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. "