Some fine tuning needed

Some aspects of Black Economic Empowerment (BEE), one of the anchor policies of government since 1994 is in need of some fine-tuning if it is to achieve its goal of broadening the base of meaningful economic empowerment for the majority of te population. This is the main message of a just-released KPMG/ IQuad-survey.

Indicators that measure the incidence of BEE-fronting should be introduced into law, both to accelerate the process of transformation and to deter fraud when companies tender for government business, according to the study done among  2 000 small, medium and large companies.

Fronting entails the nomination of individuals to achieve BEE ownership points, while these co-owners usually do not serve in executive positions in these companies and some of them have no idea of their rights and/or responsibilities as shareholders.

This practice lies at the heart of the phenomenon of tenderpreneurship, which has become a highly contentious issue in recent months and a subject of considerable tension between government and some of the members of the governing alliance, especially organised labour.

The initial draft of the codes of good practice for BEE score-carding included measures to monitor the risk of fronting. These were however left out when the codes were eventually gazetted in early 2007.

Sandile Hlophe, KPMG managing director of restructuring, said that “a lot of black businessmen make a career of winning tenders. Governments says it wants to buy from black people, but it needs to improve the rules. It should buy from black companies, not black individuals. They need to verify the entire supply chain”.

Fronting is driven by the absence of a clear set of rules and adequate checks and balances. While fronting is supposed to be addressed by other anti-corruption legislation it is not happening in practice, Hlophe said.

Besides the fact that fronting frustrates the ambitions to make BEE broad-based, not only is “business not transformed, skills development is not taking place, and it drives up the cost of doing business,” he said and described fronting as the enemy of transformation.

A former director-general of the department of trade and industry and previous executive director of BHP Billliton, Savareh Rustomjee, also warned against the dangers of over-emphasis on narrow empowerment objectives, in a recent article.. In the wake of the Kumba-Mittal dispute over mineral rights, he wrote that “the department (of mineral resources) seems to have over-emphasised narrow empowerment objectives to the detriment of other public policy objectives.

“This also demonstrates the emerging power and influence of a segment of the domestic black capitalist class, intent on leveraging the act to capture rights to future mineral rents at any cost.”

According to the KPMG/IQuad survey, prevailing economic conditions have impacted considerably on BEE. While companies fared better when it came to employment equity, because people did not move around as much as before and the companies could maintain their employment equity better, the economic climate had a negative effect on the attention given to ownership, management control and socio-economic development.

“Preferential procurement became more important because companies can shift the responsibility to their suppliers by putting pressure on them to transform.

“Other issues took a back seat due to the recession. There was no money available for ownership transactions, directors and executive management remained stagnant, and a lot of socio-economic development budgets got cut,” Hlophe said.

The survey also found that there is now a positive trend towards broader public involvement in ownership patterns than in the past.
KPMG and iQuad found that this shift in focus has meant that some ownership structures solely involving BEE investors were being reconsidered to incorporate employee ownership and broad-based public participation schemes which, if properly implemented, could improve the attraction and retention of key black employees or improve the public image and perception of a company.

There has also been a move towards addressing internal BEE people elements such as skills development and employment equity, which have not previously been areas of focus.

The survey showed that 57% of respondents felt that having a verified broad-based BEE certificate was essential to the sustainability of their businesses, while a further 35% agreed that a certificate was a necessary compliance requirement.

However, in spite of this swing in the pendulum, company-compliance among most sectors of the scorecard-rated is  below last year's figures.
Ownership went down 0,22 points to 11,83 points out of a target of 20 points, employment equity averaged a decrease of 0,39 points, management control was down by more than a point, and so was socio-economic development.

Hlope said that the weaker compliance was somewhat worrisome considering that compliance targets would see a rise in 2012.

"The best way for companies to prepare for this will be to keep on developing their staff into skilled and management positions, and thereby also standing a better chance of retaining staff."