Trialogue’s primary research shows that 43% of companies surveyed in 2022 managed some or all of their corporate social investment (CSI) through a separate legal entity, 28% through trusts and 15% through non-profit companies. This is an increase from 35% in 2021.
On 30 March 2023, responsible business consultancy Trialogue hosted a webinar to explore the motivation behind setting up these separate entities, and to consider which may be best for corporate CSI.
The panellists included Tshego Bokaba (Group CSI Manager, Momentum Metropolitan Holdings), Arthur Mukhuvha (General Manager, MTN SA Foundation), and Nicole Copley (founder of ngoLAW).
Three legal options for companies
Nicole Copley indicated that there are three legal options available to companies that do not wish to manage their CSI function internally. These are:
- A voluntary association
- A charitable trust
- A non-profit company (NPC)
None of these entities can be owned, although they may retain strong ties with the company funding them, and they can be registered as non-profit organisations and attain tax-exemption status.
“They all exist for a purpose, as against organisations that exist to make a profit,” Copley noted. It is recommended that organisations that want to raise funds externally should consider externalising the CSI function.
A voluntary association can be established under common law with no registration necessary, says Copley. It is inherently democratic and is often a grassroots or community-based organisation, with new committee members voted in each year. The voluntary association is generally not a good structure for CSI, according to Copley.
Charitable trusts have long been a favourite for foundations. They are governed by a board of trustees only. However, trust deeds must be physically registered with the Master of the High Court, and physical documents, signed by all trustees in pen must be lodged with the Master every time a trustee is changed. This is a time-consuming process, and the responses from the Master are very slow, which is why trusts are becoming less popular. Copley notes that the Master will be introducing electronic systems in future, though this may not apply retroactively to older trusts.
Non-profit companies were known as Section 21 companies under the previous Companies Act and had to convert to NPCs when the new Companies Act came into being in May 2011. A Memorandum of Incorporation replaced the Memorandum and Articles of Association.
Although greater compliance is required, this confers greater credibility.
The tax picture
An in-house CSI department may claim expenses as tax deductions, which can be justified as marketing or stakeholder engagement expenses, for example. However, there is always the chance that an auditor may question whether the extent of expenses claimed have actually been incurred in the production of income, and this may prompt a company to set up a separate legal structure for tax reasons.
For-profit Companies can’t provide Section 18a certificates, while non-profits with 18a status can, says Copley. However, it is important to note that Section 18a certificates can’t be issued for anything other than authentic donations. “It can’t be a disguised payment for something that’s actually a marketing service,” she notes.
“If you can satisfy the requirement of section 11a, which applies to trade expenses incurred, then the corporate can claim a normal tax deduction. However, if you can’t justify such a deduction inside the business – if it’s inherently misaligned and there’s no tangible benefit to the business – a Section 18a can be issued.”
Momentum Metropolitan Foundation
Tshego Bokaba explained that the Momentum Metropolitan Foundation was established in 2009 when the two companies merged.
“We did this to integrate the Group’s CSI efforts and move away from a fragmented approach to CSI” she pointed out. “This made it difficult to manage CSI initiatives, especially from an SED perspective – and it limits the impact of your CSI efforts, because that is also fragmented. We had to set up a structure where all the business units could contribute their NPAT to the foundation.”
Another challenge involved different business units wanting to report separately. “There needs to be alignment from both the SED and ESD perspective, or we could potentially return to a fragmented approach, which we don’t want,” Bokaba said. “The closer the foundation works with the business the better. We can’t operate in silos – both stakeholders have to work together for the benefit of business and society.”
Copley remarked that there can be a lack of control where there are many business units, and bringing their work together under one umbrella makes sense, not least of all because it is easier to put across consistent brand messaging.
For the foundation, setting up a trust was never an option. “We felt all the requirements would make it too cumbersome,” Bokaba said. “Setting up an NPC is seamless, and it has the same benefits as a trust.”
Arthur Mukhuvha says the MTN Foundation was registered in 2007. “Before this, our charitable initiative was a part of the business,” he says.
There were a number of factors that persuaded the company that setting up an NPC would be the best vehicle for its CSI initiatives.
“The funding model itself appealed to us as the business provides cash flow, and you can easily contract with the private sector or non-profits to implement your long-term vision,” he says. “In addition, we didn’t have to defer to a marketing department – we gained full control of how to increase our visibility in the market and consolidate the reputation of the brand.”
Independence has empowered the foundation to be responsive to community needs and make decisions as needed.
Mukhuvha said the foundation’s aim is not just to do good. “We want to build sustainable communities and make MTN’s business viable in the environments in which we operate,” he asserted.
Agility is a vital concept
Both Bokaba and Mukhuvha agreed that it is vital to be able to respond in an agile way to changing circumstances. However, they disagreed as to how this could work.
“Having a Foundation can sometimes limit agility and a quick turnaround time, especially in instances where you have to respond swiftly i.e. during a disaster. It is important to have a disaster relief or emergency fund which is dedicated for such and where the CSI management team doesn’t necessarily require the Board’s approval.” Bokaba said.
Bokaba believes that strategic CSI unlocks opportunities for both but says it can be challenging to try to convince a dozen people with divergent opinions who sit on the board of a foundation.
Mukhuvha agreed that boards can be bureaucratic but noted that some are more agile than others when it comes to approving courses of action. “When your company is in the digital solutions environment, you can’t afford to be lagging behind and bureaucratic in implementation, so you have to be agile, even within the confines of compliance to ICT sector codes set.” Adding: “what matters is the constituents of the board to allow for responsive operations within the NPC.”
He noted that the board pre-approves how funds will be allocated at the beginning of the year, and if there is an immediate need a proxy may approve the release of funds. “At least 80% of our initiatives are strategic, with some reactive, philanthropic giving,” he pointed out. “The structure of the NPC itself can help you navigate these issues.”
Copley says the composition of the board can make all the difference to your agility.
“It’s not about whether you’re a trust or an NPC – for me, the legal structure is immaterial to this issue,” she says. “It’s about who’s on your board and who you delegate authority to. How much power is given to the people on the ground running the projects as opposed to how much the board tries to control. This comes down to institutional culture.”
Copley says independent board members lend credibility, provide an outside perspective, and help a company align with society’s values, but you also want to keep your donors on board. “There’s no right way to balance a board, but you should do what feels authentic to you and what allows you to respond effectively and with agility,” she concluded.
Watch a recording of the webinar here:
- Read Trialogue’s article ‘Establishing a foundation’, published in the Trialogue Business in Society Handbook 2022.
- Chief Executives for Corporate Purpose (CECP) has published a report for global companies that want to supercharge their foundations to be social innovation incubators. Download the report here.
- Read more information on the ‘Octopus Act’ (General Laws (Anti Money-Laundering and Combatting Terrorism Financing) Amendment Act 2 of 2022).