Edition: February/April 2018


A vision designed to work

Financial institutions are positioned to be in the forefront of ‘radical economic transformation’. They’ve committed themselves to the means without the blights. Great promise beckons.

What a mouthful is “broad-based black economic empowerment”. It sings political correctness, sometimes propagandistic and sometimes meaning what the term implies. Around it a veritable industry of codification, compliance, measurement, enforcement, consultants and certification has been spawned.

They all come at a cost to be considered worthwhile only to the extent that BBBEE is realistically, in substance overriding form, the end result. It isn’t always so. One example is the skewing of benefits to arbitrarily-selected elites, disproportionately trickled to broader bases. Another is the dilution of shareholdings held by retirement funds, which are the largest depositories of black peoples’ long-term savings, as companies issue new shares to elevate ownership recognition.

What are reasonable tests for success? Surely helping many more black people to participate in the economy by providing access to capital, with leg-ups in skills transfer and supplier development, must be amongst them. These should facilitate economic growth, painfully absent, without which there’s scrapping for morsels. And where there’re rivers of money swilling around, as ends lacking efforts, temptations to flaunt consumption distort the nobler objectives of wealth redistribution.

Codes of good practice, for companies to know and agree on the actions expected of them, are necessary interventions. The more comprehensive and meticulous the negotiation, the greater the likelihood of successful implementation. The Financial Sector Code (FSC), recently gazetted under the BBBEE Act, stands out for the ultimate accord reached by a representative cross-section of the industry’s drafting participants.

In a better world, there shouldn’t be a need for legislative compulsion of BBBEE. It makes such obvious sense that business models be adapted for penetration into target markets by boards and managers finely attuned to them. Demographic representation does carry a certain logic, much as it perpetuates racial classification in order supposedly to someday defeat it.

Undeniable is that SA’s demographics are swiftly changing. In relative terms, the white population is ageing and contracting; the black population is younger and growing. Rapid emergence of this urban middle class, salaried and aspirational, itself motivates “transformation” in companies’ ownerships and operations allied to it for businesses’ own futures.

This may happen, with varying levels of enthusiasm, in the natural course. BBBEE codes of good practice are intended to push along the process.

There are defects when application is limited to those in jobs or seeking to find them, eluding the jobless and impoverished communities. Similarly, because of racial quotas in line with demographics, it discriminates against whites where they might be objectively assessed as better qualified for employment and promotion. A lacklustre economy, becoming protracted in SA, exacerbates competition for scarce jobs.

Then take sector comparisons. They belie a uniform judgment on the efficacy of BBBEE as a whole. As much as the charter for the mining industry is inherently bad, and opposed by miners because it will stymie investment, the FSC is inherently good and supported by financial institutions because it encapsulates the principles for their continued relevance.

To a greater or lesser extent, and in their own business interests, institutions can already claim to be off the mark in what the FSC requires of them. What the FSC really does is standardise the markers for economic inclusivity to be promoted.

As set out in its preamble, this Code “commits all participants to actively promoting a transformed, vibrant and globally competitive financial sector that reflects the demographics of SA, which contributes to an equitable society by providing accessible financial services to black people and by directing investment into targeted sectors of the economy”.

Unique to the sector is its ability to provide empowerment financing and access to financial services: “They empower the previously disenfranchised through the provision of affordable housing, financing of black SMMEs (small, medium and micro enterprises) and agricultural activities, and investing in various types of infrastructure that help to create the necessary platform to grow the economy on an equitable basis.”

Also unique, because of such regulatory requirements on the capital adequacy of banks and life office, entities can top up ownership points through the “equity equivalent” of providing commercial-risk capital to black industrialists. The need for top-ups will arise on the exit of existing empowerment shareholders, thus offering a riposte to the “once empowered, always empowered” contentions.

Scope of the FSC embraces the industry’s gamut, from the largest banks to the smallest stockbrokers. Some compliance elements will complement established businesses; financial education, integral to socio-economic development, is a case in point (see First Word). Some could be disruptive; preferential procurement of services from black-owned firms is an example (see box).

Up for measurement are ownership, management control, skills development, enterprise and supplier development, and socio-economic development. For compliance, each element is weighted and awarded scorecard points in a matrix of definition and detail.

Indeed, the detail dazzles. Spend a few hours on the website of the Financial Sector Charter Council to start coming to terms with it.

A summary notes that, although the BBBEE Act and codes do not impose legal obligations on firms to comply with BBBEE targets, a business’ BBBEE status affects its ability to tender for public-sector work and to obtain licences in certain activities. Also, many private-sector businesses require their suppliers to have a minimum BBBEE rating in order to boost their own BBBEE rating: “BBBEE is accordingly an important factor to be taken into account by any business in normalising and conducting business in SA.”

What then of retirement funds? Since many aspects of the BBBEE dispensation aren’t relevant to them, and there is no body authorised to have represented them in the negotiations, the top 100 funds (including umbrella funds) have been incorporated on a voluntary basis only.

However, it is recognised that retirement funds “have a critical role to play in the financial sector itself, largely by the appointment of private-sector service providers”. The proposal is therefore that the funds measure themselves annually against relevant aspects of the Code’s BBBEE scorecard i.e. that large retirement funds compile and publish annual scorecards for the elements of preferential procurement and management control.

Trustees have little or no influence over membership demographics. So it’s suggested that large funds not be scored on the ownership aspects but report annually on the proportions of fund liabilities attributable to black male and female members. Further, because of the roles played by trustees and principal officers, the funds should annually disclose details of the amounts spent on training for each office bearer and staff member.

In addition, initiatives in member education should be disclosed in terms of both the number of members trained and the amount spent relative to the size of membership with a narrative on the BBBEE score achieved and future plans for improving it. If sufficient disclosure is not obtained, the Charter Council will consider revising the dispensation.

There’s no stipulation that retirement funds, whose primary purpose is after all to provide retirement benefits, should entertain the added layers of cost. Rather let them be carried by the service providers, under their incentives, for them to earn the scorecard points.

Get the FSC working for the stimulation of economic growth and inclusivity. Then the coming year, into the years ahead, could offer lift-off from the stagnation of the last. View the FSC as potentially the most formidable private-sector initiative, whatever the government.


Parties at loggerheads in the Codesa negotiations ultimately produced the SA constitution. Like a little Codesa, marked by intense lobbying this way and that, the cross-section of participants representing players in the finance industry eventually reached unanimity on the Financial Sector Code. The achievements are comparable because the FSC lays the groundwork for transformation distinctively within the capacity of financial institutions to effect.

Vawda . . . intellectual force
Vawda . . . intellectual force

Grim economic circumstances – of zero growth, ratings downgrades and the Steinhoff blow to investment markets – are far from ideal for systemic reform. But equally they compel a realism that facilitates it. Backs to the wall, predicament is the mother of consensus.

A starter is the broad acceptance, at last, in calculating the economic interest of black people in SA corporates. As TT has long argued, ownership particularly through retirement funds is central. Past surveys, notably for the JSE, have ascertained that the number of black individuals has come to exceed the number of white. It is a quantifiable measure of transformation progress.

These figures cannot be debunked, the more so since they’re pretty much confirmed by the survey subsequently commissioned by National Treasury. It telescopes the focus into appropriate structures for exercising rights of ownership, as for example through investment mandates and proxy voting, which has much more practical merit in nailing down empowerment than constant haggling over macro numbers.

On the micro numbers within the financial sector itself, research undertaken by investment manager 27four is invaluable. Whereas the company’s earlier surveys might have induced scepticism, for allegedly flawed counting and special pleading, its most recent is greeted for the authority born of objectivity. Previously getting up the noses of established firms held to be lacking blackness, in terms of ownership and executive seniority, this survey has benefited from cooperation with them through researchers at the Association of Savings & Investment SA.

A beneficial spin-off is that 27four managing director Fatima Vawda, outspoken from the platform of the Association of Black Securities & Investment Professionals, has joined the main board of Asisa. An articulate agitator if ever there was, she goes inside the tent to argue her cause for accelerated transformation at the top of the bigger guys and a larger slice of the pie for the smaller. Now with her on the main Asisa board, also with Absip credentials, is Mazi Capital chief investment officer Malungelo Zilimbola.

Pertinent in this context is the 27four finding that, of the total R4,6 trillion pool of assets managed by the private sector, less than a tenth is allocated to asset managers which are black-owned (“black” as defined by the Department of Trade & Industry empowerment codes). This fuels the argument against perpetuation of the savings and investment industry’s power concentrations.

“The situation is SA is dire,” Vawda emphasises. “To achieve good outcomes in redressing inequalities and progressing transformation, we cannot have us-versus-them approaches. We must pull together in delivering from unified positions.”

She’s impressed by Asisa’s committee structures, but believes that memberships predominantly comprising the most senior executives in the largest life offices and asset managers don’t properly appreciate the difficulties of smaller independents in gaining access to markets: “My intention is to help integrate younger black firms into the mainstream and to bridge the gaps that exist.”

In her experience, top executives don’t even know how lower tiers in their organisations are resisting interactions and denying shelf space to highly capable people. Aspirants for allocations also have to battle against trusted brands and the pricing advantages of critical mass, both of which take time and opportunity to develop.

Additionally, amongst the dominant institutions there’s often a vertical integration of value chains from actuarial consultancy to fund management, from risk benefits to member advice. Packages make it difficult for the independents to compete on any one service, she contends.

Expect provocations aplenty from Vawda. Expect also that she’ll be a frontrunner for employment equity and stakeholder activism, from sleepy pursuit to lively monitoring. Power is in the hands of asset owners, she insists. This moves the wheel full circle, back to retirement funds and their service providers, now under pain of the Financial Sector Code’s year-end review.

It’s been said that the avoidance of a troublesome woman is the beginning of wisdom. In this instance, where government looks quizzically at the industry, it’s the opposite.