Issue: September/October 2007


Politically Incorrect

In an address to the FPI conference, ALLAN GREENBLO challenged commonly held assumptions about black economic empowerment. He asked why companies, retirement funds and trade unions weren’t kicking at an open door.

We live by the terms we create,  so we must be wary of their introduction to the lexicon. This is especially true when terms are created for us by politicians, because descriptive terms might sometimes be loaded with emotion to advance a political objective that distorts their dictionary meaning.

It’s a dangerous practice. When applied by governments, it might disguise pitfalls in the purpose. Also, it can inhibit criticism to the extent that the comforts of political correctness stifle the courage for dissent. When something bears a label that has good connotations, there’s a human reluctance to warn of bad consequences. For instance, we might go along with the “war on terror” because we don’t want to be accused of supporting terrorism.

South Africa has a long and unhappy history of words being perverted so that wrongs could be clothed in terms of respectability. In a period of uncherished memory, we had a Suppression of Communism Act which had little to do with suppressing communism; an Immorality Act, which prohibited behaviour that was perfectly moral; an Extension of University Education Act, which closed off opportunities for black people’s university education; an Abolition of Pass Laws Act, which extended pass laws to African women. “Homelands” was the appellation given to rural dumping grounds for impoverished and unemployed black people.

Today, in our democratic society under a constitution that enshrines non-racialism, we have the Broad-based Black Economic Empowerment Act. BEE and “transformation” pervade our vocabulary as they do our corporate behaviour. Nobody who wants a just and stable society can oppose BEE and transformation any more than they can oppose motherhood and apple pie. As always, however, the devil is in the detail. My problems are not in any way with the skills transfer and preferential procurement aspects of the BEE good-practice codes. Rather, they are with ownership.

Can BEE transactions truly be broad-based when they exclude occupational retirement funds, certainly the most broadly based of all investment groupings and frequently the only vehicles through which black workers have been able to save? To what extent is “empowerment” in name also “empowerment” in application, or is it merely a synonym for elitism?

I raise these questions because, I fear, an exciting opportunity is being lost. And it will be lost unless there is serious effort to promote awareness of a vital amendment to the Broad-Based BEE Act as gazetted earlier this year. The codes of good practice now allow, up to a 40 percent cap, for black members of retirement funds to be recognised as company owners under the BEE scorecard.

The effects are profound, at least potentially and doubtless realistically – provided retirement-fund trustees, principal officers and service providers (which includes fund consultants and intermediaries) go out of their way not only to familiarise themselves with the codes as they now stand but also act vigorously to ensure fund members enjoy the benefits that can be derived.

Strangely, Cosatu is prepared to cripple the public service with mass actions for higher pay but has not been visible in ensuring the amended codes are used to the advantage of its members. Equally peculiar is apathy on the part of organised business to kick at an open door.

For this is an area where organised labour and business should have common cause: labour, because it is patently in the interests of trade-union members whose savings are in retirement funds; business, because it makes the scorecard targets easier to reach and hence less costly to implement.

They all have a duty to act vigorously so that fund members aren’t prejudiced by BEE transactions as they’ve commonly been structured. Each time a JSE-listed company issues new shares to an arbitrarily-selected BEE consortium, the retirement funds invested in that company subsidise the transaction to the extent that they are diluted in the proportions of shares they hold and therefore by a reduction in their entitlement to dividends. It impacts adversely on their retirement benefits.

On the labour side, I recently attended a workshop of Cosatu members serving as trustees of a particularly large retirement fund; none of them had an inkling of this adverse impact on their members. On the business side, note for example the latest interims of Reunert; it took a charge of R557 million against headline earnings as the cost of its BEE transaction.

Make no mistake that we’re talking huge numbers, of a huge wealth transfer ostensibly from rich whites to poor blacks but in reality from the broad mass of shareowners – of all colours, from all income groups – for the accelerated creation of a privileged black class. There is an abundance of instances where the rand value of wealth transfer far exceeds the business value that BEE recipients are likely to bring, no matter the sometimes charitable by-products needed to qualify for the “broad-based” description.

Some months ago, purely by way of illustration, Today’s Trustee analysed the effect on one retirement fund of one typical BEE transaction in a particular JSE-listed company. The fund’s members comprised 19 000 municipal workers, about a third of whom earned under R4 000 per month. For this single transaction, the cost to these members was R14 million. When factoring the subsequent appreciation in this company’s share price, and its dividend distributions, the cost to these fund members would significantly exceed R20 million. And this is only one transaction of dozens similarly concluded, bringing in their wake a relative dispossession and hence disempowerment of the poor.

Yet nobody asked the fund members, the black fund members, whether they were prepared to make the sacrifice. Nobody asked them to approve it. Nobody even informed them of the sacrifice they were to make. Were there some culture in this country of shareholder activism, were there demonstrable commitment to the noble pronouncements of the Financial Sector Charter and the King code in respect of transparency and intelligible communication with stakeholders, were retirement-fund trustees adequately skilled in their rights and obligations, it is conceivable that the dynamic of this debate could change quite dramatically. Instead, people are duped by nice-sounding terms and complex jargon. They think that somewhere out there it’s the money of other people that’s affected. They don’t realise the impact on their own pockets of their own money. And the amounts of money are colossal.

In a November 2005 research report, Deutsche Securities quantified it in these terms:

“From a purely clinical perspective, taking South African business as being worth R5,2 trillion – assuming that (JSE) listed companies comprise 55 percent by value – then R1,3 trillion will have to move into black ownership over the next 10 years if (BEE) targets are to be met. The financing of this will cost South African business an effective 2,5 percent to four percent annually, or R130 billion, equivalent to the dividend yield of South African business.

”These numbers ignore the extensive black ownership through retirement funds. They ignore the owners of the savings. On such ignorance relies the frequently bandied and clearly nonsensical computation that less than one percent of the JSE’s market capitalisation is owned by blacks, notwithstanding that the Public Investment Corporation alone owns around 10 percent of virtually all the major JSE corporates on behalf of the predominantly black Government Employees Pension Fund, or the extensive collective investments represented by our giant financial institutions.

Thus, if empowerment for purposes of BEE scorecard ownership is reflected exclusively by black groupings specifically created to take BEE advantage, then relatively few blacks (in selected consortia) become empowered at the expense of the many (in retirement funds). The former become empowered (i.e. richer); the latter become less empowered (i.e. poorer). No matter how broadly based the respective consortia, they can never be as broadly based as retirement funds. These funds are by far the largest single category of JSE investors. Often, they are also the sole vehicles through which millions of black workers hold their savings. It is morally indefensible that they be ripped off. It is surely unintended that the process of empowering some black people causes the disempowering of many others.

The argument has been raised that share ownership via retirement funds is indirect and so shouldn’t be included under BEE. But this argument is fatally flawed. First, as soon as the various consortia become investment holding companies, as they invariably do, their members similarly become indirect shareowners. Second, the means by which shares are held is immaterial because the economic interest of shareowners is identical; both direct and indirect shareowners are entitled to dividends in proportion to the number of shares held and both are equally beneficial shareholders, irrespective of whether their shares are held in their own names or through investment-holding companies or through retirement funds, even where shares are registered in the names of fund managers.

Third, BEE ownership is measured under the good-practice codes not only by economic interest but also by voting rights. Well, all shareowners – direct and indirect – have exactly the same voting rights. Whether they choose to exercise these rights is their business and nobody else’s. It would be obscene to decree that shareowners who don’t exercise their voting rights are deemed not to have them. By the same logic, there cannot be discrimination against members of retirement funds on the basis that their trustees have not given voting instructions to their fund managers, or that their fund managers have elected not to exercise their voting rights at shareholder meetings.

The thrust of the BEE ownership debate has relied on the faulty pretext that JSE companies are predominantly owned by whites to the exclusion of blacks. In fact, the major JSE-listed companies are owned by financial institutions significantly representing retirement funds whose members by number are largely black. It would be unconscionable for these black shareowners not to be recognised for BEE scorecard purposes and thereby pay for creation of a BEE class to enjoy advantages they don’t.

This is what’s happened on each occasion new shares have been issued on favourable terms to selected BEE consortia. Thanks to the intervention of Trade & Industry Minister Mandisi Mpahlwa, against the wishes of several on the BEE Advisory Committee not always invulnerable to interest conflicts, it need happen no longer. The partial recognition of black retirement-fund members means they can now participate partially in the BEE largesse.

The change has some radical implications:

  • Because the BEE codes now recognise black members of retirement funds in calculation of the company-ownership scorecard, members of retirement funds will need to be racially profiled for that recognition to take effect. This can be no more difficult than recording the classifications required by labour legislation for companies’ employment- equity returns. A consequence would be that black members of retirement funds would enjoy a measure of protection from being diluted, and possibly participate in the benefits of new share issues at discounted prices.
  • Because BEE ownership is measured by economic interest and voting rights, it behoves the registered shareholders to exercise these rights on behalf of those whose economic interests they represent. In other words, it elevates shareholder activism from an option to an obligation.

A consequence would be that registered shareholders, notably financial institutions, actually do vote in person or by proxy at meetings of company shareholders. For this purpose, shareholders would need either to take specific instructions from the beneficial shareowners, or have general voting policies (for example, on the issue of new shares at the discretion of company directors), or both. It does not pass unnoticed, by way of another example, that the new Companies Bill proposes that shareholders have an advisory vote on the contentious matter of directors’ remuneration.

We’re at a crossroad, and we have a choice. The crossroad is whether we move to a more participative society where empowerment is given traction by shareowner democracy, or whether we don’t. The choice is whether we want the politics of reconciliation to be eclipsed by the politics of envy, with the inevitability of social conflict, or whether we don’t.

In the financial-services community, our starting point should be in saying what we mean and in meaning what we say.