Issue: April/May 2007
Editorials

NEW BEE CODES

Empowerment for the people. VIVA!

Black members of pension funds can now be recognised as company owners for BEE purposes. This breakthrough significantly changes the numbers game for the scorecards, and has numerous other spin-offs that are equally profound. There are very real benefits for all parties, provided they make the effort to realise them.

It’s official: success at last! The cause that TT has vociferously championed over many months – for black members of pension funds to be recognised as owners of companies in which their funds are invested – has been won.

Plough through the detail in the final codes of good practice for broad-based black economic empowerment (BEE), gazetted in February, and the victory is evident. It’s a little belated in that so many of the deals in larger JSE-listed companies – where pension funds are mainly invested – have already been concluded. But more opportunities will come, certainly as new deals are initiated and possibly also as some existing deals unravel.

The paradigms in calculating BEE ownership of companies change significantly by the inclusion of what Trade & Industry minister Mandisi Mpahlwa has described as “indirect ownership”. This is to the undoubted benefit of companies, where they have fund managers representing retirement fund members as the beneficial shareholders, and of the black fund members themselves, where their trustees take the trouble to ensure participation.

The critical clause in the codes is that black participants in “broad-based ownership schemes”, holding rights of ownership in a “measured entity”, may contribute “a maximum of 40 percent of the total points on the ownership scorecard of the measured entity” if they meet certain basic qualification criteria and 100 percent of the total points if additional criteria are met (see box).

The compliance target for “ownership” is fractionally over 25 percent of the votes in the measured entity, and ownership is credited with 20 points (the highest, with preferential procurement) out of 100 on the generic scorecard. Under the codes, BEE must be measured “by substance over legal form”. In turn, ownership is measured “as an entitlement to both voting rights and economic interest”. The codes add: “Any financing structure that passes the test will be able to obtain ownership points.”

To take advantage, what actions should be undertaken?


Mpahlwa . . . never too late

  • At retirement funds, the principal officers and trustees will need to profile members on racial lines – much as employers do for requirements of employment-equity legislation – so that the extent of black members’ economic interest is quantified. A separate structure might need to be created within funds, and especially umbrella funds, to qualify as a “broad-based ownership scheme” (for example, that 85 percent of benefits accrue to black people);
  • At fund managers, which are usually the registered shareholders of companies where the funds invest, there’d need to be clear mandates from retirement funds for the exercise of voting rights;
  • At these companies, being the “measured entities”, there’s the carrot of an easier target for BEE compliance on ownership against the possible stick of shareholder activism if the fund trustees and fund managers do the jobs now expected of them.

The codes are explicit that ownership schemes must encourage “full participation of beneficiaries in all structures” and “accountability by fiduciaries (trustees and fund managers) to the intended beneficiaries”. Equally, they must discourage “a practice where no real powers of ownership accrue to beneficiaries”.

True, the 40 percent of total ownership points allowed does cap the extent of funds’ recognition. But the principle of recognition is absolutely right. Among other reasons, it

  • Accepts that members of retirement funds – the most broadly based ownership schemes – are beneficial shareowners with rights undiminished by shares held indirectly through fund managers;
  • Acknowledges that black members of retirement funds are as much entitled to the fruits of BEE wealth transfers as other black individuals;
  • Restricts the subsidisation by black members of retirement funds – often the main and sometimes the only vehicle through which black workers save – of arbitrarily selected black consortia;
  • Reduces dilution of existing black shareowners, when new shares are issued on favourable terms to BEE consortia, causing them to receive a lesser proportion of future dividends and capital appreciation;
  • Entitles them to a voice at meetings of company shareholders, and even a power to block special resolutions, enhancing their capacity as transformation agents to oversee implementation of non-ownership BEE practices such as skills training;
  • Strengthens the “democratisation” of company ownership, representing a culmination of the workers’ campaign through the 1970s and 1980s for the assertion of greater influence over assets by those who put in the money and bear the investment risk;
  • Facilitates the funding of BEE transactions by recognising the extent of company ownership already in black hands, at the same time rendering obsolete the computations of JSE-listed companies’ ownership that ignore the inclusion of retirement funds.

Not entirely clear from the codes is the position of the Government Employees Pension Fund (GEPF). Through the Public Investment Corporation (PIC) as its agent, the GEPF is the largest single JSE investor. The codes provide for an “excluded equity principle” that applies to “government owners”. The sole PIC shareholder is government, and members of the GEPF are government employees.

Yet a GEPF member is no less a beneficial shareowner than any other individual member of any other retirement fund. If an intention of the “excluded equity principle” is to exclude them, or the PIC, it’s inconsistent and therefore wrong.

CRITICAL CRITERIA

To satisfy the basic qualifications as a broad-based ownership scheme for 40 percent of total ownership points:

  • Management fees must not exceed 15 percent;
  • Constitution must record the rules governing any proportion of economic interest received and reserved for future distribution and application;
  • At least 85 percent of the value of benefits allocated by the scheme must accrue to black people;
  • At least 50 percent of the fiduciaries must be independent persons having no employment with or direct or indirect beneficial interest in the scheme;
  • At least 50 percent of the fiduciaries of the scheme must be black people and at least 25 percent must be black women;
  • Chairperson of the scheme must be independent;
  • On winding up or termination of the scheme, all accumulated economic interest must be transferred to the beneficiaries or an entity with similar objectives.

Additional criteria for 100 percent recognition:

  • A track record of operating, or demonstrable evidence of full capacity to operate, as a broad-based ownership scheme;
  • Operational capacity evidenced by suitably qualified and experienced staff in sufficient number, experienced professional advisers, operating premises and all other necessary requirements for operating a business.