OPINION: Real economic transformation: Don’t mess around
Moneyweb / 22 September 2017 00:30 / Etienne Nel
Meaningful black empowerment structures are required.
By nature and convention, businesses struggle to be altruistic. The profit motive by businesses is built into legislation all around the world. Profit is hard-won and ‘giving it away’ is counter-intuitive.
So, it takes a fresh way of looking at things to enable business to automatically serve a social need while doing business as usual.
The various industry charters that have defined Broad-Based Black Economic Empowerment (B-BBEE) structures as a vehicle for transformation mean well. But they’re not innovative enough. They’re riddled with old-style business thinking, predicated on debt funding and keeping shareholders away from the heart of the business.
Etienne Nel, the CEO of SA’s newest stock exchange ZAR X. Picture: Moneyweb
Therefore, B-BBEE structures add complexity and cost to an already fraught business environment. And, they have limited impact in terms of truly benefiting members of society at grassroots, where the need for a share in business success is most urgent.
The inherent irony is that B-BBEE can be easily achieved by having grassroots people play a direct role in the success of the business. All it takes is for their B-BBEE shares to be listed on a stock exchange and traded in a restricted market. This drives a whole new behavioural pattern as individual citizens take an interest in the company, naturally building education levels, increasing the value of the shares, and turning the B-BBEE structure into a bottom line contributor in which ordinary people have a vested interest.
A restricted market ensures that the shares remain in the hands of broad-based investors rather than being snapped up by those already advantaged. It therefore guarantees that wealth is shared equitably, reaching the places where it can have the greatest impact and thereby ensuring real empowerment. In this way, by ensuring the continuity and longevity of a listed empowerment vehicle, a restricted market provides broad-based economic empowerment in perpetuity.
The beauty of empowering B-BBEE beneficiaries to trade in shares is not just its simplicity. It actually reinforces rather than dilutes the profit motive. It’s right in the sweet spot of business activity and fosters economic growth by broadening access and promoting investment.
However, it does call for a retail approach to shareholding which, for many executives, goes against the grain. There really is no other alternative left.
This year the Intellidex Empowerment Endowment report examined what portion of the value created by the country’s largest BEE deals since 2002 has gone towards public benefit organisations.
While the report challenges the urban myth that B-BBEE deals have benefited only a handful of politically-connected elites, it does nonetheless confirm that the majority of black South Africans remain excluded from the benefits of investing in the capital markets.
According to the report, of the JSE’s top 100 companies, 87 had conducted B-BBEE deals, 35 of which included public benefit organisations as beneficiaries. In total, these deals returned R51.6 billion to beneficiaries, or about 16% of the R317 billion in value (net of funding) created by B-BBEE deals at the end of 2014.
Of the R51.6 billion returned to beneficiaries, R32.6 billion in endowments (money flowed from B-BBEE deals) was now held by 27 foundations that were set up for these deals.
The figures look good but they don’t tell the whole story. Most B-BBEE deals are debt funded, meaning participants are funded through debt in order to invest. The cost of funding the deals has been enormous, reducing the overall potential value to beneficiaries and limiting the broad-based reach of each transaction.
Also, the foundations established through B-BBEE deals are designed to exist in perpetuity and they do offer financial benefit to a broader component of society than might have been obvious. But, they carry a concentration risk.
The endowment is based on a block of shares of the sponsoring company. According to the report: “this is an outcome of the current BEE regulatory environment which requires companies to maintain BEE-qualifying investment levels.”
The block of shares results in a serious lack of diversification. Being utterly dependent on the performance of a single company, the foundation is at substantial risk. The report notes, “several foundations currently have no net asset value in their endowments. This is because share price performance has not been sufficient to cover the cost of funding received to buy the shares.”
A further limiting factor is that, in order to retain its B-BBEE rating, the sponsoring company tends to maintain the right to approve any future share disposals. This constrains the value of the shares because they cannot be freely traded. By contrast, a restricted listing allows you to dictate the profile of a shareholder while allowing market forces to prevail.
Then there’s the old problem of companies having difficulty in preventing their mandatory B-BBEE credentials from unravelling when B-BBEE shareholders cash in on their shares to meet personal financial commitments.
That’s when the benefit of a restricted market kicks in strongly. B-BBEE shareholders can get financial benefit when they need it, by selling their shares. But because the shares can be sold only to similar types of beneficiaries, the company retains its B-BBEE credentials and redistribution of wealth continues in perpetuity in a natural and organic way.
That has to be better than a heavily-indebted deal that is locked in to five or seven years, can’t get off the ground without cumbersome upfront organisation and negotiations, and runs contrary in every other way to the principles of a market-driven economy.
Etienne Nel is the CEO of SA’s newest stock exchange ZAR X.
LINK - https://www.moneyweb.co.za/moneyweb-opinion/soapbox/real-economic-transformation-depends-on-meaningful-black-empowerment-structures/