BEE Partner, South Africa Economy Watch

This section is technical, which is one of the reasons why I mentioned earlier that they must be set up by someone specialising in employee benefit scheme structures. For an employee ownership scheme to obtain recognition as Black owned, it must comply with the requirements of Section 2 of Annexure 100B of Statement 100, which are as follows:

• The scheme must define the participants and the proportion of distributions they have a right to. The beneficiaries’ right to benefits must be identifiable. The scheme must retain a written record of the names of the participants or a defined class of identifiable natural people, with the fixed percentages of their stake or, alternatively, a fixed formula for calculating their stake. In large organisations it is not necessary to list the individual employees by name and allocate a right to each. The scheme may identify a group of employees as equal beneficiaries.
• The fiduciaries of the scheme may not have discretion over the above-mentioned provisions. They may not change the proportion allocated to the named stakeholders nor may they change the named stakeholders. Most employee ownership schemes in large organisations do not name a specific person but a class of employee, for example, junior management who are Black people. If this provision did not exist, the fiduciaries could change all the stakeholders to junior management, thereby defeating the purpose of BEE. In the QSE environment it is more likely that all employees will be known and recorded by their name, position and some adult movies.

The treatment of a named participant’s right to the shareholding on dishonourable and honourable discharge must be considered.

• The participants must take part in appointing at least 50% of the fiduciaries of the scheme and managing the scheme at a similar level to the management role of shareholders in a company. The Codes promote shareholder activism.

This provision counters the previous practice of management of reserving the sole right to appoint trustees to the employee ownership scheme and determining which trustees receive representation on the company’s board. In essence, there was no real change in the decision-making structure of the company. Some commentators submit that it is difficult for an employee representative to go against the decisions of management as a “master- servant” relationship exists’ between management and employees. Management has the power to determine the fate of the employees in the workplace. Therefore, employees would not want to bite the hand that feeds them.

• The constitution of the scheme must be available in writing on request by any participant in an official language that the participant is familiar with.
• The constitution of the scheme must maintain that all accumulated economic interest of the scheme is payable to participants at the earlier of either a date specified or on termination or winding up of the scheme. This prevents companies from creating open-ended schemes with the objective of changing the by-laws once broad- based BEE laws are retracted and rerouting the benefits back to the original shareholders. The benefits received by the scheme must go to the designated beneficiaries regardless of future events.
• The fiduciaries of the scheme must present annual financial reports to the participants.

The scheme has to comply with these provisions otherwise the ownership will not be recognised as Black owned for measurement purposes.

Annexure 100B also provides 100% ownership recognition for employee ownership schemes that qualify according to additional recognition criteria. These criteria allow the employee ownership scheme full ownership recognition, allowing the measured business to sell the full 25% target to the employee ownership scheme and achieve the full points. The criteria are:

• A track record of operations of the employee ownership scheme, or in the absence of such a record, evidence of full operational capacity to operate as such.
• The operational capacity must be evidenced by suitably qualified and experienced staff, professional advisors, operating premises and all the requirements for operating a business.

The requirements are the same as those for the additional recognition of broad-based ownership schemes. The objectives of the requirements are evident. However, the substance provided by the additional recognition criteria is insufficient to prevent abuse.

Although the following provisions are not contained in the Codes, employees may find them useful inclusions to ensure the strength of the scheme’s constitution.

• The constitution should limit management fees to 15%. A crafty scheme saw employee ownership schemes undermined through excessive management charges. Employees received ownership through an employee ownership scheme and the original owners appointed themselves as trustees of the scheme. Any income accruing to the employee scheme was paid to the trustees as management fees.
• The constitution of the scheme must set rules about how economic interest received will be reserved for future use and how it will be used or distributed to participants. Where the scheme sets a target of ten years or more before beneficiaries receive benefits, verification agencies should investigate the possibility of fronting. Ten years is too long for most employees. They would have left the employment position before receiving any benefit.
• The Codes encourage active participation by employees in managing and controlling the scheme so that the responsibilities of control are commensurate with ownership. These clauses protect employees from schemes developed by management to undermine real benefit accruing to them. The trustee elected to represent the employees’ trust on the company’s board must be strong enough to take decisions that are in the best interests of the employees, even if it means going against management’s wishes.

Economic interest

The Codes say nothing about a percentage of Black ownership of the scheme before it can be included as Black owned. Employee ownership schemes should be measured using the flow-through principle to identify actual Black beneficiaries.

While the Codes do not prevent it, measurement of Black ownership through employee share schemes using the modified flow-through principle is an abuse of the principle. The main aim of the modified flow-through principle is to help Black-owned companies source equity finance from non-Black equity participants. Employee ownership schemes are not developed to introduce capital into a measured entity. The only reason for using the modified flow-through principle for employee share schemes is to dilute the Black ownership. As mentioned, the Codes do not prevent this so it may be a somewhat idealistic comment.

The value of benefits accruing to Black people, as opposed to a percentage based on the number of Black beneficiaries in the scheme, must be used to determine Black ownership. For example, the scheme may ₇ have 80% Black employees and 20% of the economic benefits accruing to them. The measurement of ownership is based on voting rights and economic interest, not the number of participants. Black ownership of the scheme is therefore 20% and not 80%.

To maximise points on the scorecard, the scheme must provide a clear distinction between allocation of economic interest to Black people and Black women. If the determination of the beneficiaries or the economic interest accruing to Black people and Black women is unclear or left to the discretion of the trustees, no points will accrue until the actual economic interest vests in them.

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