Tell me somethin’ good: The Impact of BBBEE on Corporate Governance in South Africa

It doesn’t take a lot of wine at a braai gathering for the topic of Black Economic Empowerment to crop up. It is a topic that many in the bourgeoisie circles have an opinion on – a strong, emotional and more often negative opinion. I recently wrote a researched piece on the impact of BBBEE on Corporate Governance (the mechanisms, processes and relations in terms of which a company is managed) in South Africa, after being inspired by a braai-friendly conversation with a few bourgeoisies who vehemently argued that BBBEE has a negative impact on Corporate Governance. In the research piece I argued that BBBEE has generally a positive impact on Corporate Governance in South Africa, and that a lot (not all) of negative reaction around BBBEE is unwarranted… I still maintain this viewpoint, and in this piece I simply explain it by briefly analysing and evaluating the advantages of BBBEE in Corporate Governance and some of its short-comings, some which were raised during our braai conversation.

So BBBEE aims to redress the economic inequality which exists as a result of the past exclusion of black people from meaningful participation in the economy during Apartheid. The BBBEE Act aims for companies to be the drivers of this redress, and forces companies to have a BBBEE strategy. This is in line with the stakeholder approach of Corporate Governance which the King Code (and arguably the Companies Act) encourages Companies to follow – i.e. that Companies in their governance take into account the advancement of the interests not only of the shareholder, but for the community in which it functions.

See a good strategy can directly and indirectly increase the extent to which – rural and local communities, workers, cooperatives and women own and manage existing enterprises; develop new enterprises; as well as increase their access to economic resources, infrastructure and skills training. It ought to develop appropriate human resources and skills, and as such filter through to the community at large and the country.

In turn for the Company – Alessandri, Black and Jackson have found in “Black Economic Empowerment Transaction in South Africa: Understanding when Corporate Social Responsibility May Create or Destroy Value” that markets reward companies that pursue BBBEE transactions in earnest, rather than for symbolic or short-run profit motivated reason. It is presented that those companies that furthered the goals of the South African government and society to a greater extent apparently ended up reaping greater benefits.

A company that falls under the scope of application of the Act and doesn’t properly comply with the prescribed black economic empowerment scorecard, will receive poor BBBEE rating which will negatively affect its ability to do business in South Africa. BBBEE is structured in a manner which aims to ensure that BBBEE will have a “knock-on” effect throughout the business supply. Companies and the State do business with companies which are BBBEE compliant. So, shareholders will simply lose out in competition if their company has a weak BBBEE rating. Thus a BBBEE strategy must be as such to ensure optimal rating, which will translate in better contracting opportunities.

Furthermore, with a good BBBEE strategy – one that includes an increased black participation in all levels of the company – ownership, management, expertise and control – there is an increased social capital with black empowerment groups, access to new market opportunities and enhancing reputation within the black majority. This is new business that the company was possibly not exposed to.

Moreover, it has been found that a mere increase of black people on boards of directors has provided voices to encourage companies to provide in-house training for its less skilled employees, and in this regard a company enhancing the available skills within the company, whilst still complying with the BBBEE Act.

Some of the critics argue that BBBEE puts an unnecessary burden on companies, financially and otherwise. I agree in so far as BBBEE strategies can be expensive in time and money. However, there are some BBBEE strategies that come cheap. BBBEE strategies don’t have to be very complex. A simple change in recruitment direction can be a great BBBEE strategy. Moreover, I have already presented in this piece that it has been found that companies with a higher BBBEE rating have had greater improvement in their profit margins. Perhaps the “burden” is worth something good after all…

Some argue that investors may anticipate actual black control and the replacement of white and coloured South African managers with lesser-qualified black managers and may react negatively to the announcement of BBBEE appointments. Dare I even agree that the black managerial talent is sparse? There are well-qualified black professionals that have emerged in the past two decades and these professionals are increasing.

It is most often argued that only a small group of the black population will reap the benefits of BBBEE resulting in the formation of a so-called “black elite”. Moeletsi Mbeki, as an example, argues in his book Architects of Poverty: Why African Capitalism Needs Changing (2009) that “[BBBEE] strikes the fatal blow against the emergence of black entrepreneurship by creating a small class of unproductive but wealthy black crony capitalists made up of ANC politicians, some retired and others not, who have become strong allies of the economic oligarchy.” There is truth in what Moeletsi Mbeki argues. However, it would simply be in the worst interest of the company’s financial and social success to empower “a small class of unproductive but wealthy black crony capitalists.” Not only would the company be staffed with unproductive people, but the company would lose out in the special incentives that exist for schemes involving black women, the youth, the unemployed, the disabled and people living in rural areas, and consequently lose in competition. These incentives should encourage companies to shy away from the already “black [male] elite” and focus more on the other BBBEE groups.

And then there is the issue of corruption and the short-sighted enrichment approach by some who front and (or) enrich themselves and claim that they have broadly empowered the black population through BBBEE. Such practices should be condemned in the strongest of terms. The BBBEE Act specifically prohibits fronting and in the event that a company is found to be engaged in fronting, its scorecard may be disregarded and it could be listed in a database containing other window-dressers. I propose a restriction of these monstrous practices through way more strict legislation – legislation that will involve financial or even prison sanctions.

Get me straight. I am in no way arguing that BBBEE is the perfect policy to transform the economic inequality of our country. But it plays an important role. For companies, the right BBBEE strategy can bring a respectable improvement in at least the financial and social bottom lines of a company. In last month IBM announced that they will invest R700m over the next 10 years in academic, research and entrepreneurial projects to enhance its BBBEE ranking. Let’s watch closely and see how this impacts the company’s bottom-line.

*BBBEE strategy in this article means the BBBEE plan of action that a Company and doesn’t refer to the Strategy that the Minister has to issue i.t.o section 11 of the BBBEE Act.

- Shomane Mathiba is the newest member to the Equilibrium Legal Advisors team.

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