Paul Janisch

Deals and doing an Mzi

I have been threatening for a while to write something on BEE deals.  Here goes.

I don't like BEE deals.

I don't like BEE deals that are done because they are BEE deals.  I like deals that are done because there is a real business need and conducted in such a way that all parties involved in the deal participate in the same way that any other merger and acquisition would operate.  I don't care who the participants in the deal are.

I can see the benefit for larger corporates doing deals especially listed companies (they've been doing similar types of things for years through share options).  SMEs however should steer clear of any deal especially if the business owner does not want to sell anything.  A BEE investor/partner who contributes nothing to the deal also doesn't make the experience any better.

Another problem with deals is the fact that it makes it really easy to front.  It is the easiest thing in the world to put a black person on the shareholder's certificate and pretend that they are in fact shareholders. 

BUT (the best is always left for last).  BEE deals have a tendency to hinder capitalist activity. Many BEE deals are dependent on the black investor remaining a shareholder.  Mzi Khumalo has shown that he is happy to benefit from these deals but when the time is right he is out of there.  And if a deal is constructed in such a way that the new shareholder is not tied into the deal through debt or some other mechanism, then that shareholder must be allowed to alienate these shares whenever they want.  Hence the term "doing an Mzi". 

Another version of an Mzi was in last week's Business Times.  Speculation mounts as to whether some of the beneficiaries in the Elephant Consortium (who did the Telkom deal) have cashed in their shares.  Smuts Ngonyama (he who claims he did "not struggle to remain poor") was quoted as saying that the deal was not an empowerment deal, even though Telkom claimed it was.

Robin Woolley summed this who deal thing up by posing the question "How can you expect a capitalist to behave in an anti-capitalist fashion?" 

Corporate social investments make good business sense

I wrote this for Real Business.  By the way Kim Marr has also started contributing to Real Business, she has a fantastic overview of CSI and BBBEE.  Her first article can be found here (Get out of the starting blocks and find the right social investment).

PRIVATE companies have been supporting causes and charities for ever. Some have developed carefully designed and structured strategies, but most operate on an ad hoc basis, donating when asked or when the urge arises.

Companies should, however, avoid simply “buying” the points on the scorecard by making random donations to charities at the end of each financial year, and should perhaps take a long-term view on their corporate social investment strategy.

Broad-based black economic empowerment incentivises companies to support causes awarding points on the scorecard. It is quite likely that this is a government plan to see more private money assisting the state in its social responsibility.

Unfortunately, the corporate social investment scorecard does not award points for sustainable activity; it only recognises nonrecoverable contributions and provides a bonus point for contributions to people living in designated areas.

There are some who cannot understand why corporations should get involved in causes that are ultimately government’s responsibility. The answer lies in the fact that government cannot cope with the sheer number of people that need assistance. The generic scorecard corroborates this fact.

A more serious economic consideration is that these people are consumers of goods and services, that should be elevated to a level to become a stable market in the shortest possible period.

The South African economy cannot wait for government’s plans to come together; private business has to get involved to speed this process up.

Take the Gates Foundation, which is donating large sums of money to AIDS research in Africa. There are probably a series of reasons behind this, but somewhere underneath it all must be the fact that Africa is the last market for consumer PCs. AIDS kills markets and keeping people alive increases the likelihood of them becoming consumers of PCs and their associated software packages.

A comprehensive and sustainable corporate social investment programme should be accompanied by a marketing plan, as these programmes regularly use up column inches in publications.

It is, in fact, a great public relations exercise and PR should accompany all social investment activities. When viewed this way, expense associated with social investment might be justified as a marketing expense.

Let us suppose that a certain large company decides to build and support a school in the Eastern Cape. Once construction is complete, they plan a high profile launch and they invite prominent politicians, business people and other luminaries. The chances are, that with this mix of people, all sorts of press will arrive to cover the event. The media coverage almost justifies the investment in the school.

The marketing mileage a company gains from social investment is probably not the sole reason for the investment, but it does reinforce the principle that a sustainable investment project must have some tangible benefit for the donating company.

This could be marketing potential or the development of a future workforce or market place. If the programme generates a mutual benefit, then both parties will want to continue.

Shane Immelman, MD of Lapdesk, firmly understands this concept. The Lapdesk is a patented portable school desk that sits on a child’s lap. These desks are donated to schoolchildren and the costs are borne by sponsors who advertise on the surface of the product.

Sponsors gain a double benefit from their investment – it is a marketing vehicle and also forms part of their social investment programme.

Lapdesk is not an nongovernmental organisation or a section 21 company, it is a business that needs to generate a return for its investors.

While Lapdesk operates profitably, it ensures that both the beneficiaries and its clients gain the maximum benefit from the programme. Sustainability is therefore ensured.

The examples above refer to larger corporates with large budgets, but they all follow the same principles and these principles can be used by all companies, irrespective of size:

• Sustainability must be a core component of any social investment donation. Charities need to know they will be supported on a regular basis;
• Social investment has marketing potential. It might not make the national newspapers, but your corporate website should at least carry these stories;
• It has the potential to develop markets and the sooner these markets are developed, the better for all; and
• Government should be involved, whether at a local, regional or national level.

Amendment to Act will spur on empowerment

Section 38 of the Companies Act, 1973 prohibits a company from providing financial assistance for the purchase or subscription of its own shares.  To be more specific:

38. No financial assistance to purchase shares of company or holding company.—

(1) No company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares of the company, or where the company is a subsidiary company, of its holding company.
(2) The provisions of subsection (1) shall not be construed as prohibiting—
(a) the lending of money in the ordinary course of its business by a company whose main business is the lending of money; or
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the subscription for or purchase of shares of the company or its holding company by trustees to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company; or
(c) the making by a company of loans to persons, other than directors, bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for shares of the company or its holding company to be held by themselves as owners.

This act was promulgated a long time ago therefore it is rather difficult to understand (this is in direct contrast to modern acts, the new ones are really easy to read and understand).

There has been a fair amount of talk about the relaxation of section 38.  Today's Business Times carried an interesting article on section 38.  It is likely that section 38 will be relaxed because it has hampered BEE deals thus far, although the article does suggest that it is an antiquated restriction inherited from English law.

What I did find interesting was that there are already exemptions to section 38.  Holding companies can provide financial assistance for the purchase of shares in their subsidiaries. Financial assistance may be provided by a company for the purchase of its business, instead of its shares. Companies may also lend funds to a share incentive trust as part of an employee share incentive scheme.

If section 38 is going to be relaxed then it won't be as simple as just financing the purchase of shares.  A report in Business Day on the 23rd of May, 2006  suggested that a few conditions would apply

• company's assets must exceed its liabilities
• board must pass a special resolution to sanction the sale of shares

Caird is off to Durban

We are off to Durban for a few days, back in JHB on Friday.  I will try and post something whilst I am down there but my experience of Durban hospitality probably means that I won't get a chance.  We are also stopping off in Harrismith on Thursday to see an agricultural enterprise development project run by Nestlé. 

Procedure, numbers and the EE Act

Alan Hammond, editor of The Skills Portal wrote an interesting comment in his weekly newsletter today, Labour Department gets tough with Employment Equity Act.  The article sheds more light on the quantitative measures the Department of Labour can use to gauge progress. 

Quantitative measures are found in sections 42 and 43 of the EE Act.  Section 42 allows the department to measure progress against an industry benchmark.  Section 43 allows the department to conduct a review within companies.  Companies are then rated as either being ‘equitable’, ‘reasonable’ or ‘unacceptable’.

Another feature of the EE Act that I was not aware of is section 61.  Section 61 guards against obstruction, undue influence and fraud. It makes provision for a fine of up to R10 000 for any false information contained in a document or provided to the Director-General or a Labour inspector in terms of the Act.

Hammond concludes in his weekly newsletter with

No longer will it be acceptable to simply submit reports each October – companies will be expected to make actual progress! And if they don’t they can look forward to a review by the Director-General and the possibility of a trip to the Labour Court.

I do recommend that you subscribe to the Skills Portal newsletter, it contains a wealth of up-to-date HR and other BEE type information.

The enterprises strike back

JSE listed companies don't take to allegations that may impact on their share price lightly.  A number of the companies "named and shamed" on Monday have come back with evidence that they have in fact complied.  This doesn't bode well for the Labour Department at all. 

I do suspect that the DoL were marginally on the money though in terms of broader EE transformation.  I am getting a distinct impression that there is some unhappiness within certain people that transformation is not happening quick enough, if it is in fact happening at all.

If it isn't happening then the DoL needs to find out why and let us know.  Legislating will only take you so far, there has to be a real desire from within in order for this to work.  Creating this desire is the biggest challenge.  We are so conditioned to instant gratification and quick fixes that a long term view almost seems inconceivable. 

Is EE failing?

The Employment Equity deadline is approaching and the Department of Labour is making a huge noise about the status of EE within some of the bigger companies.  Headlines like "Mdladlana names ‘too-white’ firms - Business Day, 12 September, 06"; and "We have regularly submitted reports - Business Report , 12 September, 06" are making the front page of the business press.   Then there are the new EE regulations and EE reports which are far more complicated than the last ones. 

It seems as though the DoL is trying its best to generate some EE activity within the private sector.  Both articles name some very large corporates who have “unacceptable levels of equity representation".  The Business Day report states that the DoL may even consider revising the fines to move more inline with inflation. (Note the report mistakenly states that the maximum fine is ninety thousand rand; it is in fact NINE HUNDRED THOUSAND RAND Download schedule_1_of_the_employment_equity_act.pdf ). 

The thing that I find most interesting about fining is what a company can be fined for.  Sections 16,19, 20, 21, 22, 23 Download the_caird_group_punitive_sections_of_the_employment_equity_act.pdf appear to be procedural, in other words you can be fined if you don't follow the procedure.  In other words you can never meet your stated EE targets and follow the procedure and you will be exempt from a fine.  It was pointed out to me that section 20 contains the following wording:

(1) A designated employer must prepare and implement an employment equity plan which will achieve reasonable progress towards employment equity in that employer's workforce.

Do the words reasonable progress have any legal recourse; can a company be fined if they do not achieve reasonable progress?  My legal background suggests not - but I'll be checking up on this in the next few days.  Watch this space.

I come back to the question as to whether EE is failing.  Is it possible that it is too difficult to legislate and change the way market forces work?  We don't know yet, but the DoL is ramping up its EE effort dramatically and there must be a reason behind this.

What is a BEE supplier?

It comes up time and time again.  I have seen certain corporates rate their suppliers in terms of BEE and non-BEE.  It must be sending out a really twisted message. 

The press (even the financial press) is no better.  Business Day carried a special feature on energy and mining yesterday (8 Sept, 06).  An article on Richards Bay caught my attention.  Richards Bay is going to expand its coal terminal to increase its coal handling capacity.  This expansion (known as Phase V) will also make "special provision to encourage a new generation of coal exporters by earmarking 4-million tons a year for BEE exporters." (Bold is my emphasis).

We all know that they are actually saying BLACK exporters.  Why don't they just come out and say that?  The term BEE is becoming a euphemism for black people and black businesses.  Why should they be stigmatised with the term BEE?  It comes across as somewhat patronising and paternalistic.  Then there is "new generation".  Surely new generation means more than black?  I think it refers to any new entrant. 

An added complication comes when broad-based BEE is brought into play.  It is technically possible for every company to become "BEE" without any form of black ownership and control.  Will "BEE" include them as well.

Drop the euphemisms and let's get on with transforming this country.  If you mean black-owned, then just say it.

State selling off land

I have been watching the government and its approach to broad-based BEE for a while and it is pleasing to note that it is making some headway in the conversion to BBBEE from the old narrow based system.  There are two examples:

New Employment Equity codes of good practice (August 06)

The definition of black people is in keeping with November and December 2005 BBBEE codes of good practice.  This may come as a bit of a drag for people submitting their next report.  All people who aren't black by definition (birth or descent etc) are now to be classified as white.

State is selling property

Erwin was reported in the Business Report last week that parastatal land will be sold to BBBEE companies.   

Erwin said that properties with a value of up to R5 million would only be open to bidders with a BEE status of level 4, through activities such as skills development, enterprise development and employment equity, or companies with at least 51 percent black ownership.

Bidders for properties valued at between R5 million and R30 million would need a level 4 BEE rating or at least 30 percent black ownership. Bids for properties worth between R30 million and R100 million would require a level 5 BEE status or at least 25 percent black ownership. Properties worth over R100 million would go to bidders with a level 6 BEE status or at least 20 percent black ownership.

This is a very positive move.  I strongly endorse the practice of providing black people with the opportunity to purchase state land.  Also it will only be provided to companies with a certain level of compliance.  In other words, black-owned companies cannot only depend on the fact that they are black; they need a BBBEE score. 

What I do find problematic is that black individuals bidding in their personal capacity would be regarded as BEE level 1.  They had better have very strong anti-fronting mechanisms in place, because this one is open to abuse.

Business Day reported today that there would be road shows to market the land.  A large amount of this land is expected to be bought by the housing department for its housing programme.

The same Business Day article also had something on scarce skills and JIPSA. 

Deputy President Phumzile Mlambo-Ngcuka said the proposed list of scarce skills earmarked for immigration had been drawn up, and was with home affairs.  When finalised, this year’s immigration quota list would be published.

Scarce skills identified by government included manufacturing and construction engineering professionals; natural and physical science professionals; medical engineers and technicians; call centre managers; and information and organisation professionals. Mlambo-Ngcuka said government would facilitate and streamline importation of skills by employers only as and when required.

We are making progress here.

ABVA developments

ABVA is the Association of BEE Verification Agencies.  As far as I can gather rating agencies must be ABVA members in order to be accredited.  Their website was dormant for quite a while but I noticed today that it has been updated.  There is a list of rating agencies who have applied for accreditation accredited.  The good news is that there are more than 90 applicants (which includes the more popular ones). 

If you are thinking of getting a rating at the moment remember that there are NO accredited agencies, although Business Owner carried an article last month saying that ABVA members would redo the rating at no cost.  You should also make sure that they are ABVA members and SANAS accredited. 

For those who wish to become rating agencies, ABVA is holding workshops around the country (started yesterday in Pretoria, 6 Sept, 06). 

BEE codes ready for approval

The rumours about deadlines have been rife in the last six months. Today's Business Report (BEE codes ready for approval) suggests that the new codes will be here sooner than later.  We can expect simpler codes, but the principles will remain the same.  As far as I can gather these principles are:

• The stimulation of local industry.  The preferential procurement and enterprise development codes strongly emphasised this.
• Skills development.  I have heard that the organisational transformation index is going to be removed or placed elsewhere on the scorecard.  I couldn't agree more, these are easy points to get but why waste 6 points on the skills development scorecard for this.  Skills development is critical to ASGISA and JIPSA and therefore should not be diluted.
• Greater black management representation.
• BEE is an inclusive process.  The scorecard allows every entity within South Africa to develop a BBBEE profile and get behind the process.
• It is part of SA’s growth strategy. This means sustaining existing, and  generating new, economic activity. Comes back to ASGISA and JIPSA
• It should be implemented within the context of sound business principles.  The most important principle behind BEE.

I don't expect a dramatic change in some of the targets.  We must see a change in the definition of preferential procurement and changes in the targets for enterprise development and CSI.  The current enterprise development target is between 3.3 and 5% of EBITDA (earnings before interest, tax, depreciation and amortisation).  Telkom's EBITDA for 2005 was R17.5 billion, in order for them to earn the full ten points on the enterprise development scorecard they would have to invest or spend between R600 and 900 million.  I can't see that happening in a hurry.