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Direct ownership of companies and active involvement in strategic decision-making are crucial if genuine economic transformation is to become a reality.

Executive chairperson of Zungu Investments and member of the president’s black economic empowerment advisory council, Sandile Zungu, said it would be impossible to run the South African economy and “take it to the next level if we only own shares. We have to own the business itself and lead its strategy.”

Innovative participation

Addressing a Gordon Institute of Business Science forum on innovation and broad-based black economic empowerment, Zungu said the introduction of the final regulations to the Broad-Based Black Economic Empowerment (B-BBEE) Act in June 2016 signalled a shift in economic empowerment to encourage the creation of black entrepreneurs, as well as ownership and participation.

The government’s black industrialists policy, released in 2016, aims to promote the creation and long-term sustainability of black industrialists. This was a step change from the previous code where broad-based trusts and employee schemes had been frequently abused to conceal fronting.

The underlying objective of the revised act, which place emphasis on ownership, management control, skills development, enterprise and supplier development and socioeconomic development, is for empowerment to deepen the entrepreneurial culture.

Zungu explained empowerment had now entered into what he termed the industrial phase.

“In the early phase, many people got very wealthy. Now the move is towards creating black industrialist to ensure black people control and are involved in the companies they invest in. It is about developing a respect for profit and loss and deepening their skills and knowledge. We must allow for a multi-pronged strategy for change in this country.”
He said the current task of the BEE advisory council was to make sure industrialists “find deep roots”. While there is room for trusts, there is “even greater room for those who want to roll up their sleeves and get involved and not just have a passing shareholding in a business”.

Head of corporate finance at Bravura Soria Hay said BEE codes were necessary because “behaviours do not change easily and structures do not change by themselves”. She said the revised codes shouldn’t be approached as a regulatory framework seeking to impede business, but rather as “an opportunity to change our thinking”.

“The business community must think innovatively about economic participation, industrialists and how we create the next level of black entrepreneurs. There are innovative ways to structure economic inclusion,” she said.

Fronting and trusts

Hay explained that fronting, or using opportunistic intermediaries in an attempt to window dress, has been criminalised under the amended B-BBEE act.

The legislation introduced penalties for those found to be involved in fronting of a fine of up to 10% of turnover, or imprisonment for up to 10 years.

Trust structures in particular have been subject to abuse where fronting is evident.

The Broad-Based BEE Commission, formed with a legislative mandate to receive and investigate complaints of any breach of the act, was worried about amorphous trust structures without clear beneficiaries or evidence of benefits, Hay said.

Zungu said that while in some cases trusts were viable and the most administratively sound vehicle to structure a transaction, they were open to abuse. He expressed concern that trusts were not in the interests of communities as they are commonly used for fronting.

“We are so bothered by fronting because the ownership patterns of the economy still broadly resemble our apartheid and colonial past. Most of us are filled with shame that we have not done enough,” Zungu said.

Fronting had become increasingly sophisticated, he added.

“It is important to make sure that the spoils are spread out among as many people as possible and ensure trusts are not blunt instruments to be used against local communities,” he said.

Johan van Zyl, co-chief executive of African Rainbow Capital and Ubuntu-Botho Investments said it was a “travesty” that so much empowerment activity is, in fact, fronting.

“We must look ethically at what we are trying to achieve, which is to make more people participants in the economy.”

He added that BEE deals that fail are often “overleveraged and over-dependent on the market and on luck.”

The increased scrutiny that comes with being a publicly-listed company was one mechanism to remove the overreliance on trust structures, which he called “a scourge plaguing BEE” and could assist to ensure people can really benefit and participate in the economy.

The move to values-based business

A values-driven business is an irreplaceable intangible if companies want to be sustainable over the long term, Van Zyl explained.

“You have to be a values-based organisation in order to survive. Business has to make money. That is important. But the foundation remains its values.”
Zungu added there was a move towards a greater commitment to values among business. “Values are important. You can’t only pay lip service to the values you are espousing. It is possible to transform the South African economy in a way that will preserve our status, and even enhance the country’s standing in the global economy,” he concluded.

Watch Here (Sandile)

Watch Here (Soria)

Watch Here (Johan)

Published in  City Press / 18 October 2017