Paul Janisch

Ownersheepish - and the only BEE compliance course

Someone searched for this on the blog.  I wrote this 14 years ago.  I'm glad to see that my thought process hasn't changed.  I've probably become a little more jaded over time. 

We have a unique online BEE course coming up.  It's all about compliance. I don't know of another course that deals only with the substance of the codes and doesn't touch on what is right or  emotional issues.  Click on the link and join us

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Bless me for it has been a while.  I discovered that if you get twittering your blogging suffers - something my fellow blogger Melissa Chang told me is a very normal process.   It's been a very interesting month - I went on a national tour talking to both the private and public sectors about the PPPFA regulations.  I was quoted in Business Day - something I have been wanting since I started this BEE lark five years ago and I appeared on TV.   Now before my head gets too big..........

I found this article on my alerts "BEE firms could warm up to family businesses" that initially got up my nose (I've changed tack since I started writing this post).  It's written by Cynthia Mapaure who is the financial director of the Mineworkers Investment Company and in it she avers

Family businesses employ millions of black workers yet black economic empowerment (BEE) has made only limited inroads within these companies - leading to impatience in some quarters over the slow pace of change at the core of our economy.

OK - I don't agree with this statement.  I firmly believe that family businesses should be allowed to remain exactly that FAMILY BUSINESSES.  Why on earth should they sell out to a BEE investor or any investor for that matter. 

But Cynthia goes one step further, surprising me very pleasantly.

Why would a family business that had stalled on BEE for years suddenly have a change of heart in the middle of a downturn? Chances are the company is in dire need of capital and is embracing a new partner out of necessity.

She backs this up with

Some empowerment companies still have relatively strong balance sheets and solid capital reserves. They might benefit from value opportunities like this.

Is she perhaps suggesting that empowerment companies might actually be willing to part with money for their shares - something VERY few have been interested in doing up until now.

Her concluding remarks are

If you are serious about your empowerment mission, there can be no shirking the responsibility of extending transformation to the workers who depend on these businesses for jobs and a regular income.

And this is where I draw a line.  We know where Cynthia is coming from - the byline tells us that she is the financial director of the Mineworkers Investment Company, a leading BEE company with a 14-year track record.  She does deals.  But surely someone who knows anything about deals knows that there is a scorecard that looks after the transformation of the workers.

I put it to you Cynthia - can you seriously prove that by extending the ownership of a private company to the workers you are benefiting them in any real way?  Let me tell you what I think

1. The shares ain't worth shit unless someone is going to buy them.  And in a private company situation this is not going to happen readily
2. I have yet to be convinced that ownership in a company where the shares are not readily for sale actually improves staff retention

Come now Cynthia - drop the ownership rubbish and start talking about job creation and entrepreneurship.  Focus on skills development and whilst you are at it talk to the SETAs about innovative ways to develop skills.  And then why not invest some of your own money in starting black owned family businesses that will compete healthily with white owned businesses.  Leave the ownership of family businesses alone - they are the cornerstone of our economy.

Breakfast BEE sessions, a sort of report back even though they aren’t finished yet

Five out of the seven planned sessions are over. They are small and focussed. David Kalmin knows his clients and I know mine. The initial purpose of these sessions was to let our respective clients know that we are on top of what's coming. I think the difference between our sessions and most other commercial ones are that we have solutions and answers and we can express those within two hours. It's possible to go over two hours but I think we'd lose the listener.

The sessions are broken up into two sections

1. The first hour or so is my introduction to the codes. Most often when people bore you with their six hour sessions is that they go into the most laborious detail about this principle and that fronting and this code and that code and, and, and, ad finitum. My starting point is the grounding principles of the codes, any code for that matter. If you cannot link your interpretation to those principles, then you are never going to beat any allegation of fronting and most importantly you're not going to convince your empowerdexadrine that your interpretation is sound. There is no one interpretation and no correct interpretation. Everything is up in the air and it's not that hard. Some of things I cover are
   1. Verification. How can a scorecard be issued under the new codes when the market is used to old codes pricing
   2. Management/control and the dreaded EAP. It is what it is. I won't go into the ridiculous complexity of these calculations. They take me an afternoon to do anyway. But I will tell you about the Prison's case and regional EAP
   3. Skills Development. 6% is a massive target and is made more onerous when you consider the EAP. We know that category F and G training is a no go – but does this mean that all inhouse training can only contribute 15% to the target. No.
   4. And then there are ABET interns. The codes have no issue with that.
   5. Procurement can be solved by incorporating supplier development into your procurement plan. This is not a small mom and pop store, but a proper, legitimate business.
   6. And what about Peter Green. I have managed to sneak in a Peter Green story into skills development.
   7. Often the presentation is changed to talk to those companies that I know so well
   8. All of this is couched in my somewhat unique presentation style.
2. David covers ownership and the modified flow through principle and tax efficient options.

There has been a large demand for inhouse sessions. We'll cover everything you need to know in two hours, give or take half an hour. If you think this could be beneficial for your company contact me and I'll come and deliver it at your offices for a fraction of the price of sending your staff on one of those rather drawn out courses that are being offered.

The pic shows David delivering a different view on ownership

Black South Africans need an AfriForum and Broederbond - Max du Preez

There are clearly parallels between the Broederbond strategies to enrich themselves and give jobs and tenders to their pals and the ANC policies of black economic empowerment, crony capitalism and cadre deployment. One big difference is that the Broederbond invested heavily in education, training, conferences and workshops to enhance skills in order to prepare their “deployees” to do their jobs properly. “Superb organisation, strict discipline and determination” were key.

But perhaps the biggest difference is that volkskapitalisme had a genuine aim to benefit more than just the few that got very rich. Unlike BEE, it spread the wealth a little.

via www.moneyweb.co.za

Something that one Kevin Lester spoke to me about years ago. The Volkskapitalisme model focused on education, and then built it up from there.  A paragraph from this Wiki page does show common pitfalls of both Volkskapitalisme and BEE.  

Volkskapitalisme strived to improve the economic conditions of the Afrikaners who in general at the time were less well-off than the English-speaking whites in South Africa. In practice the program consisted of utilising the Afrikaner capital into new and existing Afrikaner businesses. Although volkskapitalisme managed to develop some Afrikaner businesses, such as Sanlam and Volkskas into corporate giants that still have a central role in South African economy, in the end the economic benefits for the majority of the poor Afrikaners were slim.

But, as du Preez observes, the results of Volkskapitalisme were far more significant than BEE

By the 1970s, Afrikaners owned a substantial chunk of the South African economy with successful companies like Sanlam, General Mining, Rembrandt, Perskor and Nasionale Pers, all dominated by Broeders. The civil service (and the SABC) was run and staffed mostly by Afrikaners and the South African Railways was used to provide employment to unskilled and uneducated Afrikaners. By the 1980s, Afrikaner capital was dominant and the overwhelming majority of their number were members of the comfortable middle class.

 

 

 

 

Related articles

Revised codes to accelerate BEE implementation - Davies

Tiger’s contorted Vodacom tangle

And so spake the Independent yesterday

One of the losing consortiums in Vodacom's R7.5 billion black economic empowerment (BEE) transaction claims that the cellphone company lied about its decision to award the stake to Thebe Investment and Royal Bafokeng Holdings. Tiger Consortium Telecommunications is demanding R100 million from Vodacom for damages it says were a result of Vodacom's misrepresentation.

It says Vodacom "failed to mention a fractional BEE allocation in or during the bidding process of the BEE stake". This, it says, is in breach of the spirit of the Broad-Based Black Economic Empowerment Act of 2003 and Trade and Industry's 2007 BEE code of good practice.

Before I get into the underlined section it must be said that this whole action wreaks of litigious extortion. One of the characters in the Tiger Consortium has a chequered past (read the article). I suppose the word "entitlement" looms large in this sordid affair.

But let's look at this term "spirit of BEE" as it comes up quite often. The spirit of anything is incredibly subjective. In a South African context we'd start off with the Constitution's preamble, most significantly

We therefore, through our freely elected representatives, adopt this Constitution as the supreme law of the Republic so as to ­

• Heal the divisions of the past and establish a society based on democratic values, social justice and fundamental human rights;
• Lay the foundations for a democratic and open society in which government is based on the will of the people and every citizen is equally protected by law;
• Improve the quality of life of all citizens and free the potential of each person; and
• Build a united and democratic South Africa able to take its rightful place as a sovereign state in the family of nations.

The BEE Act is a direct result of the first and third bullet points. The preamble of the Act itself states its intention as being to

"promote the achievement of the constitutional right to equality, increase broad-based and effective participation of black people in the economy and promote a higher growth rate, increased employment and more equitable income distribution.";

And the next clue as to what the spirit can be found in the current codes (paragraph 2 of statement 000)

2.1 The fundamental principle for measuring B-BBEE compliance is that substance takes precedence over legal form.

2.2 In interpreting the provisions of the Codes any reasonable interpretation consistent with the objectives of the Act and the B-BBEE Strategy must take precedence.

The B-BBEE Strategy document deliberates the definition of black economic empowerment and concludes that the best description is (paragraph 3.2.2)

an integrated and coherent socioeconomic process that directly contributes to the economic transformation of South Africa and brings about significant increases in the numbers of black people that manage, own and control the country's economy, as well as significant decreases in income inequalities.

The spirit of BEE must therefore lie within all these documents and pieces of legislation. The spirit is not a process per se, it has to be how the process contributes to the ultimate result which must be to increase broad-based and effective participation of black people in the economy and promote a higher growth rate, increased employment and more equitable income distribution. I believe that the operational words here are

• Broad-based
• Effective participation
• Promote a higher growth rate
• Increased employment
• More equitable income distribution

It is incumbent on those alleging any act that is against the spirit of BEE to prove that any of these five requirements were not met.   When a deal is concluded with a major ANC player like Baleka Mbete (yes I know this is a mining deal – this is for illustration),  Cyril, Patrice or Khanyi for that matter the it is not hard to prove that the spirit is somewhat lacking. These types of deals don't really meet a few of the criteria and hence are not in keeping with the spirit. I can't see that meeting three out of the five is good enough, it's all or nothing.

When you view this Vodacom thing you can clearly see that you're dealing with a very unpleasant bunch of people that make a tiger look tame. However if Rob actually paid attention to what goes on around him he'd notice the black economic empowerment is in fact black economic entitlement. He could change things and add in an entitlement requirement, the Tiger consortium would then be in with a very good chance of getting that R100 million from Vodacom.

Changing face of BEE deals, which are few and far between

The nature of empowerment deals has changed in the last few years, MD Samara Totaram told investors at PSG’s recent AGM. “Early deals were fully vendor funded, with big discounts and long lock-ins. This has changed and today companies expect BEE shareholders to put skin in the game.”

Another trend in BEE deal-making is the move away from black investment companies and towards employee trusts. “This notion of once empowered always empowered is a misnomer,” she says.

This means that companies whose empowerment deals are unwinding – as in the case of Absa’s Batho Bonke deal – are stuck in an awkward position. “They could choose not to do another deal, but then their BEE ownership credentials will fall. They could do another deal – but what company wants to fund a new BEE deal every seven years? Or they could create a trust for staff that exists in perpetuity. This is the option we think many companies will choose.”

via moneyweb.co.za

Enough of the Zuma-bashing for now.  This is useful to know, I can see the trust lawyers rubbing their hands in anticipation.

 

 

Vesting and a Rabbitt in the tree

I was at a meeting with a company who wanted to know what happens when the shareholders vest their shares.  After about half an hour I figured they were talking about cashing out.  I like cashing out - it generally means you are going to make some money.  Companies who have done BEE deals don't like it.  Why - because our esteemed government is so obsessed about ownership and not about value created from the shareholding.  Companies need to try and retain their black shareholding or suffer the consequences - which generally amounts to wild accusations of lack of transformation and racism et al (you might be able to figure out that I do not hold the ruling party or its corresponding government in high regard).

Take a look at ABSA.  Theirs was one of the first BEE deals that vested - certainly the first of the big 4.  Their ownership score dropped from 14 points to 9 in a year.  And this is a problem for them.  FNB on the other hand is not going to have this problem in a while.  TimesLIVE reported

Though the term of the initial third-party funding was five years, maturing in 2010, it was always envisaged that [the trust] would, subject to it being commercially feasible, refinance the third-party funding in 2010 for a further five years, since the BEE transaction contemplated a 10-year term, maturing in 2014

Mzwandile Jacks of Business Report phoned me yesterday and asked me what I thought.  He didn't publish my whole diatribe, so I thought I'd add in the bits he missed.

FNB's deal was underwater and they very cleverly went off and and refinanced their deal for another four years - their ownership score of 16 points is likely to be safe.

A smart move that should be emulated across the board.

And on the subject of racial obsession I have posted a lovely little duo by Margaret Singana and Rabbitt - a cover of a Freedom's Children song called Tribal Fence. 

13 - Rabbitt - Tribal fence

There is some Jeremy Taylor stuff coming soon too - I will try not to be so sparse in my posting.

JSE BEE board

We need to talk about this.  It seems as though Russell Loubser's casual comment last week is actually going to happen.  There were two articles about this today.  It apparently is quite a far way down the line in being developed - we can expect it in September. 

South African bourse operator JSE (JSE:JSE) Ltd plans to launch a separate board for black economic empowerment schemes to make trading between black investors more transparent, a spokeswoman said on Tuesday.

South African companies have to meet affirmative action targets on a range of ownerships, employment and procurement as part of the government's drive to give the previously disadvantaged a greater part in the mainstream economy.

Shares issued for ownership deals often need to be held by black people and can only exchange hands between them so companies do not dilute their black economic empowerment credentials.

"This new board would make trading of shares by BEE scheme participants more transparent," JSE's investor relations officer Michelle Joubert said.

BEE schemes' participants commonly trade their shares, which would be subject to the same regulatory procedures, over the counter.

Apparently this board was requested by a listed client

Local bourse operator JSE Ltd has said the idea behind its mooted black economic empowerment board originated from clients seeking a platform to trade shares which form part of empowerment transactions.

"We were approached by a company that wanted to make sure its shares will be traded in a transparent manner once the mandatory lock-in period expired," said JSE deputy CEO Nicky Newton-King on Tuesday, declining to name the firm.

As I said before - I think this is a great idea.  That post sparked a fair amount of debate between Mark and myself.  But being the natural cynic my reasons for liking it are because it will show up the absolute folly that makes up many BEE deals.  And this comes back to the fact that the deal is measured by representativity and not by value - as has often been reiterated often by Mvela's Pine Pienaar. 

If the bourse exists so that black people can trade shares between each other then we are going to experience huge problems.  I'll list a few

1. Limiting the potential market means that there will be fewer buyers - and fewer buyers means less demand.  No institutional/white or other investor can purchase these shares.  Where is the wealth creation here?
2. The JSE is going to have to set up a system that vets the blackness of share purchasers.  And this could lead to litigation or a constitutional challenge.  I can only see this as one administrative nightmare.

What would I do

I would open up the shares to the general market after the lock-in clause has passed.  Can you imagine if these shares were heavily traded - it would be a major endorsement for BEE.  It would tell the market that the black ownership has grown these companies and made their stock attractive to other investors.  In fact this could be the one thing that shows that the entire BEE policy was worthwhile in the first place.

We shall see

(Group) 5(0) ways to leave your lover

Got this from Business Day this morning

ILIMA Group, a black economic empowerment (BEE) partner to construction giant Group Five , yesterday argued in the high court in Johannesburg that the courts could treat BEE transactions differently from those not underpinned by public policy.

ILima’s counsel, Vuyani Ngalwana, drawing from constitutional case law, said the government had a constitutional mandate to transform the economy, and BEE was one of the ways it had chosen to do so.

He said if strict enforcement of a clause in a contract could result in unfairness or unreasonableness to the BEE partner, a court should not enforce it — even where neither party was an organ of state.

What our esteemed advocate is suggesting is that a BEE partner should have more rights than the other party in the transaction because it is contributing to the transformation of the country.

Does this sound like rubbish to you?  Do you not think that this little pronouncement is a complete and utter waste of the court's time?

ILima has even gone to Rob Davies to moan about this.  And Rob has asked Group 5 to respond within 30 days as to why the DTI should not get involved in this case. What a crock.  Running to the DTI and crying because you can't get your way. 

I remember in the early days of BEE when I was offering BEE courses that didn't prescribe ownership I asked a delegate in Cape Town (Henry Shields of the Marimba restaurant fame) whether a contract could be canceled because it came to light later that empowerment status was significant to the other party.  Henry's answer was in the negative and he spoke of the "sanctity of contract". 

Surely the court will reject this argument because of the implications - viz

1. Messes with the sanctity of contract
2. It's a waste of the court's time
3. It will end all BEE deals because companies won't conclude them because of the potential prejudice
4. It's a monumental waste of the court's time

I suppose because this is a high profile case we'll be hearing more about it.  I'll add it to my Google alerts

Once empowered – always empowered discussed (disgust?)

We are about to hit the third anniversary of the DTI's codes. This is significant because to my mind it is the first time that we can use the once empowered, always empowered; high watermark or continuing consequences principle. The reason for this is paragraph 3.5.1.3 of code 100 states that transformation must have taken place. The only way that this can be measured is by comparing BEE scores over the last three years. And this can only be measured using a uniform scorecard which only came into effect on the 9^th of Feb, 2007. I suppose you could compare EE submissions over the three years but this won't apply to every company.

It would appear that if the black shareholder willingly parts with their shares by selling them then you can recognise the actual ownership percentage in perpetuity, but a only a fraction of the points. This implies that if the company was a QSE that was more than 50% black owned and the black shareholder sells out then this company is still regarded as 50%+ black owned – and hence could be regarded as a Category B ED beneficiary (provided it has a BEE score higher than level 6). I say this because the codes don't mention 25% black owned, only 50% black owned. I somehow think this might be difficult to push through but I'd invite the discussion.

The paragraph contemplates two different ways of relinquishing shares – sale or loss of shares. They are more lenient on the company if the shares are sold. If the black person loses the shares because they are taken back or for any other reason then the codes penalise the company. I think this magnifies the ridiculousness of the ownership model and seems to presuppose that the black partner is the innocent party in this programme – surely if a black partner does not pay for the shares or can't meet the payments and the shares are taken back they have to shoulder a portion of the blame. I've never been a fan of the ownership element, especially in small or family-owned businesses.

Paragraph 3.5 is the significant section (The recognition of ownership after the sale or loss of shares by black participants) and has four aspects to it

1)    Recognition of black ownership

3.5.1 A Measured Entity is allowed to recognise a portion of black ownership after a black participant has exited through the sale or loss of shares subject to the following criteria:

This is a little confusing – the paragraph says "a portion of black ownership" but doesn't explain what this means. It is different to paragraph 3.5.2 which refers to 40% of the points under ownership. The Interpretative Guide hasn't explained it either.

3.5.1.1 the black participant has held shares for a period of 3 years;

3.5.1.2 value must have been created in the hands of black people;

This is a simple calculation of the value of the company at the time of sale of shares compared to the current value of the company. I suppose this is a bit of an incentive to make sure that the company makes a bit of cash over the period.

3.5.1.3 transformation has taken place within the measured enterprise.

See above

2)    Can't have more than 40% of the score under ownership

3.5.2 black participation arising from continued recognition of black ownership cannot contribute more than 40% of the score on the ownership scorecard.

The maximum number of points you can get is 9.2 for generics and 11.2 for QSEs. But in spite of the reduction in points and the lack of clarity in 3.5.1 it would appear that the company may still be deemed the same percentage black-owned and should be recognised under procurement and ED (as I discussed above). Otherwise what is the point of regarding it as having black ownership – is it only for the points?

3)    Loss of shares

3.5.3 In the case of a loss of shares by the black investor, the following additional rules apply:

3.5.3.1 a written tripartite agreement between the Measured Enterprise, the black Participant and a lender must record the loan or security arrangement, unless the Measured Entity is the lender; and

3.5.3.2 The period over which the points were allocated or recognised will not exceed the period over which the shares were held.

The minimum amount of time that a company can regard itself as being black owned (or getting the points) is then 3 years. This is just plain stupid!

4)    A calculation to determine the points

3.5.4 The ownership points under this paragraph that are attributable to the Measured Entity will be calculated by multiplying the following elements;

3.5.4.1 The value created in black hands as a percentage of the value of the Measured Entity at the date of the loss of shares as a percentage of Measured Entity's value;

3.5.4.2 The B-BBEE status of the Measured Entity based on the balanced scorecard at the date of measurement; and

3.5.4.3 The ownership points that were attributable to the Measured Enterprise on the date of sale or loss.

Maths and I aren't the best of friends, but I can proudly state that I understand English particularly well. Even so – I do not know how to calculate these points. The Interpretive Guide offers some clarity but no enough. I'm sure Vuyo's book says something but I can't seem to find my copy. If you do find yourself in this position I am happy to announce that BEE-Matrix can help you with the calculation.

True empowerment is what exactly?

  And I quote

Chief operating officer of empowerment rating agency AQRate KZN Brigitte Brun said yesterday that the recession had a “helluva impact” on BEE deals. A lot of them that have been finalised have resulted in little real empowerment as black investors have been left with a huge debt burden. She said this year “either deals will be structured differently or there will be fewer deals”.

Forgive me Brigitte, I am quoting something that is attributed to you and I haven't checked whether you did say it.

Since when does a huge debt burden not create real empowerment.  Do you mean that if they paid cash for the shares or got them for free they'd be fully empowered?  This is the way I understand this quote.

This is rubbish - the operative word here is INVESTOR.  And INVESTOR put money into something with an eye on a return on this investment.  At worst they could lose all their money - such is the nature of economics and capitalism.  Why do so many people assume that if black investors accept a risk then they are not truly empowered?  Is it because the codes award the full number of realisation points if the 25%+ is paid off?  Even this is completely flawed.

We have to move from this mindset.  If a person is a shareholder (just like it is in the real world) then they mustbe regarded as empowered - they are shareholders which is one better position in the empowerment scale!

Drop this notion and let's see if we generate some real wealth across the board.  Real wealth will only come from a balancing of risk and reward - there's been a little too much reward going around.

Motsepe re-evaluated

Tim Cohen wrote a rather hard hitting comment about Patrice Motsepe's strange comment about nationalisation in yesterday's Business Day

“My belief has always been, if nationalisation is what is in the best interests of SA, I’ll support it, whether it’s nationalisation, or whether it’s socialism — if the policies are what will improve, uplift and create a better lifestyle, better living conditions …” 

It's a bit of a character assasination than anything else, but I believe that Cohen is right.  Patrice has made an obscene amount of money (something that NUMSA believes should be nationalised as well) from BEE and as a result should be the uber-capitalist. 

Hmmmm............................... so very disappointing.  You'll never see someone like Raymond Ackermann ever going for something like this.  In fact you won't see the great Marxist, Robert Mugabe going for it either.