Edition: September / November 2015


Words, words and damned words

Critically missing is the concept of dilution. When R317bn in “value” has been “created”, pension funds should determine whether their members – specifically their black members – are benefiting or paying.

Terms can be emotive or descriptive, informative or misleading, helpful or deceptive. Into which category should “broadbased black economic empowerment” rightfully fall? Whoever concocted it deserves a medal for marketing. Whoever professes to understand the codes is worthy of applause for the sheer time and effort required to unravel them. Whoever deigns to contest an evolution wrapped in the warmest connotations of political correctness and desirability, can face the fate of a heretic.

Zuma . . . 3% distraction

In time, the B-B BEE term in popular parlance of the ANC government might be seen as a misnomer similar to the manner in which the former National Party government commonly used terms to confuse their real meaning and intent: the Suppression of Communism Act which had little to do with supressing communism; the Immorality Act which had nothing to do with immorality; the Extension of University Education Act which prevented black people from entry to UCT and Wits; the Abolition of Pass Laws Act which applied “influx control” to African women, and the social engineering of “homelands” in reference to “independent” bantustans.

The terminology hurdle arises at a time to feel good about the achievement of B-B BEE. Computing the transfers of ownership in the JSE’s top 100 listed companies, comprehensive research by Intellidex chairman Stuart Theobald has found that the value created for black beneficiaries of BEE deals concluded to date stands at a debt-free R317bn.

In anybody’s language, this is a huge amount. It equates, for example, to roughly double the market capitalisation of Barclays Africa. It eclipses that of Old Mutual and exceeds that of Anglo American. It’s more than 10 times that of Coronation.

But conspicuous by their absence from the BEE transactions are retirement funds. Although they’re the largest single category of JSE investor, they’re consistently excluded from the largesse. Although their black members comprise a numeric majority, making them a more broadly-based vehicle than any other, they’re invariably ignored. And although it could have been relatively easy to ring-fence them as identifiable groupings, their existing shareholdings have subsidised the wealth transfers to recipients less broadly based.

On each occasion that a company has issued new shares for a BEE transaction, existing shareholders have been diluted. The proportions they receive in dividend flows and capital appreciation, which accumulate in their retirement funds, are reduced. The R317bn in “value created” must have been partly, if not substantially, at their expense.

Check further that the “value” was “created” for, not necessarily by, the BEE beneficiaries. Had there been no BEE transactions to extend share ownerships, as a requirement for companies’ licences to operate, it can be argued that retirement funds (obviously including their millions of black members) would have been better off.

The sheer magnitude of the R317bn throws into sharp relief the precise nature of BEE as it is practised, recognised and accepted:

  • Dilution must become the apex of debate within the retirement-fund industry. The trade unions should have led the charge years ago. That they didn’t do so hardly redounds to their credit. The R317bn computation makes glaring the reason for them to roar;
  • For all the efforts of National Treasury to promote retirement-fund reform, aimed at improving benefits for fund members, it’s a notable omission that the dilution effects of BEE were off the radar. There’s time to put them on, before the effects further erode fund members’ benefits;
  • Dilution will be worsened if the principle of “once empowered, always empowerment” is kicked from the BEE codes; if President Zuma stands by his contention that black people own only 3% of the JSE (ignoring the stakes of retirement funds) to create fresh rounds of BEE, and if retirement funds don’t themselves stand up to defend their real economic interest;
  • The exacerbated inequity in BEE, evident from the Intelligex study, is its spread. Where the share prices of listed companies have performed spectactularly, the beneficiaries of their BEE transactions have reaped spectacular rewards. Where respective share prices of other companies have performed poorly, the BEE rewards have been poor. The luck of the draw – where a black employee works, where a black director serves, which recipients have been chosen – is a function of subjective selection;
  • “Broad based” relates to no objective number or structure. “Empowerment” has no objective meaning beyond a synonym for the handout of wealth, either to be privately pocketed or diverted to social programmes that companies should (and frequently do) implement on their own initiative outside of BEE. And while “value created” can be quantified, it begs interpretation: on BEE’s role in this creation, the outcomes in distribution of this value, and the expense to existing shareholders in having provided it.

Massive pension funds in the public sector, such as the GEPF and Eskom, represent vast numbers of black members. Although these funds are definedbenefit, where the taxpayer effectively underwrites the benefits promise, dilution nevertheless affects them.

The more their investments are diluted, the less their proportionate dividend receipts and consequent scope for annual benefit increases.

Those in the private sector, including funds controlled by trade unions and bargaining councils, are predominantly defined-contribution. They’re additionally exposed because the value of these funds, and hence of their members’ ultimate benefits on retirement or job loss, are in the value of their investment portfolios. There’s no backup from an employer or the state. Each time an investee company issues new shares for a BEE transaction, it’s their fund that contributes to payment for it.

A conflict thus arises. On the one side are black business lobbies wanting BEE to be accelerated. On the other are pension funds that acquiesce by their silence, either because they’re unaware of the prejudicial implications or because trustees are afraid to stick their heads above the parapet.

The funds should be quiet no longer; not to challenge the self-evident need for socio-economic transformation, which takes many forms that they have rights as shareholders to advance, but to articulate their interests in a debate refocused to ensure that “broad-based black economic empowerment” means just that.