Black economic empowerment (BEE) is a term that is generally misunderstood and feared by industry in general.
Some believe that the need to have the right BEE credentials is limited to service industries where government or government departments are their main customers. Others believe that only JSE listed companies are compelled to acquire black equity partners often by offering significant shareholdings at attractive prices where the `loan' can be paid back through future generation of dividends. Note that the use of the term `black persons' is generic and means indigenous Africans, Coloureds and Indians.
The fact is that BEE will eventually affect every company from the smallest to the largest and now is the right time to ensure that strategies are put in place to be able to achieve the required goals. BEE was adopted by our government in an attempt to address the inequities of the past, particularly the conditions that existed under apartheid, although the structured exclusion of black people from economic power began in the late 1800s with the first dispossession of land, and continued throughout the 20th century with the first Mines and Works Act (1911), the Land Act of 1913 and then the raft of legislation introduced under the apartheid structure from 1948 onwards. It was the latter that was most significant in that it confined the majority of (black) African people to homeland areas and created a job reservation policy for whites that was reinforced by a vastly inferior education system for black learners which resulted in limited skills being acquired by this sector of the population, further restricting their opportunities in the labour market.
The definition of broad-based BEE is an integrated and coherent socio-economic process that will directly contribute to the economic transformation of this country and bring about significant increases in the number of black people that manage, own, and control the country's economy, as well as significant decreases in income inequalities. The DTI document stresses that is not limited to transferring corporate assets from white to black ownership. The BEE process in fact includes elements of human resource development, employment equity, enterprise development, preferential procurement, as well as investment, ownership and control of enterprises and economic assets.
In general the objectives of the strategy are as follows:
* To rapidly and substantially increase the number of black people who have ownership and or control of the business.
* To rapidly and substantially increase the number of black people in executive and senior management positions.
* To increase the overall number of black-owned businesses in the country.
* To widely increase skills and infrastructure, particularly in currently under-developed areas.
* To accelerate economic growth and social development.
* To close the income gap between race groups.
In order to measure how companies have achieved its targets the DTI has established a scorecard that companies can use to determine where they currently stand and what they need to do to improve compliance.
The total score possible on this card is 100% and this is made up of the following components:
* Equity ownership 20%.
* Management (percentage of black persons in executive management and/or executive board and board committees) 10%.
* Employment equity 10%.
* Skills development (expenditure as a percentage of payroll) 20%.
* Preferential procurement (procurement from black owned and empowered enterprises as a proportion of total procurement) 20%.
* Enterprise development (investment in black owned and empowered enterprises as a proportion of total assets) 10%.
* Residual (basically corporate social responsibility spending on health, education, poverty alleviation, community development etc.) 10%.
Each of these objectives on the scorecard has a target that should be met. Examples are that 3% of the payroll should be spent on skills development and that preferential procurement should be 50%. Note that in terms of procurement, organisations have to have a system in place to verify the BEE status of suppliers, as there have been many instances of window dressing. As even the calculation of one's own BEE status is complex it is advisable to make use of DTI-approved accreditation agencies such as EmpowerDex. Using the total score achieved allows a company to see where it stands. A total score of 65% and above labels the company as a good contributor to broad-based BEE, above 40% and below 65% defines a satisfactory contributor, while a score of below 40% reflects a limited contribution to broad-based BEE.
This strategy, passed by government in 2003, makes it clear to companies what is expected from them. Before that many actions were ad hoc with procurement from BEE companies being seen as a very positive move although this now only amounts to 20% of the scorecard. Another Gauteng-based company had a very innovative idea with logistics. Instead of running its own fleet of trucks for delivery and employing the drivers, it decided to make loans to the latter so that they could purchase their own vehicles and then be contracted to carry out deliveries. This obviously contributed strongly to enterprise development.
Government can and will exert pressure on companies that do not seem to be making headway on BEE. Sasol was widely criticised when the new CEO appointed was white and was criticised when its board was also seen to be not BEE representative. The company later appointed a black woman to the board. Even foreign-based companies are starting to take notice and while black ownership could be problematic they are working hard on the other aspects including employment equity, preferential procurement and satisfying the needs of the community in which they reside. Not least here is comprehensive HIV/Aids programmes where counselling and antiretrovirals are provided free of charge. The example of Endress+Hauser should also be mentioned as it distributed part of the equity in its local operations to both black and white staff. Many companies, by the way, throughout the world have made use of this principle and it is amazing to see how productivity improves if you are going to actually share in the eventual profits.
Governmental shopping
Government and its agencies are also major buyers of locally manufactured industrial products, these including construction materials (eg, cement and steel), food, pharmaceuticals, fuel, vehicles and paper. Obviously government will give preferential treatment to companies that embody the principles of BEE. Then there are the SPII grants to industry and another organ of the government, the IDC has a major influence on the construction of new projects such as the hoped for new aluminium smelter in Coega. In a recent article in 'Engineering News' it was stated that in the nine months to March 2005 of the R3,8 billion approved by the IDC for 181 projects 72% in value was for medium sized enterprises while finance to empowerment companies represented 83% of the total value.
Major charters negotiated amongst others with the liquid fuels, mining and financial service industries bind companies in these sectors to certain targets for equity transfer and other actions. While government has ruled out an approach of a charter for every sector, its scorecard approach encourages voluntary self-assessment. Government has also stated that it will use a number of policy instruments to achieve its objectives in terms of BEE. These include legislation and regulation, preferential procurement, institutional support, financial and other incentive schemes. In addition, government will seek partnerships with the private sector to accelerate the BEE process. In this respect indirect empowerment where private companies invest in black-owned enterprises or create joint ventures with black-owned businesses will be seen in a very favourable light. Then there is the government's existing Export and Marketing Assistance Scheme where again a substantial percentage will be allocated to BEE participants.
Definitions
In terms of the definitions a black enterprise is one where 50,1% or more is owned by black people who also have substantial management control. A black empowered enterprise is one in which at least 25,1% is in black hands and there is substantial management control. A third category is a black women-owned enterprise where at least 25,1 % of the equity is in the hands of black women.
Not to be viewed in a negative light
BEE is here to stay and should not be viewed in a negative light as the inequalities of the past do need to be addressed. The lack of skills amongst black employees as a result of their poorer education in the past can be addressed through training, skills development and mentoring. With the current black education system being more on a par with that previously enjoyed by the white population more skilled personnel will be available in the future and this should reduce the pressure experienced by companies as headhunters look for qualified black people. Over time it is expected that equity will be achieved in industry and that is both right and justifiable.
Dr Maurice McDowell has many years' experience as a technical journalist, editor, business manager and research scientist. His third party analyses of world-class companies and processes, as well as his insight into industry and technology trends are well respected.
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