   ensuring that the black business sector develops further, as a major influencing factor on
   South Africa’s ability to prosper in the global economy. And they must take a proactive lead
   in ensuring that this is the case.
   Emerging black business and SMEs must also be mindful of and embrace the concepts of
   CSR and CSI for their own long-term prospects. Given the historic reluctance by business to
   adopt sustainable CSI practices, the black empowerment business sector may to some extent
   consider the current focus on CSI as creating an unfair advantage, particularly since their
   more established – and traditionally white-owned - business counterparts did not have to
   adopt CSI in their nascent stages. One challenge therefore for the corporate sector is to
   develop indicators that will help demonstrate the benefits of integrating CSI into business
   strategy for black businesses and SMEs.

(iii)Transparency and reporting
   Meaningful disclosure to stakeholders represents an integral aspect of the stakeholder-
   inclusive approach to governance advocated by the King Report 2002. From an investor’s
   point of view, information on a wide range of non-financial issues, or value drivers – not least
   from a reputational perspective – provides an indication of where future economic value will
   be created. Other stakeholders need access to information on corporate practices, behaviour
   and impact for a variety of reasons, not least to ensure continuous and ongoing renewal of the
   “licence to operate”. Disclosure should to the greatest extent possible be subject to
   independent verification.

   Business should identify the information requirements of key stakeholders and develop the
   means to provide such information across the “triple bottom line”. The trend towards “triple
   bottom line’ accounting and reporting is growing, whereby organisations provide an
   integrated account of their economic, social and environmental stewardship, performance and
   impact. The King Report 2002’s emphasis on the importance of integrated sustainability
   reporting is reflective of this trend and there is a growing body of guidance available to
   support such initiatives, as provided by, for example, the Global Reporting Initiative (“GRI”)
   in its Sustainability Reporting Guidelines.11 Such initiatives are based on the premise that
   public accounts of corporate behaviour, when based on appropriate performance
   measurement criteria and subject to independent verification, serve only to promote and
   reinforce stakeholder confidence in an organisation’s integrity.

   The King Report 2002 acknowledges that organisational capacity to move towards “triple
   bottom line” reporting varies. For many organisations, it will be an iterative process, where
   the nature and extent of disclosure will develop over time, as requisite management
   information systems are developed.

(iv) Private/public sector partnerships
   A major theme of the recent WSSD centred around building partnerships between business,
   government and non-profit organisations (“NPO”) - including non-governmental
   organisations (“NGO”) and community-based organisations (“CBO”) - towards reaching the
   goals of sustainable development. Indeed, these three sectors all have comparative advantages
   as well as historical roles and contributions they have made towards South Africa’s overall
   development.

   While in the past the primary expectation of business in terms of contribution to the economy
   was essentially its financial bottom line, stakeholders now expect business to take an active
   role in social development. It fulfils this role as the primary generator and distributor of
   wealth, for example in the form of purchases of products and services and payment of
   salaries, dividends and taxes. But the weight of expectation on the corporate world to foster
   an environment of social development, in terms of sowing the seeds of tomorrow’s brighter
   future today – is significant. Business is expected to play a significant role in environmental
   protection, health promotion (for example in relation to HIV/AIDS) and local community
   development. The King Report 2002 seeks to demonstrate that companies treating
   responsibility of this kind in a comprehensive, holistic manner enjoy benefits such as brand
   recognition, reputation, consumer loyalty, employee motivation and broader stakeholder
   satisfaction, in terms of their “licence to operate”. All of which contribute to stability and all
   of which, in the long run, translate to sustainable economic return.

   The NPO sector is recognized for its unique role of being the voice of communities. For
   example, NGOs and CBOs play a significant role in HIV/AIDS prevention and management,
   mostly because they are perceived to approach development issues facing communities in
   culturally sensitive ways.

   The South African government enjoys a moral authority on social and economic development
   issues precisely because of South Africa’s apartheid history and the legacy of the previous
   political dispensation. Socio-economic development represents a key element in the
   government’s platform. Yet government’s ability to finance much of this development from
   the current tax base is heavily constrained. Hence, it seeks to implement many of its social
   development policies through the medium of the business community, in partnership where
   possible, by means of statutory intervention when not.

   There exists historical distrust between the three sectors, which could potentially influence
   the CSI activities:

   •   Business is not entirely convinced that NPOs have effective structures for proper
       governance and financial accountability.

   •   NPOs are generally cynical of corporate involvement in community development
       endeavours, perceiving these activities as business marketing strategies.

   •   Government is seen by both business and NPO sectors as meddling or sometimes
       inefficient when it comes to addressing social and economic issues.

   However, the current socio-economic climate in South Africa and international developments
   encourage these three sectors to work cooperatively with one another. It is, for example, now
   generally accepted that HIV/AIDS is not simply a health issue, which can be tackled through
   public health policies alone. Instead, partnerships among government, business and NPOs are
   proving to be most effective in preventing the spread of HIV/AIDS and so mitigating the
   potentially devastating effects it threatens to have on communities, companies, the economy
   generally and the very fabric of South African society. Further, the business sector generally
   prefers to partner with NPOs in areas where, for example, active community-based or
   culturally sensitive focus is required.12 This means that these two sectors must find ways to
   strengthen their relationships in ways that add value to development projects.

(v) The South African economy and CSI
   The implications of an uncertain economic climate can not be overlooked in any
   consideration of CSI, because as a discretionary spend, CSI risks being affected by cost
   cutting brought about by any economic downturn. Factors that, individually or in
   combination, may influence the performance of the South African economy in this respect
   might include:
    •   International – and therefore potential investor - concerns over regional stability;

    •   The impact of HIV/AIDS on economic performance;

    •   The relative lack of industrial infrastructure and dependency on hard-currency
        denominated imports;

    •   Capital flight;

    •   The relatively low tax base;

    •   The weakness of the Rand against major international currencies;

    •   Consumer spending;

    •   The rate of inflation.

    •   The crime rate;

    •   Unemployment.

    At the same time, international influence (through, for example, governance and business
    practices adopted as a result of the introduction of the King Report 2002 and the growing
    internationalisation of South African business activities) can be expected to act as a catalyst
    for improved sustainable management practices, in line with international best practice. And
    CSI initiatives can to some extent be focused on tackling some of the issues described, as a
    means of minimising their potential impact.


Conclusions
It is impossible to say with any certainty how the South African corporate community will
respond to the recommendations of the King Report 2002 in relation to corporate social
responsibility (and its constituent, corporate social investment) and the broader international
developments that the King Report 2002 to some extent reflects.

However, the following represent some possible scenarios over time going forward:

•   Boards and executive management will seek ways to ensure that corporate social investment
    initiatives are more closely aligned with corporate goals and strategy.

•   Traditional philanthropic CSI practices will increasingly be mirrored by socially responsible
    corporate investment practices, in which mainstream business activities will be considered in
    the light of economic, social, ethical and environmental considerations.

•   The corporate community’s focus on its return, however defined and usually indirectly
    financial, from social investment activities will intensify, notably in relation to performance
    measurement practices.

•   In line with the King Code 2002’s recommendations, corporate reporting practices will
    develop to ensure that the value so created can be effectively communicated to existing and

                                                                                                 !
    potential investors, the investment community generally and other interested stakeholder
    parties.

Areas in which SAGA is considering further policy work with members and other stakeholders
are:

•   Facilitating the ongoing development of a viable and sustainable SME sector.

•   Strengthening NPO capacity (for example to improve their profile as the corporate
    community’s partners of choice for CSI initiatives).

•   Facilitating and supporting public/private/NGO sector partnerships and joint initiatives on
    social and environmental issues of common cause and/or concern – such as, for example,
    tackling the HIV/AIDS pandemic.

•   Promoting the concept of socially responsible investment as an integral aspect of corporate
    policy and practice.
1
  Institute of Directors. King Report on Corporate Governance for South Africa 2002.
2
  Trialogue. The CSI Handbook 2001.
3
  The Shell Report 2001
4
  www.sab.co.za
5
  www.abi.org.uk; www.icgn.org
6
  Institute of Directors. King Report on Corporate Governance for South Africa 2002.
7
  Business Day-05.09.2002. “King Approves new JSE Initiative”.
8
  African Institute of Corporate Citizenship. Socially Responsible Investment in South Africa.
9
  Employment Equity Act (No. 55 of 1998), Skills Development Act (No. 97 of 1998); National
Environmental Management Act (No.107 of 1998).
10
   Decree no. 2002-221, revision of article no. 148-1 to become 148-2, 20 February 2002
11
   Global Reporting Initiative – www.globalreporting.org
12
   Mark Swelling, Bev Russell, Graduate School of Public and Development Management (P&DM),
University of the Witwatersrand, The Centre for Civil Society (CCS), University of Natal. The Size and
Scope of the Non-Profit Sector in South Africa.




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