Paul Janisch

Trophy directors - more pearls from Fred Wilson

And I quote verbatim - you can see the original post here.  I don't have Fred Wilson's permission to reproduce this post.  He is the reason I blog and I have yet to come across someone as prolific as Fred.  You'd do well to follow him.

A “trophy” board member is someone with a big name who, in theory brings credibility and connections to your company. They are often out of the world of politics, or a Fortune 500 CEO job, or Wall Street.  Trophy board members are more concerned about their reputations than your company and will often react badly in times of crisis and challenge, which is exactly when you need your board members at your side more than ever.

Trophy board members often miss board meetings, show up unprepared, and frequently don’t take the time and effort to truly understand your business. 

I am a huge fan of independent directors to compliment the founders and investors on a board. The quality of the board is highest when there are more independents on it than investors and founders. Try to get that ratio right on your board as soon as practical.

But don’t put “names” on your board. Put operators, ideally very seasoned operators, who have done everything you want to do, ideally multiple times, and can help you spot the issues before they become problems and spot the opportunities with enough time to go after them.

These ideal board members are often not big names and they usually don’t have big egos. They are solid, steady, and worth their weight in gold. They come in male and female varieties and across the racial and ethnic spectrum too. It is true that it take a bit more work to build a diverse board of operationally focused board members but it is worth it.

But whatever you do, stay away from trophy board members. They rarely help and often hurt.

 Not so easy to do here, there is immense pressure to put high profile people on larger companies' boards.  One day when we have overcome our sensitivity about race and transformation, a case study will be written about the efficacy of the many trophy board members that grace the boards of our larger corporates.  Danisa Baloyi is one example that comes to mind.

ABVAcuousness

I was sent an email by Louis McLaren telling me that the certificate I issued might not be accepted.  I sent him a mail back telling him that it was perfectly legal in terms of notice 32467.  I then got a response from him telling me that a VA would not accept it because ABVA says it won't.  I then mentioned that the VA is not in a position to decide who are what certificates are acceptable.  I have blogged about this in a great amount of detail before.

I need to stress that Louis is a highly respected man in this industry - he is not part of this tirade.  At all times he kept the name of the VA away from me.

This dimwit (who is nameless to me) has a similar intelligence level to Bright Matonga  - in fact I'll call him/her that name.  This is Bright's response (peppered with my comments.

"His statement that no verification agency may decide what to accept or not clearly shows ignorance on the side of the individual in question.

Really?

It is the precise function of a verification agency to decide on the validity of evidence presented to it by a measured entity.  The procurement official of that measured entity may have decided what to accept as sufficient proof for its procurement purposes but for verification purposes verification agencies have to make their decisions within the context of a legislated regime which prescribes what is acceptable evidence or not.

Questionable legislation.  Tell me Bright have you actually read the verification manual?  It is a document drafted by someone who might be marginally cleverer than you.  The English and exemplary BEE knowledge of the drafter/s make for comedic reading indeed.  Here are but two examples

• Establish the existence (?) proof through the AMP201 (page 64).  What the hell is an AMP201?  It doesn't exist in a South African legislative context.  I somehow think they are referring to an EMP 201.  If Bright's drafter friends don't even know this then what are they doing drafting this riveting document?
• There are no local production (5.4.6.1 - page 69).  Lovely stuff - something my corporal might have uttered and he made no bones about the fact that he spoke English very reluctantly.  Bright, could you be my old corporal?

Whilst it might be regarded as "law" for now - everyone knows that this document would be thrown out of a court of law. 

The decision of the verification agency can therefore not be arbitrary but must have a sound legal basis.  The interpretation of ABVA on the particular matter is based on the current legislation issued on the matter.  Although controversial, it is the only interpretation that stands the test of legality.  I would love to hear the legal - not policy or emotional argument, for the view adopted by this individual.

Yes Bright this is ABVA's interpretation.  Confirmed to me by Andile (is BEE really my strongpoint?) Tlhoaéle.  And this is the most important point - it is not a point endorsed by the DTI or SANAS.  Whilst Andile avers that it has some legal backing because of the definition of a verification agency in R47-02 it still lacks legitimacy.  And this is another perfect example of ABVAndalism and ABVAingloriousness. 

I suggest he starts off by providing me with the legal definition of the term "unaccredited verification agency" that does not result in an absurdity"

I just did you knucklehead.  And I have a little news for you I have heard the Sipho Zikode asked the question why your little association should be the only one that gets to play BEE god.  He suggested at a recent meeting that SAICA, ACCA or any other association should also represent their members who are VAs.

My advice to you Bright is wake up, read the gazetted legislation and then work your pathetic little backside off from the 1st of February next year, because you are going to have to do about 50 verifications a day.  In the meantime stop hiding behind ABVA's skirt tails and service your clients not your immature ego.

Comment from Kevin Lester on Advisory Council

Kevin commented on my Zuma appoints members of BBBEE Advisory Council post. It's too good to leave buried away under comments so I've reblogged it.

I am thrilled by the composition of the Advisory Council - not one BEE consultant, not one verification agent and not one member of the team that drafted the Codes - finally an opportunity for an un-conflicted regulator. Chantyl Mulder was a member of the committee that drafted the Accounting Professions Charter, but she is an extremely level headed and capable person who is unlikely to be conflicted, even if that charter becomes a Sector Code.

Eltie Links, Wendy Lucas-Bull, Jerry Vilakazi, Sandile Zungu, Don Mkhwanazi and Claudia Manning all have extensive business experience. Big business in South Africa could not hope for a better "representative" than Lucas Bull who ran FNB before going out and co-building a not unimpressive BEE Investment house (Peotona that now holds some pretty impressive shareholdings, including a stake in De Beers)

But, all things being equal, a DTI that serves, an ABVA and NABC that is being watched, and my old friend Sandile Zungu up there, I have no complaints at all. Indeed, safe hands are finally completely on the wheel – I must say, with a team like this, I doubt very much that the (real or imagined) influence peddlers are going to be happy with this outcome.

But, if I have any complaint, I wonder why those with experience in establishing and managing genuine viable broad-based groups are absent from the team. People like Clifford Elk (MIC), Kgotso Schoeman (Kagiso Trust), Tanya Slabbert or Sonja Sebotsa (Women's Development Bank) and (my shareholder) Salukazi Dakile-Hlongwane (Nozala).

Also some people who manage BEE compliance from within major corporates would also have been useful, and I think particularly here of Nolitha Fakude, who's absence from this Council is notable.

In the interests of ensuring consistency in policy, I think it might have been useful for the President to co-opt Philisiwe Buthelezi from the National Empowerment Fund, but perhaps her role will be like that of the BEE Unit of the DTI, which is (I assume) to guide and support the Council.

But that said, I am still very impressed.

(ENDS)

Oy, Zumachine Gun - if you're reading this do as Kevin says (this is Paul writing).

Caird BEE consultation methodology

Caird follows a very strict implementation methodology on all our engagements.

Understand the client's business

This is a singularly vital aspect in any consultation. Without a firm understanding of a company's internal and external workings it is not possible to develop any working BEE solutions. Often the codes' requirements cannot and will not fit into a client's business environment – and it is only with a complete understanding of the client's business that a working empowerment solution can be developed.

Know the industry that the client operates in

A simple requirement that is too often overlooked. Caird does not subscribe to the notion that more BEE points means more business but we firmly believe that every company must operate within the industry points' average. Caird conducts a comprehensive analysis for benchmarking purposes. We then plan our consultation to meeting this average in the shortest amount of time.

Ensure that all the correct people are involved in the process

In smaller companies this is generally an easier process because it is typically the CEO who manages the process. In larger companies there are many more people that are involved in the process – this ranges from ExCo through to sales people. Once we start implementing our balanced scorecard measurement process we are able to include almost every person in the organisation in the process.

Conduct a thorough as-is assessment

When reading a map there is no way you will ever get to your destination unless you know where you are at the moment. The as-is assessment shows where the company sits on the scorecard – both intentionally and un-intentionally (in other words points were found in the organisation that were a happy accident). It is not advisable to use the last verification certificate as a benchmark as things change and the same score might not be achieved in the next assessment.

Establish what the client would like to achieve on the scorecard and manage these expectations

Transformation is like a diet – it can take years of dedication to the programme to achieve the desired results. A client may want an incredibly high score that is not achievable in the short term. It is our job to ensure that we set realistic targets at the outset. We may work with the verification agency at a very early stage to ensure that whatever we do will be acceptable to them.

Look for points within the company first

It is amazing how many consultants fail to observe this point. We have seen companies spend hundreds of thousands on enterprise development without knowing that the points that they have just bought could be found within the company.

Bring in additional expertise

Caird expertise lies in BEE compliance. We have a broad knowledge of all the elements in all the scorecards. In some circumstances it is necessary to supplement this with legal, financial, HR etc experts. We have a network of experts that we draw on where necessary.

Implement a transformation balanced scorecard

This scorecard here refers to Kaplan and Norton's balanced scorecard. The Kaplan and Norton scorecard ties up business goals with an individual's key performance areas (KPAs) and links their performance to the overall goals of the company. In this way every person in the organisation knows what their involvement is in the overall transformation process.

Be part of the verification process

Caird comiles a logical verification file that makes it easy for the verification agency to perform the assessment in the shortest possible time.  If there are any outstanding issues we take care of them and report back to the client.  We analyse the preliminary assessment to make sure that it is accurate and correct all mistakes with the verification agency.

Judgment of the SCA in City of Tshwane vs the Engineering Council of SA

It is perhaps as well at the outset to make it clear what this case is not about. It is not about the application of the Employment Equity Act in the Tshwane Metropolitan Municipality.

M J D Wallis Acting Judge of Appeal  - The Supreme Court of Appeal of South Africa

Damn - this is such a messy case he could have made some obiter statement about the intention of the EE Act and how it is being implemented in the public sector. 

Zuma appoints members of BBBEE Advisory Council

I just got a call from Mzwandile Jacks telling me about the BEE Advisory Council that's just been announced.  This is what it looks like

1. Minister of Trade and Industry, Rob Davies.
2. Minister of Labour, Membathisi Mdladlana
3. Minister of Economic Development, Ebrahim Patel
4. Minister of Women, Children and Persons with Disabilities. Noluthando Mayende-Sibiya.
5. Professor Mohammed I. Jahed, professor of macro-economic policy, economics and public finance at the Wits University Graduate School of Public and Development Management.
6. Prof Eltie Links, a professor extraordinaire at University of Stellenbosch Business School
7. Wendy Lucas-Bull, a businesswoman and the founder of Peotona Group Holdings
8. Andile Lungisa, Chairperson of the National Youth Development Agency
9.  Sebenzile Matsebula, an independent consultant and former Director in the Office on the Status of Disabled Persons in the Presidency
10. Jerry Vilakazi, chief executive officer of Business Unity South Africa
11. Dumisani Mthalane, a member of the National Working Committee of the South African National Civics Organisation
12. Ellen Tshabalala, a business and management consultant with expertise in small, medium and micro-sized enterprises development, banking and marketing.
13. Adv Matshego Ramagaga, Vice-President of Black Lawyers Association
14. Tsakani Matshazi, President of the Association of Black Accountants and Vice-President of the Confederation of Black Business Organisations
15. Sidumo Dlamini, President of the Congress of South African Trade Unions
16. Sandile Zungu, businessman with extensive experience having served in various companies at a senior level including NAIL and Denel.
17. Don Mkhwanazi, a former president of the Black Management Forum
18. Dr Claudia Manning, businesswoman
19. Chantyl Mulder, senior executive for transformation and growth at the SA Institute of Chartered Accountants, who has served as facilitator of the BEE Charter process amongst other work on economic transformation.

It's the required 19 people with the exeception of the President who is required in terms of section 6(a) of the BEE Act.  I wonder if this will have an impact on the legitimacy of the council.

I would have liked to see more business representation.

Jacob Zuma on plans for economic transformation

Zuma's ANC letter beautifully precised by Moneyweb as "ANC president responds to the concerns raised by the BMF over Eskom and other SOE's". 

A few features/quotes

• One of the key focus areas of the ANC government is economic transformation.
• We emphasise that the creation of decent work will be at the centre of our economic policies and will influence our investment attraction and job-creation initiatives.

To achieve this, we said we would utilise state levers such as procurement, licensing and financial support to assist small and medium enterprises as well as to promote the implementation of Broad-Based Black Economic Empowerment (BBBEE) and affirmative action policies. These policies must not just benefit a few but should be extended to a broad section, especially the workers, youth, women and people with disabilities.

(You know where licensing comes in - good old section 10)

And then a reference to the BMF (who now deny that they ever suggested Bobby is racist, but they want the board to resign).  And now for a post within a post.  This is from November the 9th (Business Report) in which they called for the resignation of the board and threw in a few choice epithets.

Mnyaka said the problems at the power utility stemmed from an ideological disconnection between the strategic imperatives of the ANC government and the board led by its chairman Bobby Godsell, as well as lack of clarity between his and Maroga's role. She added that Maroga was a victim of "anti-transformation people with a racist agenda" at the electricity parastatal.

'nuff sed about that.  Back to Zumachine Gun

• Our meetings with black business sensitised us to some actions of government which serve to hamper the development of small entrepreneurs. One of these is the delays in paying small businesses.
  
  During the election campaign we said we would change the way in which government works, and that we would ensure faster delivery. Treasury Regulations on the approval of expenditure in government states that unless determined otherwise in a contract or other agreement, all payments due to creditors must be settled within 30 days from receipt of an invoice or, in the case of civil claims, from the date of settlement or court judgment.
  
  We have instructed all government departments to comply with this regulation without delay.
• To further streamline our transformation work, we are currently in the process of appointing a BBBEE Advisory Council which in terms of the BBBEE Act will be chaired by the President of the Republic. This process should be completed in a few weeks’ time. The Council’s responsibility will be among others to advise government on black economic empowerment, monitor implementation and review progress in achieving black economic empowerment.

That's about it.  You can read the whole thing here.

Tiger by the tale

  I was sent a letter that Tiger Brands has sent out to its suppliers.  Sincerely signed by Peter Matlare, the letter informs us that

Tiger Brands will be taking a (far) more demanding stance on non-compliant suppliers (i.e. level 9) as well as those who achieve minimum compliance, i.e. 7 and 8.  In this regard, we confirm that suppliers with a BBBEE status of levels 9, 8 and 7, will be expected to evolve two levels per year, until a minimum level of 5 is achieved and thereafter one level per year.  It is also confirmed that suppliers who are deficient in these expectations will be granted a three-month grace period, with Tiger Brands thereafter being forced to consider alternatives.

It then requires each supplier

to please confirm your current rating as well forward a detailed plan as to how your organization plans to improve your BBBEE contributor level over the next year.

And this has to be done by the 30th of November, 2008.   Dave Webster of Rapid Transformation Services cc is the person who has been tasked to read through these business plans.  I wonder if this letter applies to ALL their suppliers or just the non-critical suppliers.  I know from my work with another FMCG company that critical raw materials do not really feature in the empowerment equation - perhaps Dave would like to clarify this?

Anyway - I decided that it would be a wonderful excercise to respond to this letter on behalf of a fictitious company called Ben and Jonny's Cellular (BJ for short).  The example is based on a real-life company who are not a supplier to Tiger but happened to receive the letter and then sent it to me.  My views on the shortfallings of the codes have been documented before - so don't expect BJ to be too apologetic.

Ben and Jonny's Cellular Current Empowerment Status

BJ is a generic company with annual turnover in the region of R300million.  Whilst this figure appears to be incredibly high it actually is a very small company employing 12 people and  profit margins running in the region of 3%.  They have been operating for about 10 years and it is because they got in early that they are still going, very few new companies can survive on these margins.

The company is a family owned business who concluded a BEE deal that failed.  The shareholder exited after about 18 months and still owes the current shareholder a few million for his shares.  His 18 months tenure does not allow BJ to use the once empowered, always empowered rule.  This leaves a single shareholder and two white executive males in management.

Staff is an even split of black and white people, with one black woman occupying a middle management post.  The balance of black staff are drivers, caretakers and admin people.  In spite of its small size, BJ operates very efficiently - each staff member has a distinct role.  There is no need to hire more people although they do hire temps on occasion.

They have achieved 12 points out of the 20 for preferential procurement and this is purely because the overwhelming majority of their purchases come from Vodacom and MTN - both of whom score very well.  There is little chance that they will be able to look at the remaining eight points because neither operator is a QSE or has sufficient black ownership.

BJ has a distributor network in many townships throughout South Africa and they spend a large amount of money on enabling and training these distributors.  For this they get 15 points for enterprise development.  They also contribute to numerous charities that gives them the remaining five points.

It must be mentioned that the current economic climate has resulted in a dramatic increase in the number of bad debts and debtors' days.  Their cashflow situation is a little rickety.

Their scorecard looks like this

Ownership - 0
Management - 0
Employment Equity - 3
Skills development - 0
Preferential procurement - 12
Enterprise development - 15
SED - 5

Total - 35

Tiger wants them to move up to at least 45 by the next year.  They've decided to go the whole hog - here follows their BEE plan.

Ben and Jonny's Cellular BEE plan

Ownership

25% of the company will cost the partner a round R10 million.  It is not a very attractive purchase because of its low profit margins so no one is really coming forward to put their money on the table.  This means that the company will have to finance the shares using section 38 (provided they meet the criteria).  They will have to use a lock in clause of at least ten years because it will take this long for the shareholder to pay off the shares.  The shareholder is doubtful whether the new shareholder will be able to increase the market share as this oversubscribed market is showing little signs of growth.  Nevertheless they'll see who will find this business attractive.  Assuming that they do get this right we can expect about 7 points.

Management

The only people who can add any value  to BJ will have to come from one of the operators.  BJ cannot pay anything close to what executives at one of these operators can command - but they'll have to dig deep to bring on another person.  Don't forget - they don't actually need another executive, the company operates very efficiently on the staff they have.  The cost of this person will reduce profit to about 2%.  For this they can expect another 6 points.

Employment equity

This is simple - retrench five of the six white people and hire black people in their place.  The CCMA is not going to look too favourably on this but it's all about points.  They will have to find similarly skilled people or spend many valuable working days on training the new people to meet the BJ standards.  Total points - 12

Skills development

The target is 3% of payroll, and seeing that they have now hired new staff and a new executive the payroll has effectively doubled.  In order to attract the six points for skills development they'll have to send all their black staff on courses for the whole year.  Remember that these six points are all about SPEND - not about qualifications.  The upshot is that the company will lose at least three quarters of the year in productivity.  Total points 6

Preferential procurement

They'll need to find a black middle man who won't be a QSE or EME.  This middle man will supply the same products that the networks do but with  a mark-up.  They can expect about 18 points.  In such a commoditised market very few customers will be willing to pay a premium for these products.  We anticipate that their turnover will drop substantially - in fact will probably push them into the QSE range.

Enterprise development

The company can no longer afford to contribute anything to its distributor network because their overheads have shot up.  As it stands the network have started looking for new suppliers because BJ is no longer a viable option.  No points

SED

Ditto - no money for charities.

BEE score in year one

Ownership - 7
Management - 6
Employment Equity - 12
Skills development - 6
Preferential procurement - 18
Enterprise development - 0
SED - 0

Total - 49

Hey they made it, what about year two

Their dubious business decisions have pushed them down to an EME level.  With the company likely to close down with six months after that.

What about Tiger then?

OK Peter, I've taken the piss.  This is a very extreme example - but I have to warn you that by forcing your empowerment agenda onto your suppliers you stand a great chance of actually causing a fair amount of damage, resulting in job losses and less tax revenue. 

How does this impact on Tiger Brands?  Simple, jobs create consumers.  No jobs - no consumers of your FMCG products.  You lose ultimately.

Perhaps you should go back to the old drawing board and find some other equitable way of encouraging transformation without such potential dire consequences.

Tax breaks for good BEE contributors

Rienzo sent this email to the TipsforTrevor email address.  I have blogged about tax breaks for good contributors before - the idea was put to me by Dave Meintjies.  I think it is brilliant idea.  If you like it as well please send him a similar email.

Dear Mr Manuel,

Our business is built to assist South African businesses in understanding BROAD BASED BEE, and in building strategies that are relevant to them and that not only keep them in business, but make them more competitive and better employers.

One of our biggest criticisms of the BEE Act, the dti's Codes of Good Practice and the interpretation thereof, is that invariably there is a "penalty" approach for non compliance.  It becomes a grudge purchase or unwelcome "additional company tax".

We understand that projects such as ASGISA and JIPSA are crucial in reducing the second economy and reducing the financial burden that transformation is having on the State coffers. Indeed, we firmly believe that the Enterprise Development, Skills Development, and Socio-Economic Development elements of the Scorecard are the keys to putting more of the economy into disadvantaged hands.  These are the cornerstones of broad-based economic empowerment

With the above in mind, we would like to suggest that you explore "tax-break" benefits for companies that can conclusively prove that they are investing in these three elements specifically. Our opinion is that if companies were offered a "carrot" rather than a "stick", we may see more defined efforts in these arenas and less of a focus on finding a well connected business person, to hand more wealth.

We cannot see anything but benefit to the majority of South Africans trapped in the second economy, or to the Government in relief from the responsibility of caring for these people alone.

We would value the opportunity of discussing this with you more.

Good luck with the 2007 budget.

Yours,

----------------------
Rienzo Colpo
The Caird Group
"creating BUSINESS sense out of BEE"