Archive for November, 2009
Business Report has published an article quoting Jimmy Manyi, the director general of the department of labour, that government will get tough on companies that do not comply with affirmative action and B-BBEE laws.
I understand his frustration – we have the same frustration with companies that refuse to make any effort, while publicly stating that they support the initiative. Our clients lose points if their suppliers do not comply.
The confusion comes when Jimmy Manyi states “His department is planning on introducing a clause into the BEE act which would allow governmen to terminate or refuse contracts of companies that do not comply with the law by June next year.” The article further states “He said it was his job as the DG of Labour to ensure that this happened.” The fact remains that the B-BBEE act is administered by the department of trade and industry, not labour. I need to ask “Who is running B-BBEE – dti or labour or treasury?” In the case of employment equity, the department of labout is certainly responsible, but this forms only a small part of the BEE scorecard.
Jimmy Manyi wants to allow government to terminate or refuse contracts that do not comply with the law. The irony is that government currently does not follow the B-BBEE act. Treasury has been trying for some time to reconcile the PPPFA – the law that government does follow the the B-BBEE act, and it probably will not even be enacted by June 2010. It may well happen that the revised PPPFA makes it mandatory to follow the B-BBEE act, but this will be the responsibility of Treasury, not the DG of labour.
Another issue is that the B-BBEE act is based on a scorecard, so it is not feasible to state categorically that a company complies or does not comply. A key point of the B-BBEE scorecard is levels of compliance. Surely the new clause proposed by Mr Manyi should be based on levels of compliance? In any event it is compliance with the principles of B-BBEE, not the law. The act as is stands makes B-BBEE mandatory only for government and government enterprises, not companies. The dti believes that the cascading effect of each company asking every other company (their suppliers) for a scorecard is a good way to go about ensuring B-BBEE levels of compliance.
Ironically again the enterprises that should become compliant, and which Jimmy Manyi should be concerned about, are the many government enterprises that do not have scorecards, or have very poor scorecards. SAA is a level 8 – pretty poor for the national carrier. The PIC does not even know they need a scorecard!
While I have no problem in ministers and DGs condemning companies for not having a scorecard or not complying with any act, the message that is going out is totally confusing, and contradictory.
The problem with this approach is it encourages those who want to find an excuse to delay their implementation. They will now say they want to wait until the revised act is gazetted, or they want more information before thinking of implementing transformation. I know it is an excuse, and they should be condemned for this, but they will use confusing reports, such as the DG’s comments to justify their inactions.
I do support his call for government to refuse to do business with companies that do not have a BEE scorecard, my problem is that he is sowing confusion.
Business Report has an article quoting Cyril Ramaphosa. He is complaining about lock-in clauses and the fact that the BEE codes have a “once empowered always empowered clause” that encourages businesses to offer loans to “BEE partners”, and lock them in for up to 10 years. Often the partner cannot repay the loan so the business repossesses the shares but does not lose their BEE points because of the “once empowered, always empowered” clause.
This is what he says – unfortunately he is wrong about the “once empowered always empowered” clause. It simply does not exist! What does happen is companies DO have lock-in clauses, and they have sometimes re-possessed the shares when the partner could not repay the loan. Group 5 is a case in point, and it is something that I do not like, so on that point we do agree with Mr Ramaphosa. However there is no “once empowered always empowered” clause in the codes of good practice.
There was lots of talk about it: The concept was if a company lost its back shareholders they would retain the points they had earned before the shareholding was lost. This would have been a way for unscrupulous companies to front by making life intolerable for their investors, find a pretext to get rid of them and retain their points. In extreme cases a company could have sold (given) shares today to a black beggar, taken the shares back tomorrow and continued as if it had the black shareholding forever.
Were this the case, then Mr Ramaphosa’s point would have been valid. The true situation is that the codes do recognise specific situations where the company has lost its black shareholding, and does make fair allowances for both parties. This is known as “Recognition of ownership after loss or sale of shares.
This clause, par 3.5 of code 100, statement 100 explains that under certain circumstances a company can recognise SOME of its points if teh sahres are lost or sold, under very specific circumstances. The example above does not count as being an accecptable circumstance. Some of the rules are:
1) The shareholder must have held his shares for more than 3 years
2) Value must have been created in the hands of the shareholder
3) Transformation must have taken place in the enterprise
Under those circumstances only about 40% of the points (this is a complicaed calculation) that had been earned can be recognised by the company, and they can only be recognised for as long as the period that shareholder originally held those shares.
This is very different to a “once empowered always empowered” clause. Cyril’s biggest complaint about the “once empowered always empowered” rule is the black parties do not benefit at all from a failed deal. Clause 2) above makes it clear that a company can only recognise continued ownership if the black partners had value created in their hands. So, if there was no value created, the company cannot recognise any points from that failed deal.
It should also be reconignised that companies earn maximum points only if shares are being paid off during the period of the deal. If no shares are paid for then the company will lose up to 8 points on its scorecard. This should be an incentive to companies to try to ensure their partners do benefit financially and can start paying off the loans immediately in order to improve their scorecard.
This clause, the recognition of ownership after loss of sale of shares, seems fair enough and protect both sides. There was the celebrated case of Mzi Khumalo who held shares in Basil Read and sold those shares to restructure his protfolio. This was a perfectly valid business deal and he was fully entitled to sell shares he owned. Basil Read, on the other hand suddenly found themselves without a black sharehholder and since there shares are tightly held had great difficulty in findind shares for another partner to purchase. It makes business sense to offer a substantial discount to a partner in order to encourage him to stay for the “long haul”. If the discount is sufficiently large then the business partner would be eager to purchase, knowing that he cannot sell for say ten years (the lock-in clause Cyril talks about).
In the above press article a BEE consultant refers to the financial sector charter stating that it does have such a clause. However the FSC does not exist as a legal document, and is not a legal sector code so it cannot be used as a reference point. One of the many reasons that the FSC cannot be finalised is because it uses definitions different to those in the codes.
We have always stressed on the importance of doing self-assessment before going for verification. This is something that cannot be emphasized more. It is a purposive process relying on assessing and analyzing the existing situation for a measured entity and reporting thereof. The reason for doing self-assessment is to ensure that every point is accounted for in its entirety. Depending on the size of your company, earning one point can translate to a certain amount of money. Without doing self-assessment, you stand to lose a couple of points which in reality means you would have lost an X amount of money.
Let’s do the numbers game on Socio-Economic Development, both for a Qualifying Small Enterprise and a Generic Company.
|Net profit After Tax (R)||Target (%)||Target (R)||Cost/Point (R) QSE||Cost/Point (R) Generic|
As shown in the table above, it costs a certain amount of money to earn just a point under SED. Question is, how many points or how much money are you losing because you haven’t done introspection? A great deal of money is lost without a comprehensive approach to self-assessment yet more often than not, we have realized that companies pull away from looking inside. As a remedy to this constantly overlooked drawback, we have online, a software to guide you throughout the process. For the Demo version, please click here http://econobee.co.za/dmdocuments/econobeev3/econobeev3%20presentation.htm
In all fairness, self-assessment is just one the many other stages of BBBEE compliance. It is equally as important as the rest. BBBEE compliance should be seen as a process not a once-off event. We recommend companies to follow our 10-step process in becoming BBBEE compliant. Visit the following link for the 10 steps: http://www.econobee.co.za/general/become-bee-compliant/10-steps-to-bee-compliance.html
The DTI has gazetted the accountants BEE charter. This charter has been issued as a section 9 (5).
A short comments period will be allowed and thereafter it may be gazetted as a section 9.
More info to follow shortly.
Finally, after years of nagging, we’ve now got the TELKM scorecard. They finally issueda verified scorrecard on 8th October 2009. Their score is a rather poor level 5. Their ownership points is 7.24, management 11 – full makrs. Employment equity is 7.86 – lss than half the points available. Skills development is 10.48 which means they are making an effort to train their staff. Procurement is good at 18.19 pints which means they are making abig effot to deal with compliant suppliers. Eneterprise development is 0- showing that they are giving their suppliers a hard time by demanding compliancy, but making no effort to assist those very enterprises that do need help. Worse, socio economic development is 3.8 out of 5 showing that they spend less than the 1% industry norm on their CSI activities.
Normally I praise any company for making any effort towards transfomation, but I expect more of TELKOM. It took ages for them to issue a certificate, ostensibly because of their difficulty in identifying their shareholders, but assured us they were compliant in other ways. To push procurement at the expense of enterprise development is not a good strategy. and to care so little for their community that they do not reach targets on SED is unforgiveable. It should be remembered that both ED and SED are based on cumulative spend since 2007, so it is likley that TELKOM have never met targets on both those items for that past 2 years, and to reach targets in 2010 will be that much harder.
We had a very good time of acquiring practical knowledge at the recent Sustainable Development Conference co-hosted by EconoBEE together with Kulima Solutions. The two-day event was an eye opener to the delegates who attended. Everyone was satisfied with the quality of the presentation and knowledge benefit.
The conference was hinged on the fact that something serious needs to be done with the unsustainable use of resources across the globe. Sustainable Development was defined as the “… development that meets needs of the present without compromising the ability of future generations to meet their own needs.” Many organizations throughout the world have talked about sustainability but less effort has been put into the practical issues of the subject. It looks like everyone is scared of one day waking up to a resource-depleted earth but nothing further is undertaken to avert such a possible danger. The presenter touched on Malthus’s Basic Theory which projects that one day the world will reach a point of crisis where the population will be more than the available resources. Companies especially need to revise the way they deplete the earth’s resources if future generations are to find anything at all. Closely associated with how people are imposing their demand on the earth’s resources is the concept of ecological footprint. This compares the human demand with the earth’s ecological capacity to regenerate. In simple terms it shows how many earths are needed to sustain the global population supposing everybody lives a given lifestyle. In 2005 it was 1.3 earths. On comparative terms more developed countries have a higher number of earths needed to sustain human life.
It was realized that there are three main aspects that the subject of sustainable development centers on – Environment, Society and Economy. The impact of climate change was emphasized. Developed countries emit more gases into the atmosphere which contributes to adverse climate change and unsustainable lives. In response to the scare of the changing climate and continued unsustainable practices by organizations the UN has convened a number of summits. Notably, the UN commission for Sustainable Development meets annually to discuss progress on combating bad practices on this subject.
The conference discussed the different reporting systems. Some of the systems that were discussed include (AA) 1000; ISO 14000; FTSE 4 Good; DJSI World Index; JSE SRI Index and the GRI. A practical session was held where delegates discussed how the GRI has been implemented by one of the biggest companies in South Africa. Some areas that the company had not considered which are obviously relevant where highlighted. This session opened the eyes, especially to those delegates who have not yet started on the reporting of sustainability in their respective companies. It was quite enriching because it examined practical issues and how best reporting could be done. Keith Levenstein of EconoBEE had an opportunity to present a very rich reporting system that is currently being used by one of the leaders in Sustainability reporting in South Africa. The web-based system makes it so easy and funny to report on Sustainability instead of it being a burden. It consists of a variety of questions that are analysed in a very understandable way that produces the most objective results.
The conference presenter emphasized the need for companies to move further in practicing the most “green” habits. With the guidance of the presenter, delegates were given an opportunity to share some of the initiatives that go towards promoting sustainable development in their companies. It was unanimously agreed that all companies should enlighten the entire workforce on the importance of conserving resources so as to maintain the earth sustainable. The co-operation of every department and hierarchy in the company was identified as a vital thing if sustainable development is anything to materialize in companies.