BEE Partner, South Africa Economy Watch

The issue of BEE ownership in a business is the dimension most often equated with empowerment because of the way empowerment was viewed in the late 1990s. We equated equality with equity, which, while it has a basis, cannot be the only aspect of transformation. The second reason ownership has such a high profile is that it is the criterion most explored from a preferential procurement perspective, meaning preferential procurement scoring is based solely on ownership for most charters and for the First Code (if you are outside a charter).

As a consequence of its high profile, it is the dimension that is most abused and most poorly tackled.

There are five broad approaches to meaningfully address the ownership issue in your business:

1. Employee share options: Develop your employees through the business to the point where they are able to exercise employee share options. This is a limited approach, though common. It acts to prevent employees voting their shares together, and thus from emerging as a full partner. Employees often sell the shares and so exhibit a ‘disloyalty. In the USA, ESOPs (employee stock option plans) attract tax breaks and are popular for that reason.
2. Employee ownership: All the evidence internationally and now in South Africa shows that employee shares should be held jointly by a trust. All the employees, as members/owners of the trust, vote their shares together and discuss and act within the company through the trust. This maximises employee information and education and gains total employee commitment. An ESOP might raise company performance somewhat for a while. An employee ownership trust (EOT) will raise it from 4% to 11% per year and keep it high if it is matched by the adoption of progressive management.
3. Direct shareholding: Find individuals who understand your industry or are in a position to quickly develop an understanding of your business, and who will begin to add value at a senior level, becoming an intrinsic part of the business.
4. Social empowerment partners: Collectives such as broad-based trusts can have a strong impact on your environment of business, and are emerging as an interesting approach to ownership.
5. Black economic empowerment group (BEEG): Sell off shareholding to a group of black people or empowered businesses that won’t become operationally involved in your business.

These five options can all make potential sense depending on the needs and nature of your business. Combinations of these options are also possible in order to harvest the advantages that exist in all of them. For example, one could lay the foundations for the organic development of your staff to the point where some (or all?) of them are in a position to contribute at an ownership level. This would take some time. Even middle-level South African employees find it hard to invest regularly, as take-home pay and employee indebtedness are very tight.

You could develop medium-term actions that result in an empowerment trust effectively warehousing the shareholding for a defined period before passing on the fruits of such a long-term (individual) ownership plan. As employee share options (Point 1) do not have a significant impact on growth, only the last four options and their related financial engineering structures will now be explored in more depth.

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