Opinionista Shelagh Gastrow 29 June 2017

The Empowerment Endowment

How have South Africa’s businesses engaged with BEE legislation? This has often been a contentious issue and the goalposts have kept moving. However, one of the exciting key outcomes has been the establishment of 27 new grant-making foundations in South Africa, mostly in the last two years, that have been endowed with a surprisingly massive amount of R32.6-billion in assets that will support charitable causes in perpetuity. This information emerged from a ground-breaking report entitled “The Empowerment Endowment” released by Intellidex, a financial research company, which gathered data from 35 companies and explored what value has been created specifically for charitable recipients through BEE deals, “including community trusts, existing charities and newly established foundations”.

Philanthropic foundations that are endowed in perpetuity are usually established by an individual or family with a principal sum injection of capital at the time of founding. Additional funds can be added later (for example in 2012 the Oppenheimer family added a further billion rand into the Oppenheimer Memorial Trust). The principal sum is expected to grow based on good investment practice and reinvestment of the income, such as interest and dividends. Annual disbursements are made and depend on the foundations’ disbursement policies and the economic climate. In general, foundations tend to disburse about 4% of their portfolio as grants to various organisations and causes as well as to cover any overheads.

However, in the case of foundations established through BEE deals, the endowment is based on a block of shares of the sponsoring companies. According to the report, “This is an outcome of the current BEE regulatory environment which requires companies to maintain BEE-qualifiying investment levels.” However, this results in a serious lack of diversification and the fortunes of the endowment depend on the performance of a single company, creating substantial risk as the company’s fortunes rise and fall.

An example of such concentration risk was provided in the report and the case showed how the founding mining company’s share price collapsed after the global financial crisis and it ceased to pay out a dividend. This had significant ramifications for its beneficiaries and the sustainability of any organisations that had projected receiving regular income. Others in the resource and construction sectors had experienced similar problems. The report notes, “Several foundations currently have no net asset value in their endowments. This is because share price performance has not been sufficient to cover the cost of funding received to buy the shares.”

One of the advantages of independent private philanthropy is that it can take risk as it is not answerable to shareholders for decisions made. Foundations established as part of BEE deals appear to be semi-autonomous with independent boards of trustees. A key issue where the sponsoring company would still maintain control would be for it to approve of any share disposals in future – and to my knowledge, the founding board members of the foundations are generally appointed by the company.

In addition, some of the foundations are administered by the company although they have independent trustees on the board. Some foundations ensured that the beneficiary groups had a link with the company, even if tenuous, and focused on communities where the company was operational or on areas that could benefit the company, such as bursaries in a particular discipline that would assist in employee recruitment. Some of the new foundations were contributing towards community infrastructure that would benefit their employees and their families, while the focus of other foundations was defined by the National Development Plan and they were investing in Early Childhood Development as a result. It was expected that over time, trustees of the new foundations would become increasingly independent and that the objectives would change.

The creation of these new foundations is to be welcomed as they will provide an additional source of support for civil society organisations and communities. The report indicates that the key focus areas for the foundations include education (67% of the funds earmarked for this sector), community development and to some degree entrepreneurship.

It is of interest that health has not received high priority and, of course, it is extremely unlikely that this funding would ever be accessible to organisations in the social justice and human rights sectors. It is clear that they are low-risk in terms of potential beneficiaries and are often guided by the BEE codes. Current trends in philanthropy are towards collaboration as philanthropic foundations are aware that the private philanthropic sector is too small to make major interventions, although philanthropy is well placed to take risk, innovate and support pilot projects. Partnerships with the corporate sector and government are the key to taking various initiatives to scale. The addition of new BEE foundations is therefore a game-changer and there should be significant potential for different grant-making entities to work together.

According to the report, most of the foundations have been established in the past two years and are not fully operational. Key challenges include “a shortage of skills and lack of infrastructure”. Some are still working through their operational model. However, once up and running, these foundations will find their niche and will hopefully add to the efforts currently being made by private and independent philanthropy. DM