BLACK ECONOMIC EMPOWERMENT AND CORPORATE GOVERNANCE – BY CLAIRE TUCKER

Thursday, October 07, 2004
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The controversy between President Mbeki and Sasol in 2002 over statements Sasol made in foreign listing material regarding black economic empowerment highlighted the need for boardroom attention to focus on BEE and the risks and opportunities it presents to a business. 
The Controversy Between President Mbeki And Sasol In 2002 Over Statements Sasol Made In Foreign Listing Material Regarding Black Economic Empowerment Highlighted The Need For Boardroom Attention To Focus On BEE And The Risks And Opportunities It Presents To A Business. 
In This Instance I Am Not Referring So Much To The "Risks" That BEE Poses To A Company's Bottom Line Which President Mbeki Properly Considered To Be An Incorrect Characterisation Of BEE But To The Reputation And Business Risks Posed By A Failure To Embark On BEE Or, Alternatively, A Failure To Properly Embark On BEE.
Before Any Company Embarks On A BEE Process It Is Important For The Board To Appreciate What Exactly BEE Is And What It Is Not. BEE Is Not Only About "Ownership" Of An Institution By Black People. In Fact "Ownership" Is Only Accorded 20 Percent Of The Measurement Points In The Draft "Balanced Scorecard" Devised By The Department Of Trade And Industry (DTI) To Evaluate BEE. Rather, In Terms Of The Scorecard BEE And The BEE Act, 2003 Is A Measurement Of Ownership And Control By Black People Of A Stake In The Enterprise Plus The Extent To Which The Institution Meets Employment Equity Targets, Develops The Skills Base Of Its Black Employees, Procures Goods And Services From Black Owned Suppliers, Enters Into Joint Ventures With Black Businesses And Assists In The Creation Of Black Businesses. Nevertheless It Must Be Noted That Transfer Of Ownership And Control Of A Significant Amount Of The Assets In The South African Economy To Black People Is A Key Government Priority And, As A Result, Government Pressure Is Focussed On The Ownership And Control Aspect Of BEE. 
The National Strategy on BEE produced by DTI states that BEE is underpinned by the following principles:

BEE is "broad-based" – i.e. BEE seeks to deracialise all aspects of the South African economy and fast track marginalised communities into the mainstream;
BEE is an inclusive process – it should empower as many people as possible;
BEE is associated with good governance – BEE is also about improving the quality and transparency of all economic activity – it must be associated with the highest standards of corporate governance; and
BEE is part of our growth strategy – BEE is about growth, development and enterprise development and not merely the redistribution of existing wealth.

The Emphasis On Corporate Governance In The National Strategy Is More Than A Fashionable Reference To One Of The Catchwords Of The Present Day. The Initial Wave Of BEE Deals In A Number Of Sectors, Particularly Those Dependent On State Procurement Contracts, Was Characterised By A Large Degree Of Fronting, Tokenism And Transactions That Could Even Be Characterised As Fraudulent. 
In This Initial Wave Of Transactions Very Little Regard Was Paid To Ensuring The BEE Deals Undertaken Were Underpinned By Sound Business Principles Or Could Stand Corporate Governance Scrutiny. Rather Their Objective Was To Create A Quick Fix "Black Face" For A Business While Retaining Control And Benefit Of The Operations Of The Company, And Contracts That Resulted From The "Black Face", In The Hands Of The Original Shareholders. These Sorts Of Schemes Gave Rise To Labyrinthine Shareholders Agreements, Sub-Contractors Agreements, Agency Agreements And Management Agreements Which All Sought To Impose A Risk/Benefit Result Different To The One That Would Appear Logically To Flow From The Structure Of The Company On Paper. For Example, In Many Instances Companies Sought To Create A Subsidiary "Owned" By Various Black Employees, This Company, With A Majority Black Shareholders, Was The Vehicle Through Which The Company Tendered. No Shareholders Meetings Of The Tendering Company Would Be Held, No Directors Would Be Appointed And Money Would Simply Flow Through The Tendering Entity Like A Sieve, Possibly With A Small Amount Left In The Tendering Company As The "BEE Component". 
From A Corporate Governance Perspective This Sort Of Conduct Is Inappropriate For The Company Creating The Tendering Company For A Number Of Reasons:

It involves a criminal risk for the company as these arrangements often essentially lead to fraudulent misrepresentations in the competitive bidding process;
These schemes are always short term and require adjustment each time the particular sort of scheme is exposed as being a sham;
They divert the attention of the board from what should be the real long term goal of a BEE project, namely really transforming the company into a broad based BEE compliant company and also of achieving the highest score possible given the particular circumstances of the company in terms of the balanced scorecard; and
They involve reputational risk as this sort behaviour can land a company on the front pages of the newspaper;

Nevertheless, these sort of schemes continue to go unchecked in many sectors and the companies employing these schemes continue to be awarded tenders. For so long as this is the case they disincentivise other companies in the market from embarking on real empowerment initiatives. To some extent, the focus, flowing from the BEE Act, on assessing "broad-based" empowerment, particularly in the tender sector should make this sort of "fronting" less of a possibility. In addition, a greater degree of auditing and scrutiny of "black" tendering entities will hopefully become a feature in the future. 
Before the BEE Act commenced, measuring BEE was difficult as there were no real benchmarks set and this allowed for manipulation of the system. Often in the past, each time a person tendered to provide goods or services to an entity a "BEE questionnaire" was sent – this generally bore very little similarity to any one of the other "BEE questionnaires" previously sent by other contractors and very little auditing of the answers was undertaken. In particular there was too little emphasis on following the flow of money through the contract and determining which entity or persons would actually perform the services or provide the goods in terms of the contract and which entity or persons actually stood to gain financially from the tender. 
The BEE Act should impose a common framework in terms of which BEE is measured and "broad-based" BEE rather than simply ownership should become the standard against which the BEE status of an enterprise is measured. This should come about once various Codes of Good Practice have been published under the BEE Act. In the interim the "BEE questionnaires" continue to flow.
The BEE Act does not itself provide for any monitoring or evaluation mechanism. The evaluation of BEE has also been inconsistent in the past. Recognising this, most industry charters provide for a "Charter Council" which is responsible for measuring compliance with the targets set and determining whether a particular practice meets the charter requirements or not. In the mining and petroleum sectors the state is the evaluation agency but this approach is unlikely to be applied widely to other sectors. In addition, various ratings agencies have been establishing themselves within the market, but these too have been inconsistent in their application of the Draft Balanced Scorecard and their interpretation of BEE principles and as yet none has been officially recognised by the DTI. As such, monitoring and evaluation of BEE is likely to remain, for some time, in the hands of the entity to whom one is tendering to provide goods and services, although, hopefully, the criteria will become standardised once officially sanctioned Codes of Good Practice have been published.
Good corporate governance requires of the board, amongst other things, transparency in the conduct of business, adherence to the law and decisions in the long term best interests of the company. As such, the provisions of the BEE Act and the Draft Scorecard should be studied in boardrooms across the country and real empowerment initiatives implemented that make the company a good corporate citizen of South Africa and harnesses the benefits offered by empowerment at all levels of the company.