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Thought Thursdays

 The importance of broad-based thinking

2015-05-28 00:00
 
The impact of one paragraph of legislation gazetted without proper research and consultation can be the socioeconomic equivalent of an earthquake in Nepal. This I realised when reading clarification note 1 (d) to the amended Broad-Based Black Economic Empowerment (B-BBEE) legislation gazetted on 5 May 2015.
  
The paragraph reads: “Black participants in Broad-Based Ownership Schemes and Employee Share Ownership Programmes holding rights of Ownership in a Measured Entity must only score points under paragraph 2.2.3 under the Ownership scorecard.”

With this single paragraph the Department of Trade and Industry (DTI) has, for all practical purposes, closed the door on South African worker and community organisations becoming owners and sharing in the wealth created by large companies in future.  

Why do I say this? Under the B-BBEE Codes of Good Practice of 2007, large South African companies were incentivised by legislation to earn ownership points on their B-BBEE scorecard through ownership transactions that included broad-based black groups. For example, a company that did an unencumbered 25% ownership deal with a qualifying broad-based community organisation or employee ownership scheme could earn its full points allocated to ownership on its BEE scorecard.  In addition bonus points for using broad-based schemes were also awarded. With the clarification note issued, this company would now only be able to claim three out of 25 points on its scorecard.  

The DTI, through the inclusion of a single paragraph, effectively took away all incentive for companies to do future ownership deals with broad-based groups. On the contrary, it incentivises direct ownership deals, which in practice will result in large deals being done with a small number of individuals. Was this the DTI’s motivation behind including the clarification note? Yes. The clarification note is the result of companies’ perceived abuse of broad-based ownership schemes. It is true that some companies have preferred broad-based schemes to direct investments, as they allowed the companies to relinquish profits, without relinquishing control. It followed that Government’s stance on black empowerment has moved to a more radical policy of black industrialisation: Government wants to grow the number of black champions of business by at least a hundred individuals. It believes that these individuals will drive transformation in the economy. B-BBEE legislation is the chosen tool through which to achieve this.  

The question that comes to mind is whether this use of B-BBEE legislation has been properly thought through. Will it provide black South Africans their rightful access to the economy? If you are cynical, you might at this stage want to point out that the next amendment to B-BBEE legislation gazetted by the DTI should be to change the title of the “Broad-Based Black Economic Empowerment Act, 2013 (Act No. 46 of 2013)” to the “Narrow-Based Black Economic Empowerment Act”. This change will at least constitute a proper clarification note.  
 
Of more concern is a trend that legislation, amendments, clarification notes and policies are not based on proper research and consultation. This also holds for corporate strategies. They are not informed by material environmental, social and governance issues. The result is regulations and strategies that are bound to cause more harm than good because they ignore crucial societal information. In a South Africa where socioeconomic exclusion is giving rise to dangerous levels of dissatisfaction, such ignorance on both the part of business and government is not clever.       

My day job straddles the fields of sustainable development, responsible investment and B-BBEE. These three fields meet each other where socioeconomically excluded groups aim to get access to benefits of our capitalist economy.  Partaking in the ownership of companies in a country like South Africa has historically proved to be a good strategy to ensure that you share in the wealth created. In South Africa B-BBEE has, since 2007, incentivised companies to create a more inclusive form of capitalism. Many Labour and Community organisations are beneficiaries of ownership deals resulting from B-BBEE legislation. With a greater emphasis on increased black ownership under the new B-BBBEE legislation, more of these organisations may stand to benefit in future.
  
This ability of B-BBEE legislation to create access to the economy for a broad range of people should be cherished and protected. It should not be diminished. What rather needs to be addressed is the way that broad-based schemes are controlled. Companies need to be held accountable by Government when setting up and running broad-based schemes. Writers of policy and legislation should apply their minds to how broad-based and employee ownership schemes can become influential owners, rather than controllable vessels.  

The onus to ‘think things through’ does not however stop with Government: leaders in companies should as a matter of principle stop entering into B-BBEE deals that will just maintain the status quo.  Broad-based schemes are about inviting different voices into your pool of shareholders and respecting these parties’ vote in the same way that you would respect those of wealthy individual shareholders. 

Lastly community and labour organisations should also take responsibility for what they own and influence. Over the past two years, I have worked extensively with Organised Labour. Traditionally a non-shareholder constituent, Labour is today gearing up to play an active ownership role. Labour is gaining an understanding of what it owns and what it can influence in the South African market.  Considering that Labour’s ownership is mostly indirect – either pooled in retirement funds or through B-BBEE and employee ownership schemes – this is no small endeavour on their part. 

Allowing community and labour organisations to play the role of active owners in the economy has the potential to put the term ‘broad-based’ back into transformation. Promoting active ownership creates the type of playing field that can constructively advance an inclusive and fairer socioeconomic dispensation.  Government and Business must however carefully reflect on whether their recent ill-considered approaches to transformation really make them the progressive agents for advancement of South African society that they perceive themselves to be.  

Rudolph Fourie.jpg

Rudolph Fourie
is a director at Alternative Prosperity, where he heads up the sustainability and responsible investment activities. He lectures on the USB’s Development Finance Programme and facilitates for USB-ED’s Business in Society Unit. 









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