Africa, Issue, Main Menu, World — October 2, 2010 at 4:43 am

White Collar Gap

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It is paradoxical that after the abolition of the apartheid regime, South Africa’s business environment is still marked by an obsession with race. This time, however, the motives are completely different than they were twenty years ago. Since the government passed Black Economic Empowerment (BEE) Act 53 in late 2003, companies have transferred tens of millions of dollars worth of shares of stock to black investors and placed black employees in management positions. Behind the pervasive goal of redressing the injustices of apartheid lies the ambition of building a long-lasting, self-sustaining black capitalist class. But a pitfall of such an initiative is a short-lived façade that features companies implementing the fastest and easiest policies to increase their empowerment compliance standing. The question, then, is how to prevent this scavenger hunt from arising.

Black Economic Empowerment Act 53 responds in great part to multifaceted societal pressures on the government to link the redistribution process to South Africa’s sound economic growth. Figures suggest that after the fall of the apartheid regime in 1994, too little has been achieved in this aspect. Having sustained a 5% growth rate for the past 7 years, the vast majority of the economy is still controlled by whites, who roughly represent 4% of the population. During the past 11 years, the number of blacks at senior levels in the private sector only increased by 25%. The ruling African National Congress party has therefore been expected to take more effective action.

As a result, the 2003 legislation prescribes targets and action plans that vary across industries, but which in many cases have been criticized for being too ambitious. For example, the financial services industry targets for 2010 are 25% for ownership and 40% for senior positions. But up-to-date results suggest that these goals are not realistic. So far, only 7% of the stock exchange has been transferred. The implementation of empowerment policies across the economy is complicated by the fact that BEE compliance is only mandatory for state-owned companies.

Therefore, the government has had to design several incentives to allow black empowerment to spread into the private sector. For all companies, compliance with the BEE Act is assessed through a scorecard that places different weights on the following components: ownership (including black women), management control, employment equity, skills development, preferential procurement, enterprise development, and corporate social investment. The main method to perpetuate compliance has been the extension of preferential treatment to corporations with the highest scorecard points. Consequently, companies that depend heavily on government contracts, like those in the mining industry, have been obliged to increase their scores.

BEE-compliant corporations have also been expected to extend a similar preferential procurement to their own suppliers. Therefore, the competitiveness of companies has become increasingly dependent on their scorecard points. This condition has created a whole new market for consultants, accountants, and lawyers who specialize in “BEE deals.” The question that arises is whether or not a good scorecard standing is indicative of solid foundations for sustainable black empowerment.

One point that causes concern is the passive role that the government has taken with respect to the training of black employees. The lack of economic means of the black population is aggravated by a shortage of skills and technical knowledge. Even though blacks have been placed in management positions, they have mainly been assigned to non-operational areas where there is a narrow scope for leadership development. They mostly work on advising in social investment areas. Cees Bruggemans, Chief Economist of First National Bank, explains that the government has not only left training mainly in the hands of the private sector, but has also underemphasized investment in education and healthcare. Even though the “skills development” component counts for 20% on the BEE scorecard, long-term empowerment requires greater contributions from the government on this front.

Some analysts have also claimed that the BEE initiative will fail if it does not stimulate entrepreneurship. Bruggemans believes that “BEE allocates greater weight to the redistribution of existing enterprises as opposed to the development of new black-owned enterprises.” In fact, 60% of the BEE scorecard weighs in favor of redistribution through the ownership, employment, and training components. Only a mere 10% stimulates entrepreneurship through the “enterprise development” element, which awards points for investing in black-owned or black-empowered firms. Paul Janisch, a BEE deal consultant for The Caird Group, explains that “this investment is between 3.3% and 5% of EBITDA (earnings before interest, taxes, depreciation, and amortization). For any company, this is a substantial amount of money, but herein lie business opportunities.” Janisch argues that companies should take advantage of enterprise development in order to not only improve their BEE profile, but also increase distribution channels and build synergies. Therefore, greater incentives should be aimed towards small business creation.

A final element of concern, which is not contemplated in the scorecards, is the financing of BEE equity transfers. In other words, how are members of the black population suddenly expected to have enough capital to become stockholders and entrepreneurs? Even though the government has allocated funds for the financing of share purchases, this responsibility has also been placed mainly on the private sector’s shoulders. The consequence of this lack of policy is that black share buyers have accumulated enormous amounts of debt that is serviced through repayment dividends. Transferred stocks therefore become forced loans that are less liquid than normal sales of equity and therefore less attractive to firms.

On this note, Duncan James Randall, a scholar from the University of Oxford, explains that beneficiaries of earlier empowerment initiatives have mainly been activists who were invited to be a part of executive boards in order to reform the corporate image and recruitment strategies; returned exiles who were well educated and possessed a background in business; and leaders of emerging black business organizations such as the Black Management Forum. Though there have been efforts to make BEE transfers to communities, women’s associations, and employee trusts, the process has been accused of benefiting a small elite, rather than the society at large.

The great challenges that mark the implementation of Black Economic Empowerment suggest that this initiative cannot be forced to succeed in the short run. The necessary steps towards long-term empowerment will not bear their fruits immediately. Even though private companies have been successfully enticed to participate, their compliance so far appears to have been rather superficial. At the beginning stages, the government should thus take the lead in promoting strong training programs, small business entrepreneurship, and structured financing plans. As the project currently stands, high scorecard points are not enough. Yet, South Africa’s diversified economy and strong financial sector pave the way for the eventual success of this initiative. The existence of Mandela’s “Rainbow Nation” is now a possibility.

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