‘Broad-based’ gets dumped from BEE codes

Sandile Zungu
Sandile Zungu

This may end incentives to include workers and community groups in empowerment deals, writes Dewald van Rensburg

Lawyers and black economic empowerment (BEE) consultants are running scared after the department of trade and industry (dti) this week, out of the blue, jettisoned much of the “broad-based” part of the broad-based black economic empowerment codes.

Until Tuesday, anyone familiar with the new Codes of Good Practice would have said a company could attain the full 25 out of 25 points for black ownership if it had a large and well-designed employee share-ownership programme (Esop) or broad-based ownership scheme (BBOS).

Then, on Tuesday, a short “notice of clarification” appeared in the Government Gazette.

Now Esops and BBOS can give you a maximum of only three points – even if they account for half the company’s ownership.

Even if an Esop or BBOS isn’t completely “passive”, but has a real say in the company, the dti will still deem them voiceless – giving zero points for black voting rights.

The move could make countless companies’ existing BEE scores crash and burn – and in effect stop the practice of including workers and community groups in empowerment deals.

It is a big victory for the organised push towards a notion of BEE centred on large, active shareholdings in the hands of “black industrialists”, as advocated by a resurgent black business lobby.

One legal source said the change probably followed “a lot of lobbying” from black business movements.

Sandile Zungu, adviser to President Jacob Zuma and a member of the Broad-Based Black Economic Empowerment Advisory Council, has been a high-profile critic of broad-based schemes.

Zuma’s recent endorsement of calculations putting “meaningful” black ownership of shares on the JSE at only 3% also relies on excluding almost all broad-based shareholders because they are “passive”.

The corporate landscape is full of Esops contributing large chunks of companies’ BEE ratings. If the “clarification” sticks, it will knock down the BEE ratings of an indeterminable number of companies – and arguably put an end to the practice of broad-based black ownership schemes for workers or communities.

BEE consultants and lawyers, many of whom have probably been advising clients to create Esops and BBOS’s until this week, have been left speechless.

According to Keith Levenstein, CEO of BEE consultancy EconoBEE, this leaves Esops and BBOS “virtually useless”.

His initial reaction was that the notice was a mistake, and he still believes it will be retracted soon.

Even if the dti really intended to make this a policy, it could not legally do it just by publishing a “clarification”, he told City Press.

“I’ve spoken to some lawyers and they have already been briefed by some multinationals,” he said. He was speaking less than two days after the notice appeared. “It’s pretty weird the way they are doing it. I’m sure they will change it.”

Safiyya Patel, partner at law firm Webber Wentzel, described the clarification as a “clear violation of several legal and procedural requirements”.

Legally, the dti can only change the BEE codes by first publishing a draft and allowing 60 days for comments.

Patel agreed with Levenstein, saying there was already “a lot of activity”, with companies “evaluating their transactions and taking legal advice”.

“They are looking at all options,” she told City Press.

“It is not a clarification; it is an amendment. My sense is that there are two routes. Either the dti will realise it did not follow the process and withdraw the notice – or someone is going to take them on.”

Speaking to City Press on Friday, Zungu – who is also vice-president of the Black Business Council – said, in his view, “all the dti has done is clarify”.

“It clarified that broad-based is important, but that there is a greater weighting on the need to create black industrialists.”

Lawyers and consultants in the private sector might be shocked when looking at it in a “legalistic” way, but ultimately “the arbiter will be the courts”, Zungu told City Press.

“We say go back to the letter and spirit of BEE.”

Companies should not be ticking boxes just to maximise their BEE score anyway, he argued.

The three points companies could get for broad-based schemes were “still meaningful”, he added.

The new codes had an overall focus on clamping down on fronting and, according to Zungu, the demotion of broad-based schemes represented “low-hanging fruit” in the war against sham empowerment.

“It is debatable if workers even benefit [from Esops].

“Esops are very vulnerable to fronting,” Zungu claimed.

There had been many broad-based schemes that were really just “shams”, Levenstein agreed. He said he could not mention names, but cited Esops where the shares never “vested” and thus became the property of an individual worker.

“Schemes that say you lose your shares when you get retrenched shouldn’t be counted.”

He also said BBOS indefinitely held shares in trust for ill-defined constituencies to pay out sporadic benefits – but again, never actually gave any identifiable human being ownership of anything.

“The principle is that it has to be traceable to a black person. Big companies do it wonderfully,” said Levenstein and mentioned Exxaro, Sasol and MTN.

He blamed the existence of bogus schemes on the lack of power among BEE-verification agencies.

There were about 400 of them and if a verifier refused to count a client’s scheme, that client could shop around for a more pliable agency, he said.

The original BEE codes date from 2007 and the new 2013 codes came into effect this week after an 18-month transition period.

Between the publishing of the second generation of BEE codes in 2013 and now, there had not been any indication that the dti intended to limit the role of broad- based schemes in this way, he said.

It is something of a double whammy, because the hallmark of the new codes is that ownership has been elevated to a non-negotiable “priority” element.

Patel said: “If you score less than 10 out of 25 points on ownership, you get penalised by dropping one BEE level. Many companies are going to suffer this ‘double dip’.”

The dti notice also slipped in an extension of the transition period for aligning the various sectoral empowerment charters with the generic codes.

These set slightly different rules for several large sectors, including finance, construction and transport.

These need to be aligned with the normal “generic” codes by the end of October, the dti says.

This would mean the sectoral councils tasked with these charters would have to draft their new charters soon, said Patel. There was also no reason to suppose they would not follow the new rule on broad-based structures, she added.

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