BLACK MANAGEMENT FORUM (BMF) SUBMISSION ON THE REVISED BROAD-BASED BLACK ECONOMIC EMPOWERMENT (BBBEE) CODES OF GOOD PRACTICE

1. INTRODUCTION

The BMF is a non- racial, thought leadership organisation founded in 1976, with the main purpose of influencing socio-economic transformation of our country, in pursuit of socio-economic justice, fairness and equity. Our vision is to be the foremost organisation in the development of managerial leadership and advancing socio-economic transformation of organisations in Southern Africa and beyond.

Over the past two decades, the BMF has been at the forefront of debates around economic transformation and has influenced the development of government policies in areas such as employment equity and Broad-Based Black Economic Empowerment (BBBEE). In 1993, the BMF developed a blueprint for affirmative action, the "Basotho Hat" model which put forward a compelling argument for employment equity targets as the only way to transform apartheid workplaces. Later, BMF members were at the forefront of drafting the Employment Equity act of 1998.

In 1997, the BMF conference in Stellenbosch called for the establishment of a BEE Commission, which was established in 1998 under the auspices of the Black Business Council (BBC). The view at the Conference was that black people should direct and take charge of a new vision for BEE, a process which, until then, had been conceptualised, controlled and driven by the private sector. In 2001, the BBC submitted the landmark BEE Commission report to former president Thabo Mbeki. The report paved the way for the current BEE policy framework, which includes the BEE Strategy (2003) and the BBBEE Codes (2007). Over the past few years, the BMF has been in constant engagements with government on the evolving BEE policy framework.

2. THE REVISED BEE CODES

The BMF welcomes the government's decision to publish for comment the revised BBBEE Codes. Since 2007, there have been a number of challenges related the implementation of the Codes. Within the private sector, many companies adopted a "tick-box" and minimalist approach to compliance. There were loopholes within the Codes that allowed companies to game the system. Companies adopted a "pick-and-choose" approach to implementing BBBEE. They could ignore poor performance in one area and still have an overall high level of compliance. This was partly due to low targets in areas such as skills development, preferential procurement, enterprise development and socio-economic development, where companies could get "free points."

Surveys by the American Society of Training and Development (ASTD) and Business Leadership South Africa (BLSA) have shown that most large companies spend more than 3% of payroll on skills development

The preferential procurement scorecard provided little incentive to procure from black businesses, who have been the biggest losers during the first phase of the implementation of the BEE Codes. The enhanced recognition for value-adding suppliers pushed up the BBBEE recognition levels of many companies.

In enterprise development, companies have avoided direct financial support for beneficiaries. They have looked for "low hanging fruit" in the form of indirect financial support such as early payments. Some companies achieved full compliance only because of early payments. According to the 2011 FM Top Empowerment Companies Survey, 82 JSE companies achieved 100% compliance with this element of BBBEE

In socio-economic development, numerous annual surveys by Trialogue have shown that most large companies spend more than 1% of net profit after tax on corporate social investment (CSI). According to the FM Top Empowerment Companies Survey, 72 JSE companies achieved 100% compliance with this element of BBBEE

As a result, many companies achieved high scores (more than 90% compliance) when looking at their combined scores for preferential procurement, enterprise development and socio-economic development, which allowed them to ignore transformation in other areas. Therefore, we support many of the proposed amendments to the Codes. Discounting of BBBEE status due to non- compliance with priority elements will eliminate the ability of companies to "pick-and-choose" areas of compliance.

It introduces consequences for companies that adopt this approach. The enhanced recognition for black-owned EMEs and higher targets for black-owned companies within the preferential procurement scorecard will address the lack of incentives within the Codes to procure from black-owned companies. We agree with that QSEs should comply with all elements of BBBEE. We welcome the capping of points for early payments and the restriction to black-owned EMEs and QSEs.

3. RECOMMENDATIONS: THE BBBEE FRAMEWORK

WE RECOMMEND THAT:

3.1. The BEE Act must supersede all other laws and policy tools that seek to achieve economic transformation. It must be the country's trumping legal and policy framework. The Department of Trade & Industry (DTI) must lead and champion economic transformation in the country and align all sectors of the economy with the BEE Act.

We note with disappointment the fact that mining, a critical sector of the economy that employs 500 000 people and generates more than 30% of merchandise exports, is the only industry in South Africa that has made no attempt to align with the BEE Act and that the DTI as the champion of economic transformation has not publicly taken steps to address this issue. The mining charter should align itself with the amended BEE Codes.

In its current form, it betrays every principle of empowerment that is contained in the BEE Codes. Mining is the only sector of the economy where there is no requirement for independent verification of BBBEE contributions. None of the mining companies has a BEE certificate. It is the only sector that has made no attempt to align with the BEE Act. We also note with disappointment that the government continues to approve unnecessary sector codes.

So far there are seven sector codes: Information and Communications Technology (ICT); Transport; Property; Construction; Forestry; Tourism; and Chartered Accountancy. In addition, on November 14, the minister of trade and industry released Phase 2 of the Financial Sector Charter (FSC) for public comment. If the FSC charter becomes a sector code, the majority of JSE-listed companies by value will not be measured against the generic BEE Scorecard.

We believe that all sector codes should be abolished. The sector codes have arbitrary deviations from the BEE Codes, which have no rationale. For example, in the ICT sector a company becomes compliant if it has concluded a transaction worth R7.5bn. The sector codes exclude large sectors of the economy from implementing the codes. They introduce added complexity and make it impossible to have cross-sector comparisons of BBBEE performance.

3.2. The government must invest resources and capacity in monitoring the implementation of BBBEE on an ongoing basis.

The proposed BEE Commission should have the resources and capacity to monitor and evaluate the implementation of BBBEE in the public and private sector on an ongoing basis. The Commission should publish an annual report on the State of BBBEE Implementation within the public and private sectors, which is similar to the Commission for Employment Equity (CEE) report. Each organ of state should submit an annual BBBEE report using a consistent template to enable comparisons.

The government should also consider making the monitoring of BBBEE compliance across all levels of the public sector part of the mandate of Auditor General's office. We also call upon the JSE to make it mandatory (part of listing requirements) for companies to report on BBBEE implementation. It must introduce BBBEE reporting guidelines to enable comparisons across sectors. Each listed company must publish its verification certificate and report for public scrutiny.

3.3. There should be consequences for companies that do not comply with BBBEE. Non- compliant companies must be published in a public register and have meaningful fines imposed on them.

BBBEE is still voluntary, although there is a business imperative to transform. We bring to the government's attention the experience of Norway. In 2003, Norway legislated a 40% quota for women on company boards. Implementation was slow during the initial voluntary phase. The successful implementation of the quota was due mainly to sanctions, the toughest of which was the forced dissolution of non-compliant companies. Companies were given four years to meet the quota, which they did achieve. The success of the Norwegian model has sparked a Europe-wide debate about quotas, according to a recent report.

3.4. There should be a requirement that all Exempted Micro-Enterprises (EMEs) should be verified by an accredited agency. The government should also consider implementing a price control mechanism to ensure that EMEs do not get charged exhorbitant fees for BBBEE verification.

We note the proposed amendment that EMEs should only require a verification certificate once and thereafter an accounting officer's letter confirming turnover and black ownership. Although we understand the government's objective of reducing the regulatory and cost burdens on EMEs, we believe that there must be a credible process of confirming EME status, including levels of black ownership and black women ownership in order to prevent fronting. This can only be provided by an accredited verification agency. It is important to note that there is also a cost to providing an accountant's letter. There must be a verification of turnover and black ownership of EMEs.

3.5. The threshold for Exempted Micro-Enterprise (EME) status should be maintained at

R5m and adjusted annually in line with the rate of inflation.

Although we understand the objectives of the government to reduce the regulatory burden on EMEs, we believe that a key objective of government policy must be to achieve an increase in the number of companies who comply with BBBEE. The DTI's research shows that the proposed EME threshold will result in 95% of businesses in the country being exempted from complying with BBBEE.

Instead of celebrating this fact, the government should seek to reverse this statistic. In addition, we believe that this proposed revision will have the unintended consequence of perpetuating fronting through the creation of related companies. Outside Gauteng, a business with a turnover of R10m is significant. Therefore, it is likely that more than 95% of business in other provinces would be exempt from complying with BBBEE. Increasing the threshold for EME status will exempt an unacceptably high number of businesses in other provinces from complying with BBBEE. .

3.6. The BBBEE compliance requirements for Qualifying Small Enterprises (QSE) should be the same as those for large companies

We note that QSEs will only have to comply with two of the proposed priority elements. Ownership is compulsory. But QSEs can then choose between Skills Development and Enterprise and Supplier Development (ESD) for the second priority element. Also, QSEs who do not meet the thresholds in priority elements will have their BBBEE status discounted by only one level compared with two for large enterprises. As stated above, the BMF believes that there must be an increase in the number of companies which fully comply with BBBEE. Also, this proposal will perpetuate the "pick and choose" approach to BBBEE implementation among QSEs.

3.7. The enhanced recognition for black EMEs must be extended to QSEs and large enterprises.

The DTI has called for submissions on how to address black-owned QSEs, given the proposed enhanced recognition for black-owned EMEs. We believe that this enhanced recognition must go beyond EMEs and include QSEs and large enterprises. In order to qualify for such enhanced recognition, black-owned and black woman-owned companies must first achieve a minimum BBBEE status of Level 4. We make this recommendation for two reasons. Firstly, there must be an incentive for companies to achieve more than 25% black ownership. Secondly, there is a mistaken perception that there are many large black-owned companies in the South African economy. But the reality is that there are too few large black-owned and black woman-owned operating companies.

According to the FM Top Empowerment Companies Survey, which excludes mining companies, all of whom do not submit BEE certificates, there are only three black-owned companies on the JSE, of which none is black woman-owned. In the mining sector, African Rainbow Minerals (ARM), Exxaro and Optimum Coal are the only large black-owned companies. The major weakness of the BEE Codes (during the first phase from 2007 to 2012) is that they had no incentives for the development of large black-owned and black woman-owned companies. Given that the

government has called for the development of black industrialists, there must be a renewed push in the form of targeted policy instruments for the creation of large black-owned and black woman- owned operating companies.

3.8. The overall points on the generic scorecard should be capped at 100.

We make this recommendation for simplicity. This will require that bonus points are either discarded or introduced into the main body of the relevant BBBEE element scorecard. We do not agree with the concept of bonus points. If something is a priority it must be included in the main body of the relevant BBBEE element scorecard.

3.9. All BBBEE elements should be priority elements

We note with disappointment that the amended codes have not included management control among the proposed priority elements. We believe that all BBBEE elements should either be priority elements or discarded. It will send the wrong message to say that some BBBEE elements are not priorities. Since 1976, the BMF has been a champion for workplace transformation. In our view, management control and employment equity are critical pillars of BBBEE. Our research shows that companies have made limited achievements in implementing management control and employment equity since the introduction of the employment equity act in 1998. Since the introduction of the BEE Codes in 2007, companies have been able to "pick and choose" areas of compliance.

With high scores in "easy-to-comply" areas such as preferential procurement, enterprise development and socio-economic development, companies could ignore the need to transform management structures.

For example, Murray and Roberts is a Level 3 contributor to BEE but it had zero points for management control and 3.79 points for employment equity at its verification in January 2012. The company had: zero black people out of 33 employees in top management; 7.7% black people in senior management using the ARG compared with a target of 60%; and 17.7% black people in middle management compared with a target of 75%. Despite such shocking performances in the areas of management control and employment equity, the company is a Level 3 contributor to BEE because it achieved 97% compliance (38,75 out of 40 available points) for preferential procurement, enterprise development and socio-economic development.

We reject the view that employment equity has its own legislative framework and should therefore not be a priority within the BBBEE scorecard. The EE Act had glaring shortcomings: it did not directly target company boards; companies could set their own targets; there were no meaningful sanctions or penalties for companies that did not comply; and there was a complete lack of infrastructure to monitor implementation. The EE Act has has not succeeded. For example, the percentage of black people in top management increased from 25.1% in 2001 to 30.5% in 2011 according to an analysis of CEE reports.

The BEE Codes addressed some of these shortcomings. They directly targeted the transformation of boards and introduced challenging targets for compliance. Therefore, our view is that the employment equity act is an inferior and ineffective policy tool for achieving workplace transformation. As stated above, the BEE Act must supersede all other laws and policy tools that seek to achieve economic transformation. It must be the country's trumping legal and policy framework. The DTI should lead and champion economic transformation. It cannot abdicate responsibility for driving the implementation of employment equity.

3.10. The weighting points for management control must be increased to 30 points from a proposed 15 points.

We note with disappointment the fact that the proposed codes have significantly de-emphasised management control with an allocation of 15 weighting points compared with 25 in the current Codes. This is in addition to the decision not to include management control as one of the priority elements. This will perpetuate a narrow form of BEE that which does not recognise the multiple dimensions of empowerment. For this reason and those outlined above, we call upon the government to increase the weighting points for the management control element of BBBEE to 30 points. This will require that:

• The weighting points for ownership are reduced to 20 points from the proposed 25 points
• The weighting points for skills development are reduced to 15 (the status quo) from the proposed 20 points
• The weighting points for enterprise and supplier development (ESD) are reduced to 30 points from 40 points

We recommend the following weighting points for the Generic Scorecard

3.11 BEE Verification agencies must be fully transformed before they can verify the transformation of others. They should be "superior contributors to BBBEE. They must achieve a BBBEE Status of at least that of level 3 contributor to BBBEE and have a minimum of 25% black ownership.

The draft codes before 2007 stipulated that verification agencies had to be "superior contributors to BBBEE." This requirement was withdrawn with the final codes. We recommend that the government should re-introduce this requirement. Verification agencies and auditors who will verify BBBEE contributiosn should be required to have a full verification even if their turnover is below the EME threshold.

4. RECOMMENDATIONS: OWNERSHIP

WE RECOMMEND THAT:

4.1. The targets for broad-based groups and new entrants should be increased to 15% each.

We support the proposed amendments to bring indicators for bonus points into the main body of the ownership scorecard. However, we note with disappointment that the 3% targets for broad- based groups and new entrants (12% of the 25% target for each) within the proposed codes are too low. The current target is 10% for each for bonus points in the ownership scorecard. We do not understand why the target has been reduced. Most transactions outside the mining sector exceed this 3% target. Therefore, we call for a bold increase in the targets to 15% each from 3%.

4.2. There should be a guideline for the composition of BEE transactions

In line with the recommendation above, there should be a renewed push for broad-based ownership that does not compromise the need for anchor shareholders with business and sector expertise who can participate in the running of large companies and drive economic transformation. We recommend that the guideline should specify the following:

• 40% of the 25% target for black business enterprises (10% of the measured entity)
• 30% of the 25% target for employees (7.5% of the measured entity)
• 30% of the 25% target for communities and broad-based groups (7.5% of the measured entity) Therefore, employees, communities and broad-based groups should comprise 60% of ownership initiatives.

4.3. The government should abolish the exclusion principle.

This principle allows listed companies to exclude mandated investments (primarily by pension and provident funds) up to a maximum of 40% from the calculation of black ownership. This results in an effective black ownership target of 15% for listed companies. We do not support this principle because it defeats the objective of achieving 25% black ownership across the economy. The exclusion principle is unfair on large unlisted and mining companies which have a 25% target. The government has never explained to the public the rationale for this arbitrary exclusion.

5. RECOMMENDATIONS: MANAGEMENT CONTROL

WE RECOMMEND THAT:

5.1. The government should increase the weighting points of the management control element to 30 points and ensure that it becomes a priority element of BBBEE

As stated above, we note with disappointment that the proposed codes have reduced the weighting points for management control from 25 points to 15 and not included it as a priority element of BBBEE. We believe that management control and employment equity are critical elements of economic transformation. For the reasons outlined above, we recommend that the government should increase the weighting points for management control to 30 points from the proposed 15 points.

5.2. The government should re-introduce the junior management indicator with a higher target of 88%, which is the percentage of black people within the economically active population (EAP).

We believe that it is premature to abolish the junior management indicator. Our research, based on the latest Commission for Employment Equity (CEE) report, shows that the economy has only achieved 56.9% black participation in junior management using the adjusted recognition for gender (ARG) compared with a target of 80%. Many sectors are still very far from achieving the target: According to the CEE the following sectors have the worst performance for black representation in junior management: mining (36%); construction (46%); and manufacturing (47%).

5.3. The government should note that the formula for calculating the targets for Africans, Coloured and Indians (ACI targets) is incorrect. Such targets will introduce complexity but not affect the scores of corporates or change their behaviour.

We note that the proposed formula for calculating ACI targets is incorrect. According to our research, South Africans of mixed descent are under-represented at top, senior and middle management. They are slightly over-represented at junior management level (13% compared with an EAP of 11%). Therefore, they will have NO IMPACT on the formula (as it should work.) Essentially the formula is there to address over-representation of South Africans of Indian descent who are significantly over-represented at all levels of management. However, this group only accounts for 45 883 people (8.7%) of the people in management.

Since South Africans of Indian descent are still a small percentage of all people in management (despite their over- representation) the formula (as it should work) will result in a marginal difference in the scores (for black targets compared with ACI targets) for the average company using the latest CEE survey as a proxy. The differences in scores are: 0.2 for top management: 0.2 for senior management; and 0.1 for junior management. The ACI targets introduce significant complexity, but will have marginal impact on the actual scores of companies. Therefore, the ACI targets are unlikely to change corporate behaviour.

5.4 We recommend the following management control scorecard weighting points and targets

6. SKILLS DEVELOPMENT

WE RECOMMEND THAT:

6.1 The scorecard must include targets for black women

We note that the proposed skills development scorecard does not include targets for black women as is the case with the current scorecard. We recommend that the government should re-introduce targets for black women - either as separate targets or using the adjusted recognition for gender. We submit that using the adjusted recognition for gender (ARG) will simplify the scorecard and reduce clutter. The scorecard displayed below (with separate targets) is too cumbersome. This will have implications for employment equity scorecard which must use the same way of measuring black women.

6.2 The skills development scorecard should not have separate targets for Africans, Coloured and Indians (ACI targets).

For the reasons outlined above in the employment equity recommendations, we do not believe that it is appropriate to have separate ACI targets.

6.3 We propose the following skills development scorecard

7. ENTERPRISE AND SUPPLIER DEVELOPMENT (ESD)

WE RECOMMEND THAT:

7.1. Government must develop a new indicator and formula for the calculation of local content.

Within the proposed ESD scorecard, local content is in direct opposition to BBBEE. Furthermore, we do not think that the formula for calculating value-adding suppliers is the most appropriate way of measuring and encouraging local content. We propose that an indicator for local content is added to the Enterprise and Supplier Development (ESD) Scorecard and that the formula for calculating local content is adapted from the SABS Standard, Local Goods, Services and Works- Measurement and Verification of Local Content

Local Content = (1- a/b)C where:

A = the total value of imports (including all incidental costs) for the measurement period

B = the sum of total cost of sales and total expenses for the measurement period

C = the targeted points for the indicator

Another option is to convene a task team to develop an alternative means of measuring local content and production, which could include the above formula. This could involve a separate scorecard and measurement system that is not in opposition to BBBEE. Like the BEE Codes, which have evolved over a decade since the promulgation of the BEE Act in 2003, a measurement system would take time to mature.

7.2. The government must re-introduce the enhanced recognition for black-owned professional services providers.

We note that this enhanced recognition does not appear in the amended codes. As stated above, black-owned companies were the biggest losers during the first phase of the implementation of the BEE Codes (2007 - 2012). There was little incentive in the codes to procure from black-owned companies

7.3. The government should note that the indicator for procurement from QSEs and EMEs is the only indicator in the Generic Scorecard whose beneficiaries are not black.

A key principle in the generic scorecard and all its elements is that companies can only score for contributions made to black beneficiaries. For example, in skills development companies can train white employees but they can only account for the portion of spend that is targeted at black beneficiaries for the purposes of BBBEE. This is not the case with the indicator for procurement from QSEs and EMEs.

8. SOCIO-ECONOMIC DEVELOPMENT

WE RECOMMEND THAT:

8.1. The target for Socio-Economic Development (SED) should increase to 2% of net profit after tax. SED should become a priority element of BBBEE

Numerous annual surveys by Trialogue have shown that corporate social investment spend by large companies exceeds the 1% target contained in the codes. Therefore, SED amounts to "free points" for many companies. Therefore, we recommend a higher target for the SED element of BBBEE.

8.2 The government must specify a formula for calculating contributions to entities which have less than 100% black beneficiaries

We note that the DTI has withdrawn Statement 500 on socio-economic development (SED). However, we support the previously proposed amendment which states that the full value of SED contributions made to beneficiaries is recognisable if at least 100% of the value directly benefits black people. However, the statement should also specify the formula for calculating contributions to entities which have less than 100% black beneficiaries. This should be the value of the contribution made multiplied by the percentage that benefits black people.

8.3. The government should not limit SED initiatives to income-generating activities alone

The previously proposed statement had emphasised income-generating SED contributions. We believe that there should be a role for grants and charitable SED contributions.

Issued by the BMF, December 3 2012

Click here to sign up to receive our free daily headline email newsletter