Afloat in recessionary climate

Over the past few decades the corporate social investment (CSI) sector has evolved from a voluntary philanthropic pursuit to a de facto requirement for conducting business in South Africa. The creation of formalised CSI departments, strategies, foundations and expenditure on initiatives has seen exponential growth in this sector.

Trialogue’s annual field research among South Africa’s top companies in the past 10 years shows CSI spending escalated from an estimated R1,5-billion in the 1998/99 financial year to more than R4-billion in 2007/08.

In the past year CSI funding showed a healthy 29% growth, reflecting the increasing pressure on corporate South Africa to contribute to national development, as well as improved accounting for this contribution.

Although this might be seen as a drop in the ocean — representing only 1,4% of government’s 2007/08 consolidated social services budget of R297-billion (which includes education, health, social security, housing and community development) — it is a healthy sum to augment state spending and to address the country’s more pressing needs.

But the groundswell of attention CSI enjoyed in 2007/08 does not fully explain the extent of growth in CSI budgets.

This can be attributed to a combination of factors, including better CSI accounting, discrepancies in CSI and socioeconomic development (SED) definitions and measurement, and healthy corporate profits.

The SED element of the BEE codes requires that companies spend 1% of net profit after tax (NPAT) on social and community development initiatives. In this context, CSI budgets are strongly linked to profit and large companies are compelled to make this level of commitment to CSI.

Of Trialogue’s sample of 100 companies, the majority (about 51%) used percentage-of-profit formulae to determine CSI budgets: 41% of respondents used a percentage of NPAT and 10% used a pre-tax profit formula. About 21% of companies determined CSI budgets on the basis of company decisions and board approval. Only about 12% had a fixed budget with an inflationary increase every year.

Many people in the development world are concerned about the effect of the economic recession on CSI. Trialogue’s research suggests that because of the large number of companies using a formula-based approach to determine the size of their CSI budgets, declining profits will have a depressing effect on overall CSI spend.

Even among companies that do not use profit-based formulae to determine CSI budgets, it is likely that they will be more cautious in a recessionary climate.

But to CSI’s advantage are other, equally weighty, factors that drive decision-making and expenditure.

For example, mining companies are required now to comply with the local economic development element of the social and labour plans. This has resulted in greater community-based expenditure in certain regions.

Business faces real financial constraints and we can probably expect a slight decline in overall CSI expenditure.

But legislative compliance among corporates and an increasing awareness and adherence to the triple bottom-line principle can buoy this drop-off in spending that need not mean a massive dip.

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