BEE-ing Out of The Box

Letter to Business Day, 24 April 2008.

An interesting and seemingly counterintuitive business deal was concluded earlier this month: Ikamva
Labantu
, a Cape Town-based nonprofit organization (NPO) that builds crèches and shelters and supports foster mothers, has bought a 51% stake in Itec Holdings, a supplier of office automation.

The purchase, facilitated as a discounted loan, is an example of the trend of companies combining the twin onuses of black economic empowerment and corporate social investment into single deals. The spin-offs for both the profit-making company and for the NPO, can be beneficial to both parties provided they have done their homework properly.

For the business entity these benefits can include establishing a strategic relationship, fulfilling BEE criteria and making a difference to society. Further to becoming “empowered” and increasing its chances of qualifying for government tenders, a BEE deal with a nonprofit organization may appear to be less risky / less demanding when compared to a partnership with an individual or a black-owned company that may wish to exert more control over the business.

For the NPO these benefits can also include a strategic partnership in addition to a potential stream of income to help it manage risk, expand social impact and maintain its infrastructure, but this will depend on the nature of the deal, and the profitability and value of the business that the NPO has invested in.

There are potential pitfalls, however. Itec Holdings now has a vested interest in an NPO’s effective functioning and profitability. It will have to play the role of the “new philanthropist” or “venture philanthropist” and invest in Ikamva Labantu’s capabilities and infrastructure to make sure the NPO functions effectively.

Similarly, Ikamva Labantu’s board of directors will also need to welcome a corporation’s involvement in its affairs. Further, unless this has been thoroughly investigated, there is a potential risk for Ikamva’s senior managers and directors to expect some sort of additional compensation for their “role” in Itec Holding’s business, and this could create unpleasant dynamics in both organizations.

Whilst we applaud this partnership, it is not what we would call true strategic corporate social investment because Itec Holdings has not invested directly in its social and environmental responsibilities, or its strategic context (e.g. to improve the long-term supply of its inputs and demand for its products.)

For example, Itec Holdings could have considered (assuming that it did not) establishing a social enterprise to supply it with some of the inputs it needs – a social enterprise which also employs let’s say high-risk youth in its surrounding community. This is the type of approach that the Body Shop is well-known for. It could also have considered embracing the “fortune at the bottom of the pyramid model” and helped entrepreneurs from poorer communities to set up businesses and sell a special range of its products to poorer community organizations.

It seems that the only real strategic benefit for Itec Holdings is in resolving the “black” ownership issue, getting BEE points and good publicity, which will die down once the deal becomes old news. The test of a true strategic CSI is whether it will return a strategic benefit for a business even if no one knew about it.

Marcus Coetzee is a business strategist who helps leaders to think clearly about the future. To find out more about how he can help you, call 0828799131 or visit Marcus Coetzee.co.za.

Cultivating strategic clarity.

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