Evidence from the USA and UK suggests that democratic employee- owned firms, with all employees owning from (typically) 20% to 1000% of the company, outperform comparable conventional firms by considerable margins.’ Moreover, their shares that are still traded sell for large premiums.’ On average, they grow capital, market share and employment by from 3% to 11⁰/o faster per annum. Because they pay dividends inside the ‘family’ of the firm, their benefit plans are two to three times better and more diverse – and little money travels abroad! Democratic employee-owned firms are some 40% more stable and lead to employee information, education, and participation, which alters management in progressive ways.

Principles of the employee ownership trust (EOT):

• Achieving BEE in terms of ownership and achieving a proper racial and gender balance can be done within the firm.

If employee ownership secures a better-performing company, then the old owners do not have to/will not want to leave. They will face a decline year by year in their percentage ownership, but the value of their holding will likely rise ahead of that relative decline. Employee ownership should grow mainly by using the expansion of the firm to issue new shares that are taken up by the EOT.

• The limitations of an EOT in relation to the BEE scorecard will be the speed at which an EOT can acquire shares, and the BEE composition of employee/owners and management.
• Our national cultural heritage supports a collective view of ownership.

How an employee ownership trust works

In employee-owned firms, all employees vote their common ownership through an EOT, in which employee owners enjoy equal voting rights. This move separates the firm as a ‘command’ organisation from the `democratic/cooperative’ mode of the trust. Benefit flows match each employee’s contribution – best measured by salary. This two-part structure – company and EOT – preserves the right of the board and of management to set policy and to manage day by day, while it provides the vehicle for employee participation and commitment. In fact, it adds agility to the whole decision-making system, as all ‘members’ of the company are more knowledgeable and become party to all crucial decisions.

The structure of the firm and the EOT

Essentially the structure of the EOT is a circle in which employees are able to raise issues through the EOT and from there to the board via the trustees. Equally, the board or management can use the EOT to provide information and open debate on important issues, particularly those that require employee support – such as new directions.

In the BEE environment, consideration must be given to the lack of funds held by Black people entering BEE deals. The necessity for finance provided an opportunity for ruthless businesspeople to undermine both the control and economic interest components held by Black people in BEE deals. To prevent this abuse, the Codes introduced a third component known as realisation points and, more specifically, the net value indicator. The net value indicator measures the Black person’s unencumbered (debt free) right of ownership. By allocating a high points rating to the net value indicator, businesses are encouraged to reduce systematically the level of debt over the BEE party’s shareholding.

Voting Rights

The objective of BEE is to help Black people gain equal ownership and control of the mainstream economy. Ownership without control represents passive participation. This indicates redistribution rather than active participation. Black people fought a hard struggle to gain the right to vote in the political environment. Voting rights attached to ownership represent the right to vote in the economic environment.

The importance of voting rights is evident in the Companies Act, which only looks at control to determine whether one business is a subsidiary of another business. The Companies Act has no reference to economic benefit when measuring subsidiaries. Control is measured through voting rights either at a shareholder or board participation level. BEE parties approaching ownership deals without sufficient regard for the necessity of preserving commensurate voting rights are not using the BEE policy for its intended purpose.

Where the BEE participation is financed by either the vendor (the seller) or a third party, voting rights may be held by the financier as security for the provision of the funds. The BEE party should negotiate the release of those voting rights on the basis that they will only revert to the financier on default of repayment, which the financier will insist on to protect its interests.

The ownership scorecard is designed to protect the BEE party’s voting rights by including an indicator set to measure voting rights in the entity in the hands of Black people.

Some businesses use a broad base of BEE shareholders in ownership deals with the specific intention of undermining the impact of Black- held voting rights. It is unlikely that a multitude of people with an insignificant shareholding are going to vote uniformly on an issue. Where Black people find themselves in this situation, they should consider pooling their votes under a voting agreement to regain the necessary participation in decision making.

The term “control“, used in the context of voting rights, is misleading and sends the wrong message to existing business owners. The targets set by the Codes are not indicative of control, but rather influence through participation. The targets are set in consideration of the Companies Act requiring a 75% majority vote to pass a special resolution. Setting a target of 25% + 1 vote gives the BEE party the ability to protect itself against unfair decisions made by the company, commonly known as minority protection rights, but it does not give control.

Measuring voting rights

Six points or a part thereof are available where Black people hold the right to participate in 25% + 1 of votes at shareholders meetings. Where the full target of 25% + 1 of total voting rights is not met, the points are awarded on a pro-rata basis.

The voting rights may be measured according to the flow-through or modified flow-through principles as discussed in the section on measurement principles.

Where the voting rights are pledged to a financier, so that the financier takes control of the voting rights if the BEE party defaults, the voting rights may be recognised as held by Black people on condition that the financier has no influence over the voting rights until reverting to the financier on default.

Calculating the points for voting rights

Voting right points are measured using the formula:

A = B/C x D

The score A is calculated as follows:

Step 1 B = Calculate the percentage of exercisable voting rights held by Black people of the total voting rights.

Step 2 Divide the result of Step 1 by C, the compliance target for the ownership criteria being measured (25% of total votes available + 1 vote).

Step 3 Multiply the result of Step 2 by D, the points weighting of that indicator, which is six.

Step 1 may apply the modified flow-through principle or the flow-through principle.

Where the enterprise achieves a score greater than the allocated six points, the scorecard will only recognise a maximum of six points.

A measured business may realise 100% of ownership points where 25% is owned by a special scheme. They were created in recognition of established broad-based entities that have a track record of achieving the objectives of BEE ownership.

Businesses wanting to enter ownership deals with a broad-based scheme must ensure they qualify or are capable of qualifying as a special scheme if the intention is to sell a full BEE participation to that scheme.

The additional criteria are:

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

Unfortunately, the additional criteria supplied by the Codes contain no real distinction and are easily circumvented. The track record does not mention length of service and an entity wishing to front can obtain offices and staff with relative ease.

Entities wanting to take on broad-based ownership schemes as BEE partners may wish to insist on a complete review of the following criteria to ensure that they acquire a partner of substance that will implement the objectives of BEE:

• historical audited financial information and accounts that provide insight into the benefits that have been distributed to intended beneficiaries

• A detailed breakdown of the management fees and the benefits accruing to beneficiaries
• A report on the nature of the projects undertaken by the scheme and the alignment of those projects with the provisions contained in the Socio-Economic and Enterprise Development Code
• A report on the manner in which beneficiaries are identified and the geographic spread of benefit implementation
• The names and details of senior employees of the scheme
• An explanation of the services provided by the scheme’s administrators.

A broad-based scheme may include the beneficiaries representing Black women, Black designated groups or any other Black people. The measured entity will receive points for ownership by priority groups through bonus points. For example, the broad-based scheme may receive bonus points for including Black women and/or Black designated groups, who, through the scheme, participate in 10% of the total ownership. The various indicators in the ownership scorecard are entitled to recognise this split as long as the claim is supported by evidence provided by the broad-based group.

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• 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.

The Codes term the measured business that sells the asset as the “Seller” and the BEE entity that buys the asset as the “Associated Enterprise“. They do not refer to the BEE party because often the sale is made to a business that is not exclusively owned by a Black party. I will use these terms to explain the calculation.

The term “Equivalency Percentages” is introduced as part of the measurement of ownership recognition. It measures the proportion of the value of assets sold to Black parties in relation to the value of the measured business. The seller uses the equivalency percentage in the standard ownership calculations for voting rights and economic interest, as the relative value of sold assets in the hands of Black people.

Each indicator in the seller’s ownership scorecard requires the calculation of an equivalency percentage and multiplying that with the actual percentage of Black ownership of that indicator in the associated enterprise. The application will become apparent when looking at the formula.

The equivalency percentage does not apply to the calculation of the net value indicator. A separate calculation is used for net value. The equivalency percentage may also not be used in the measurement of bonus points, which are not available to a business choosing the sale of assets as an ownership alternative.

The Codes recognise the contribution to ownership as follows: A = B/C x D

A = the equivalency percentage

B = the value of the sold asset to the associated enterprise measured using a standard valuation method

C = the value of the seller using a standard valuation method

D = the indicator percentage of the entity sold to Black parties.

The indicator percentage must be calculated for each indicator. This is the Black person’s share of voting rights or economic interest in the associated enterprise. Remember that white people often have a stake in the associated enterprise. The indicator percentage is the raw score, not a percentage of the target, of Black participation in each indicator of the associated enterprise. For example, if Black people own and controls 51% of the voting rights in the associated enterprise, then the indicator percentage is 51%.

Note: The Codes do not give guidance on the application of the modified flow-through principle when measuring the indicator percentage. The assumption is that it may be applied.

A simple explanation of the calculation is:

• The value of the sold asset divided by
• The value of the measured entity multiplied by
• the percentage of Black ownership in the associated enterprise for the corresponding indicator.

Example

Company A sells an asset valued at R100 to Company B. Company A’s market value is R400. A Black woman owns 65% of Company B and 35% is owned by the non-Black owners of Company A. The ownership of economic interest and voting rights are in proportion. This means that the voting rights and economic interest indicators will follow the same calculation — I will just demonstrate voting rights here.

The equivalency percentage for voting rights for Black people is calculated as:

The value of the entity sold = R100

The value of the measured entity = R400

The indicator percentage (Black-owned portion of Company B) = 65% It is 100% Black using the modified flow-through principle.

Note: The measured entity cannot apply the modified flow-through principle to itself. However, there is nothing that prevents the use of the modified flow-through principle on the associated enterprise.

A = _100/400 x 100% = 25%

The measured entity, Company A, would recognise 25% Black ownership through the sale of assets and apply that amount to its ownership scorecard for the voting rights indicator.

MEASURING NET VALUE

With the net value measurement the seller must first establish the following information to include in the calculation of the score:

The Black participant’s share of the asset owned as a percentage of the total value of the asset

• the current value of the Black participant’s acquisition debt over the asset owned by the Black party using a standard valuation technique
• the current value of the asset representing the qualifying transaction.

These values are used in the net value formula in the same manner as prescribed in Statement 100 to determine the net value score for the ownership scorecard. This calculation will also require the value of the measured entity for the net value to be calculated correctly. The seller is also entitled to claim the ownership fulfilment point where the conditions for that point are complied with by both the associated enterprise and the measured entity.

Subsequent valuation

Every year thereafter the sale will be measured in the same mann_er.If the sold asset grows faster than the measured entity, the ownership points will increase as will the net value points.

Initial drafts of the Codes required that the qualifying transaction b_emeasured annually against the underlying value of the measured entity. With the introduction of the once empowered always empowered principle the annual revaluation of qualifying transactions became defunct. The qualifying transaction is measured as above for three years. Thereafter the calculation is based on the indicator percentage multiplied by the value of the asset in proportion to the sellers at the date of measurement in the third year after the transaction date.

The value of the sold asset is measured as a ratio to the current value of the measured entity for each year after the transaction to establish the ownership score until after year three. Then Section 5.1.2.2 pegs the value of the equivalency percentage and carries this value forward regardless of change in value in either the associated enterprise or the measured entity. Only the value of the assets sold and the value of the measured entity are pegged, but if the Black ownership decreases then the points accruing to the measured entity will also decrease. Furthermore, if the Black ownership goes below 50,1%, the modified flow-through principle will not apply. The pegging of values is in line with the introduction of a diluted once empowered always empowers principle.

• It must result in the creation of a sustainable business opportunity for the Black party.
• It must result in the transfer of specialised skills or productive capacity to Black people.
• It must be sold to a separate entity that has:
• No unreasonable limitations on its clients or customers
• clients, customers or suppliers other than the measured enterprise that sold the asset.

• Any outsourcing relationship between the seller and associated enterprise (the BEE entity that purchased the asset from the seller) must be negotiated at arms length on a fair and reasonable basis.

The requirements form the basis of anti-fronting criteria. The transaction must be a sale of real assets capable of being a stand-alone business beyond the control of the initial measured entity.

If any of the above criteria are not achieved, the transaction will not qualify for recognition as the sale of assets. Accordingly, the measured business will not obtain recognition in terms of the ownership points.

Rentals, leases and licences

Section 3.2.4 of Statement 102 makes two specific exclusions. Licences, leases and rentals offer an interesting angle on recognition of the sale of an asset for recognition of ownership. Say an income- producing asset, for example, a haulage truck and trailer, is leased by a company to a Black party for a period of time. The Black party, as a consequence of the lease, may haul goods for profit for the duration of the lease.

Was a business asset sold to a Black party for the period of the lease, rental or licence? The government’s view is that it may not be recognised as the sale of an asset because there was no sale. A right is handed over for a specific period, which means it is not sustainable because the right will revert to the original owner at the end of the licence or lease.

Section 3.2.4.1 specifically excludes leases, licences or other similar legal arrangements not conferring unrestricted ownership from recognition as a sale of assets.

Franchising

The sale of a franchise by a franchisor to a franchisee is, arguably, the sale of an asset. Various options were reviewed in this regard. Essentially it meets the requirements of Section 3.2. However, the Codes do not recognise the sale of a franchise from a franchisor to a franchisee as the sale of an asset. The reason is that the franchisor would receive ownership points for something that is part of their normal business anyway. Therefore, Section 3.2.4.2 specifically excludes the sale of a franchise by the franchisor to a Black franchisee from recognition as a sale of an asset.

The scorecard as it stands does not specifically recognise the creation of franchises as a separate indicator on the scorecard. The unintended consequence of the non-recognition of the sale of company-owned outlets to Black franchisees is that nothing encourages the franchisors to sell to Black franchisees.

However, a franchisee selling the franchise to a Black party, that is, another franchisee, will qualify for recognition as a sale of assets, assuming it meets the requirements of Section 3.2.

In addition to all the exciting plans we have, we believe this year is going to be a very exciting BEE year with many aspects changing, not to mention all the political action.

BEE Implementation in 2009

• 2008 saw a big expansion in BEE certificates – this year will be different. It will no longer be good enough to have a certificate. Companies will need to get scorecards that have enough points to satisfy their customers.
• Verification of BEE status for companies will change substantially – hopefully verification agencies will be accredited, but more importantly proper preparation will be vital in order to get a good verification. The most effective way to do this is with EconoBEE V3.
• BEE Charters – we don’t like the idea of charters as we feel it gives some companies an excuse not to implement BEE because they are waiting for a charter. We suspect that the charters will continue to be delayed and will have lots of controversy when they are finally gazetted.
• Corporate BEE Pressure will increase. Corporations will focus heavily on corporate governance. If they do not implement BEE properly they will start losing credibility. Corporations will need to follow the BEE codes extremely accurately to avoid any public embarrassment from press, businesses and government.
• New Government changes to BEE – We feel that B-BBEE is not likely to be changed. The political leaders talking about changes are suggesting changes that are more closely linked with implementing B-BBEE as intended, rather than scrapping the entire concept.
• Companies who have 2nd and 3rd generation scorecards will start focusing on earning BEE points in a very cost effective manner. They will also spend less effort on verification but more on earning points and collecting documentation.
• A BEE Scorecard will become a norm when measuring the quality of a company – e.g. a construction company. If all points or a high score is earned in Skills Development it will indicate an investment in their staff and quality workmanship. If all points or a high score is earned in Enterprise Development and Socio-economic Development indicates an investment in the community and will more likely be a good company compared to a company that has not earned well in Skills Development.
• The number of points a company has will be used as a gauge of competence as well as an advantage when selling products.
• Sustainability: many companies are getting involved in sustainable development and the environment. They realize that BEE is a sub-set of sustainability and their bottom line will benefit as a result.

On the EconoBEE Side

• EconoBEE V3 – our latest version of our very popular EconoBEE Scorecard BEE Scorecard rating tool is set to enhance the way businesses do their BEE Scorecards.
• EconoLog is the ultimate BEE logging tool designed to ensure every item on the scorecard is calculated. EconoLog reduces the cost of earning BEE points by taking into account spend that has already happened.
• 10 Steps to BEE is our tried and tested methodology. Our simple 10 step approach takes into account each and every aspect of your BEE journey which helps you strategically implement BEE in a cost effective manner.
• Training, we have many new courses planned for 2009. In addition our BEE workshops are a must for anyone who needs to understand BEE in a practical sense.
• EME’s – businesses below R5 million can get an EME Pack processed quicker than ever. Contact us and we will make sure you get the status you deserve.
• Consulting – we focus on the business side of BEE compliance. If you need a consultant who knows how to earn points give us a call.
• BEE Associates – make a profit while selling our BEE products.
• BEE Consultants – become an EconoLog Implementer. Consult to your clients with EconoBEE’s powerful tools.

BEE in 2009 is going to be very different to 2008. Start earlier to ensure you get ahead of the pack because more than ever a BEE scorecard and the points you achieve will determine the success of your business.

Many customers are asking for your BEE score. The only profitable response is to give them the right answer – “Yes, I do have a BEE scorecard – here it is”. Further your customer is no longer interested in knowing whether you have a BEE certificate – they want a high BEE score – the higher the better.

Many sales people tend to ignore or deflect the question, and in previous years have still landed the sale. The environment of 2009 will show that this is less and less possible. Your customer is going to seriously consider moving his business to another company that can provide the required good BEE score.

Put another way, a high BEE score will provide a marketing advantage over the opposition – it will help open doors, get those appointments, and help sign the contracts.

All sales people owe it to themselves to find out what their company’s BEE score is, and if they do not have a score to convince management that a BEE scorecard will provide that competitive advantage.

We have said it many times, but it bears repeating – a good BEE score is based on the 7 elements of BEE, and does not rely on only the narrow based element – i.e. black ownership as many people tend to think.
A completely black owned business could have a low BEE score, while a completely white owned business could achieve a high BEE score.

To put it quite simply:

High BEE Score = More business

The most common route taken by QSEs is a hollow appointment. I have discussed this above. It means promoting someone in title, but in practice the role remains unchanged. This is fronting and the points will not be granted.

The successful practical application of the management control element requires the business owner to develop a strategy based on two key principles of BEE:

• BEE is a process rather than an event. Although there is a business i_mperative to achieve a high score in the near future, a sustainable BEE strategy is more likely to be developed over time. Instant solutions are not sustainable.

• Sustainable BEE strategies are based on growth initiatives.

By including a new managerial participant, the business owner is afforded the opportunity to manage the business on a more strategic level, which is often something that QSE owners have insufficient time for. The opportunity to provide strategic direction can increase the profitability of the business and justify the inclusion of a new management participant.

When a QSE has many top management positions, succession planning becomes a key factor in achieving management control points. The nature of management succession requires the measured entity to be proactive in forward planning. Management positions are not dynamic as they are usually held for a long period. Failure to use an open position for a Black person now virtually precludes scoring opportunities on the management scorecard for a number of years to come. The emphasis is on planning, not immediate succession without substance.

Board participation

To qualify as top management, the Black participant must own a portion of the business or have board participation. Some QSEs do not have an active board of directors. Where the QSE chooses not to comply with the provisions of the ownership scorecard, they will have to initiate an active board of directors to qualify for management control points. However, they should only do this if an economic rationale exists.

A board of directors can bring strategic management direction to a small business. The shareholders control who is appointed to the board. A small business owner will want to retain control of the board, so a board of directors is likely to be appointed giving the business owner the right of control over decisions made by the board. Including outside participants who contribute to the board meetings and ask questions that challenge decisions will result in more robust decision making in the operation.

The Codes are not asking for the business owner to hand over control of the business. They are asking the business owner to include Black People in top level management participation. Including Black people does not mean leaving a seat open for a “yes” person who will add nothing to the business. Black board participants must be selected o_n their ability and willingness to contribute to the current and future profitability and success of the business. Successful Black board participation depends on the active involvement of the Black member.

When a business makes a hollow board appointment, represented by a Black person who has a position but is never taken seriously, then it does not have substance. If there is no substance, then the entity may not claim the points. Not only is there no substance but the appointment represents a straight expense to the business. If the Black person does not contribute to the business then there is no return on investment. Move away from hollow appointments towards someone who is more likely to earn their money.

Using board participation to assess potential partners

Board participation should also include non-executive members. Non- executive members are people who are not employed in the daily operation of the business. Where a business is looking for an appropriate BEE partner, appointing that person to the board as a non-executive board member gives the business owner and the BEE party time to assess their ability to work together and whether the association is capable of creating new profit for the business.

Obligations

Black people with positions in management and directorships on the board are perhaps more empowered than any other party to drive transformation in an organisation. There is no legal necessity for the Black appointees to participate in the transformation drive. In some cases, Black directors will know less about BEE than their white counterparts.

The only obligation on Black directors to drive transformation is a moral one. The liberty of Black people to participate in the economy is at the mercy of existing business. Black leaders have a moral obligation to encourage the participation of Black people in the economy. They can achieve this by driving transformation from their position of power. While there is an economic driver for BEE, the social necessity should not be underplayed.

To understand the management control scorecard, the definition of top management needs deciphering. Although the Codes do not define the term, they do define “top manager” so one can assume that a top manager represents top management. A top manager is:

An employee who holds the right of ownership, serves on the Board and undertakes the day-to-day management, has overall responsibility for the overall financial management and is actively involved in developing and implementing the overall strategy of the measured entity.

The way the definition is written it would appear that the top manager must represent all of the above criteria to be classified as a top manager. Many QSEs do not have an active board. However, if the QSE does not have a board and its managers meet the other requirements, such as shareholding and participation in strategic decision making, then the substance of the statement will be captured. QSEs should not create boards of directors just for the sake of BEE if there is no substantive economic need to do so, as this would be tantamount to fronting.

If a business does have a board, but the active CEO does not hold ownership in the enterprise, then that person would not qualify _{as a} top manager. Further, if the manager under review did hold ownership and held a position on the board, but was a marketing manager and did not hold overall responsibility for the financial management of the business, then that person may qualify for recognition as top management, provided he or she is actively involved in developing and implementing the overall strategy of the measured entity.

Unfortunately, as is evident from the paragraph above, the definition of top manager has the unintended consequence of undermining the promotion of Black people to management in QSEs.

Statement 802 provides common examples of senior top management:

• the chief operating officer and the chief financial officer
• the chief information officer, the head of marketing, the head of sales, the head of public relations, the head of human resources and the head of transformation.

In all likelihood some of these positions mentioned above will not be applicable to QSEs. From these descriptions it seems reasonable to read the definition of a top manager in the following light:

• An employee of the business who
• holds the right of ownership or
• serves on the board of directors or
• undertakes day-to-day management and
• participates in the responsibility for overall financial management or
• is actively involved in developing and implementing the overall strategy of the business.

The top manager is someone who is the head of their department and actively participates in the management and strategic decision making of the business. The definition also requires that person to hold an ownership stake in the business or to hold a position on the board of directors. The indicator does not stipulate how much equity participation the Black manager requires nor the percentage representation on the board. Subsequent clarification from the dti is that the ownership requirement in the top manager definition may be removed due to the unintended consequence of destroying the impact of the management element by linking it to the ownership element.

In the QSE environment, operations are too small to penalise companies for not including Black women in the management control element. The scorecard encourages Black women participation by allocating bonus points to a QSE that does include Black women in management control. However, the QSE can still score 100% of the management control points if Black women are not included.

Target

The next folly in this Statement is setting a target of 50,1% for top management to be held by Black people. Although the Statement is not clear, it seems natural to assume that one out of two top managers must be a Black person. It seems highly unlikely that any QSEs will hand over management control to a minority shareholder or minority shareholders. If the full 50,1% management control is held by a Black manager, then the QSE will receive the full 25 points for management.

Throughout the Codes, calculations are done on a pro-rata basis. Although guidance is not given, it seems reasonable that the scores will be rounded to the nearest two decimal places. If a QSE had Black top management representation of 49%, leaving the overall control in the hands of the original management, then the points would be calculated as 49/50 x 25 = 24,45 points. For the sake of overall management control it seems likely that most QSEs will forgo half a point.

The target appears unrealistic. In practical terms, if a QSE has more Black top managers in lesser positions, such as marketing manager, human resources manager and public relations manager, and the two senior positions of chief financial officer and chief executive officer are held by the original management, then the entity would achieve the 50,1% target with control remaining with the original shareholders.

At first glance the practicality of the target appears ludicrous. However, in practical terms the target is achievable without the original owner having to give up actual control of the business. There is a great likelihood that the target will be changed to 50% to be in line with Statement 200’s target.

The target for the bonus points is-25% of the top management positions to be held by Black women. The 25% does not represent an additional 25%. Black women are also Black people for the purpose of Measurement, so a Black woman chief financial officer would score Points under both indicators.

Points

There are 25 points available for an entity that achieves the target f_orthe Black top management indicators and two bonus points for entities who have 25% Black women represented in senior top management. A total of 27 points may be taken forward.

Calculation

Calculating the points for management control involves a relativel_y simple equation.

A = the score for the management control

B = the number of Black top managers as a percentage of the total top managers

C = the target provided by the indicator (50,1% for the Black people indicator or 25% for the bonus point indicator)

D = the weighting points allocated to the indicator (25 points for the Black people indicator and two points for the bonus points indicator.