Issue: December 08/February 09


Just say no

Demands for an increased BEE stake in financial institutions continue. There’s a multiplicity of reasons to reject them outright.

Allow a muted cheer for the banking crisis. Market turmoil should lay to rest, and hopefully put to death, the thinly disguised wealth grab for an addition to the direct “empowerment” shareholdings in financial institutions.

As if the existing 10% had not already come at a cost of billions to existing shareholders, including black members of retirement funds who’d been significantly excluded from the intended largesse, a stratum of politicians new to the corridors of power wants another five percentage points added to the black economic empowerment (BEE) direct ownership scorecard accommodated in the Financial Sector Charter.

Cosatu, which has seen former colleagues enriched beyond their dreams, has been typically blunt in its demands. Supplementing them is the argument cleverly articulated by Mathews Phosa, now the ANC treasurer-general, who introduces the weight of government.

He speaks of “compromise”, although an agreement hammered out in Nedlac with organised labour is already in place. He implies that a higher level of BEE ownership will promote faster transformation of the sector and greater benefits for “people at the bottom of the wealth pyramid”, although it’s obscure how the higher percentage of direct ownership is more likely to succeed where the lesser percentage has allegedly failed.

No, for the subtext is arguably that a fresh bunch of post-Polokwane political masters can pressure institutions for another bite of the cherry. The populist pretext, wholly unproven, is that a larger BEE direct stake makes for better transformation. Were there a correlation, either the first 10% was a waste or there’s no reason to stop at another 5%.

Mathews Phosa

Phosa . . . wants more

Phosa is forthright that the ANC as government wants to intervene so that BEE beneficiaries are earmarked as “those organisations that genuinely make a difference in the communities that they serve, and to channel dividend funds to them so that they can assist communities in participating in projects that affect them”.

No, is how the financial institutions should respond without pussyfooting:

  • An agreement already exists in the form of the Charter. An agreement is not simply a basis to renegotiate a different agreement;
  • The Charter provides for a wide range of transformation objectives, defined and measurable by both quantum and time scale. They include affirmative employment and procurement, skills transfer and empowerment financing, enterprise and agricultural development, improved access to financial services and consumer education, and targeted investments. Cumulatively, they make Phosa’s argument redundant;
  • If there is a basis to attack the Charter, it is not because the objectives are lacking. It would be because implementation is lagging;
  • To create controversy over ownership is to distract attention from the difference in the critical areas of transformation that the Charter is designed to make. It doesn’t necessarily follow that higher BEE direct ownership will cause the allocation of funds to a new category of direct shareholders for projects “that affect them”. Shareholders have no obligation to divert dividends from private pockets to public projects;
  • As it stands, the Charter provides for 10% direct and 15% indirect black ownership. Technically, the “organisations that genuinely make a difference in the communities they serve” would have to hold their shares in some form of collective vehicle such as an investment company. Thus, by definition, they can become indirect shareholders (through this company) within the 15% category. Unless the addition of 5% direct shareholding is code for some present-day communists to transform into elite capitalists, the proposition is superfluous;
  • Yet it begs the question of why little attention has been paid to indirect shareholding, through collective investment vehicles such as retirement funds, permitted in the good-practice codes. Neither the ANC nor alliance partner Cosatu have been in the forefront of promoting this recognition, despite retirement funds being the single largest repository of black workers’ savings.

But suppose, for the sake of debate, that all these arguments were dismissed. There are then down-to-earth practical considerations:

  • In the current share-market turbulence, it can reasonably be assumed that a number of the largest BEE transactions in the financial sector are under water. For instance, the Old Mutual share price has fallen to roughly half and the Investec share price to less than half of their values from when their transactions were concluded. These transactions, like many others in the industrial sector too, were supposed to have been without risk. Instead, risk becomes unavoidable should future dividends be insufficient to meet loan repayments;
  • Depending on the detail of respective deals, at least some BEE recipients (formerly known as beneficiaries) would be able to escape the risk by simply walking away. If they don’t, they take the knock because the loan-financed shares had already been issued to them at higher prices. If they do, the funders take the knock by having to realise their security at the shares’ diminished value;
  • In instances where the BEE recipients do walk away, the institutions and companies will have to reinstate their BEE shareholdings to the required levels. Do they again issue shares and provide funding to the same people who’d just walked away?
  • Inevitably, to refinance existing deals will stretch the banks’ lending capacity when their capital is unduly tight; it will also favour selected BEE groupings against the individuals and businesses whose loans are called up when they sour. Alternatively, the issue of new shares will come at further cost to shareholders in that they’d face further dilution;
  • Across the world, banks are in a quest for capital. Desperation is forcing governments, for want of anybody else, to provide it. Were banks in SA in need of more capital, as they are from time to time so that they can advance new loans without calling up old ones, it’s hardly likely that their debt-burdened BEE shareholders would be able to support rights issues. The same might be said of some controlling shareholders also. Consider, for example, Barclays at Absa or Old Mutual at Nedbank. Recapitalisation of SA banks would be difficult enough under current circumstances, even without direct BEE shareholdings extended.

Unless there’s a significant and sustained upturn in share prices – somehow, some day before a proliferation of BEE loan defaults – there must be a real probability of several large empowerment deals unravelling. But look on the bright side. It’s that their unravelling would offer the opportunities to replace present consortia with shareowners in the communities for whom Phosa pleads, leaving the sector charters and gazetted codes undisputed.

There’s a complementary irony. That banks in SA are adequately capitalised, at least for now, renders them immune to nationalisations of the US and European varieties. For those in the ANC alliance leadership who cling to visions of controlling the economy’s “commanding heights”, it must be frustrating that a similar need for government bail-outs doesn’t arise here.

Thank heavens for relative mercies.