Giving Peanuts

While it`s one thing to inflate the value of a contribution for marketing purposes, it`s quite another when the company in question is being evaluated on its contribution to broad-based black economic empowerment (BBBEE), especially if this evaluation could help the business access high-value private and public sector tenders.

Unfortunately, the way things stand in the proposal and the Department of Trade and Industry`s (DTI) BBBEE codes of good practice, there is nothing stopping companies from inflating the value of their non-cash contributions to organisations less fortunate than themselves. Except perhaps for those verification agencies that are willing to stand their ground.

ON PAPER

At first glance, the charter and the codes appear to be quite clear on the requirements for corporate social investment (CSI) - the ICT charter stipulates that 1.5% of profit before tax should be set aside for CSI, while the codes, which will override the charter once ratified, specify that 3% of profit before tax should be used for community investment.

Where it gets vague is how non-cash contributions should be calculated.

The DTI`s latest draft of the code defines "acceptable valuation standard" as the rand value of a qualifying residual contribution, whether monetary or non-monetary, calculated in accordance with normal valuation methodologies that represent standard market practice.

It goes on to say that the rand value of qualifying residual or CSI contributions that directly provide [South African] beneficiaries with a means of generating an income for themselves will be calculated at the specified multiple of 1.5 to actual rand value.

IN PRACTICE

Without a guideline as to valuation methodologies, companies have, to date, been left to determine what the `value` of non-cash contributions should be based on. For some it`s cost to company, to others wholesale or retail price, and for a devious few, the highest retail price that they can find at the time.

Torque IT`s executive chairman Mthunzi Mdwaba explains many ways to calculate the value of non-cash contributions.

"There are two ways of calculating the value of products donated as part of CSI: the ethical person`s way and the businessperson`s way. It`s a question of compliance versus doing the `right` thing. A company interested in compliance and purely focused on the bottom line will look to the actual value to the company of that donation, including the actual cost of the product and the cost in lost profits of the donation. This means the value to the company is the retail price. A company looking to do the right thing for the community will, however, claim the cost of the product as this is what the donation costs them in actual terms," he says.

ALL ALONE

So how do other countries define these measurement standards? Diana Bell, HP`s senior VP for corporate affairs, says that US tax law stipulates that the retail value should be claimed.

"American tax legislation rewards companies for engaging in philanthropic activities by giving them a tax rebate on the retail value of the contribution. In SA, you have a different situation. Contributions to the underprivileged help companies to earn points which make them more favourable to do business with."

She adds: "While this strategy encourages companies to give back to the communities, it does have the unfortunate side-effect of putting the focus squarely on the value of the contribution rather than the impact on the society itself."

Ann Bown, owner of Charisma Communications, a specialist consulting and training establishment for non-governmental and non-profit organisations, concurs: "We have to ask ourselves whether we`re just ticking boxes or are we really helping people? Including CSI in the codes and relative charters is not about encouraging charity, it`s about developing people, communities and the broader economy."

Another international vendor, Dell, addresses CSI in another manner all- together. According to Dell SA`s marketing manager, Rob Nunn, the company has set up a Dell Foundation which receives a portion of the company`s revenue as opposed to profit.

"We wanted to increase our contribution as we grew and quickly recognised that taking the contribution off the top line would mean that our contributions would not be affected by any overhead and liability fluctuations. The Foundation distributes cash, services and products as they see fit, although great emphasis is put on sustainability. All tracking of spend is shown as actual spend," he reveals.

AT HOME

When looking at the considerable investment that HP is putting into the underprivileged societies of SA, it`s easy to see what Bell is getting at. The Mogalakwena HP i-community in Limpopo has become a global case study for the company, attracting the likes of President Thabo Mbeki to the launch and receiving kudos for its focus on sustainability. Other companies have also stepped up to the plate. Local PC manufacturer Mecer puts most of its CSI funding into education and regularly overspends, according to the company`s divisional director of education, Ian Jackson.

"We invest heavily in education and schooling projects as this is such a critical factor for SA`s long-term growth. When calculating the value of these projects, we only calculate the actual cost of the hardware. Supporting contributions like our education software, services and maintenance are not included. Typically, for every R100 000 we donate through hardware, we spend an additional R200 000 in salaries, installations and delivery costs," he explains.

IN COMPARISON

Of course, there are many companies that are making as much of an impact as HP and Mecer are; however, how do you compare actual contributions if both companies are calculating their investments on different value standards?

And therein lies the catch. If Company A is contributing less to CSI than Company B but is calculating its investment on the cost of the contribution to the business, while Company B is calculating on the retail value, how does the market ascertain which company is actually meeting its BBBEE requirements?

OF VALUE

For Dominic de Saldanha, director of KSO Verification Services, an empowerment rating firm, there is no variation from what he believes is the appropriate way to calculate the value of non-cash contributions.

"We calculate non-cash contributions on the price that the company mostly sells the product at. This means that if a company sells 80% of its products to a distributor and 20% direct to the customer, it cannot claim the retail price," he says.

As for supporting services provided by human resources, De Saldanha points out that the DTI has already provided relevant guidelines that allow companies only to claim that portion of salaries and wages which relate to time spent by the staff on the project. He concedes that it is possible for companies to misrepresent their CSI contributions with the help of unscrupulous empowerment rating companies.

"At the moment the policies and procedures for auditing the various elements of the BBBEE scorecard are being put into place by the South African National Accreditation System (SANAS). These will be released once the codes have been confirmed to ensure that there is no conflict between the two. Additionally, guidelines will be drawn up along the way to help verification agencies address unusual or sector-specific requirements, thereby nullifying loopholes," he says.

UP CLOSE

SANAS is, in fact, set to play an important role in the verification of empowerment ratings. In addition to setting out the policies and procedures to auditing the various aspects of the BBBEE scorecard, SANAS will verify members of the Association of BEE Verification Agencies before these companies can apply to the DTI for approval.

Moreover, SANAS will monitor the activities of verification agencies and businesses seeking rating. De Saldanha explains: "SANAS will follow movements in the marketplace to ensure that companies are not hopping between rating agencies for better BBBEE scores and that agencies are not offering to overlook certain aspects to get the business.

"Currently, it is possible for companies to skew their representations. But soon, businesses will not be able to shop around for the best empowerment ratings without being caught".