23 August 2018 | By Tracey Henry, CEO and Adam Boros, Head: Social Impact at Tshikululu Social Investments |
With the advent of the BEE codes in the early 2000’s, many large South African companies established trusts as one of several strategies to diversify ownership structures. Unlike most charitable or corporate foundations in the country, these “empowerment trusts” hold shares and are funded by dividends rather than donations. In different ways – depending on their respective founding documents – they explicitly set out to improve the lives of Black South Africans.
More than a decade after the first empowerment trusts were established some have realised substantial value while others remain “underwater”. When viewed holistically however, the strategy has been successful.
In 2017, Intellidex released research on the “empowerment endowment” that showed 35 trusts from Top 100 JSE companies held more than R30 billion of assets, generating an estimated R3 billion of funding for social investment per year. In research released this week, Tshikululu partnered with Intellidex to take a deeper dive into 25 empowerment trusts by looking at governance, management, disbursements and social investment strategies (the value of assets across these trusts was more than R37 billion).
This research confirms that the empowerment endowment represents a powerful opportunity to contribute towards positive social transformation in South Africa. In 2017, corporate social investment accounted for approximately R9 billion of development spending in the country. In other words – taking into account that many empowerment trusts are only just starting to spend substantively – the amount of funding available for social investment is set to increase exponentially in the coming years.
Of course, the key question that must now be answered is what should responsible social investors do to realise the full potential of this incredible windfall?
At Tshikululu, we have managed numerous trusts over the past 20 years, and nine of our current 23 clients under management are empowerment trusts. When thinking about such trusts, we hold three principles front of mind:
Complement, don’t duplicate
Many South African companies now have two “streams” of social investment at their disposal: first, “traditional” corporate social investment based (usually) on a donation of 1% of net profit after tax; and second, an empowerment trust funded through dividends. Many companies have responded to this new reality by simply duplicating their CSI activities. We believe that companies should rather find ways of leveraging the expertise and experience gained through CSI to design and implement complementary activities funded by empowerment trusts. If done well, this can have substantial social impact. Hand-in-hand with this is the importance of collaboration amongst like-minded funders who collectively can leverage their expertise and resources to achieve scale.
Focus, focus, focus
Along with duplication, we also caution against over-extension. When a second stream of funding comes online, companies can easily fall into the trap of extending their scope. For example: “if our CSI funding is focusing on education then our empowerment funding should target healthcare”. Given the depth and intensity of challenges we face in South Africa, it is only human to want to solve many problems. But private social investors are at their most effective when they focus their energy, time and resources into a limited number of strategic issues that complement each other. For example, investing in the first 1 000 days of a child’s life. By adopting a holistic approach that includes quality education, nutrition, access to social services and health care, investment has a long-term impact on the cognitive, health and ultimately employment prospects of young children.
Finally, companies should view empowerment trusts as an opportunity to think creatively about social investment. Too often we see social investors take the “default” position of registering as a tax-deductible public benefit trust. Although this is certainly the most appropriate vehicle in many cases, it is not in all cases. When thinking about how to optimise their empowerment trusts, companies should investigate the full range of options at their disposal. In recent years, a growing number of legal entities and social investment approaches, including impact investing, have been introduced into the ecosystem. This allows for greater flexibility to drive social change in diverse ways, and should be fully explored.
In the next five to 10 years, empowerment trusts will play a critical role in pushing South Africa’s development agenda forward. If all companies think deeply and strategically about this opportunity, the spirit and positive social impact of the empowerment endowment can become a reality.