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Now that the dust has settled after the new B-BBEE code amendments have been announced, Deon Oberholzer, CEO of Gestalt Growth Strategies and sustainable transformation expert weighs in on what the amendments mean for your business.
Before we start, it’s important to understand the context for the amendments by taking into account 2 events. The first being that the B-BBEE Commissioner declared a large number of Broad-Based Ownership schemes and trusts invalid for BEE ownership recognition. And secondly, as an apparent parting gift from retiring Minister Rob Davies, the DTI gazetted the final versions of the draft amendments that came out for public comment about a year ago. The gazette includes an updated General Statement 000 (General Principles) and changes were made to Statement 300 on Skills Development, Statement 400 on Preferential Procurement and ESD, and Schedule 1 containing the definitions used in the Amended Codes and a few Sector codes.
Here are the most notable amendments according to Gestalt.
Luckily the implementation for these changes has a grace period, but it effectively means any company with a financial year ending after the end of November 2019 will have to affect these amendments in their current financial year. This includes the vast majority of businesses in South Africa.
Oberholzer cautions businesses to take careful note and expect verification agencies to be compelled to apply the changes to any verification from December onwards, irrespective of the financial year or measurement period. He explains that “if your year-end was in December 2018 or February 2019 to be sure to have your next BEE certificate done by November 2019 prior to these amendments affective date. There would be very little leeway to change skills development and procurement retrospectively, so it is unlikely to be to your advantage to linger.” Notably with regard to skills development, absorption is redefined and the option of term contracts or continued education is removed. Absorption now means a contract of employment until mandatory retirement. These changes will have tremendous impact on further education and development of new staff, more on this later.
No Generic Exemption For Big Black Business
Interestingly the biggest bombshell is not what was included, but was EXCLUDED entirely. 2018’s draft Statement 000 included a conditional exemption for Large Black Owned Companies; however, this clause has been removed in the final version.
This means all companies with annual revenue in excess of R50m have to comply with the Codes without the option of exemption. Make no mistake, Black Owned Companies will continue to enjoy significant preferential treatment over all other companies, especially if they operate anywhere in the government’s extended value chain. However, there will be added pressure to ensure that the broad based emphasis of the codes are equally engaged with no matter the shareholding.
Probably one of the most exploited “escape clauses” in the previous Codes was the exemption of 51% Black Owned EME and QSE companies. A plethora of ownership schemes, scams and structures mushroomed under this pretext “with only 26% effective ownership” held under easy to dismantle structures. Understandably the Commissioner issued a modification to this flow-through principle. An unintended consequence however, the Codes did not specifically preclude, lead to considerable debate. The new release makes it clear that exemption can only be based on 51% and 100% using the flow-through principle.
The dispute is, however, far from over. The current release does not address the ownership element with regard to broad-based ownership schemes. The B-BBEE commissioner castigated several of the dominant broad-based schemes, triggering intense debate in the media. Should your business have such a scheme in place, Oberholzer recommends you seek advice from an expert B-BBEE consultant to help you navigate your way through this matter.
#FeesMustFall University Subsidy Scheme.
It would seem that government’s apparent response to the #FeesMustFall student-led protest movement is to pass some of the responsibility to business. Skills development expenditure has now been separated into 2 streams, namely funding students for higher education and everything else.
The total skills development target of 6% has not changed, but 2 more points have been allocated to the total expenditure score to increase it to 10. Of this, 4 points are allocated to “bursaries for students at higher education institutions with a target of 2.5%, and 6 points for any other qualifying training utilizing the remaining 3.5% of the allocated spend.
Few companies manage to get full points for the expenditure targets in Skills Development and it is interesting to note that a company that spent 3% (or half of the 6% target) would have received 4 points in the past and qualify for 5.14 points now.
This shift towards higher education will likely have a positive impact, as it will assist the plight of poor students with the added benefit of creating a more direct link between students and industry.
Obzerholzer says, “Any expectation that companies will henceforth spend 2.5% of their payroll on bursaries for full time students is unrealistic and we can expect a number of more business-friendly or budget friendly models hitting the market. Fortunately, a work linkage is added in, in the form of allowance for student stipends. We expect that the most popular models will contain some form of ‘study while you work for a stipend’ programmes, in combination with a strong focus on online learning. There are a growing number of learnerships and skills programmes that run on similar models.”
“One hopes that SARS will produce a higher education equivalent to the Section 12h tax benefits and further that the SETAS investigate more favourable discretionary grants for higher education. If this happens, we may have the potential to achieve some phenomenal and sustainable career outcomes for our youth.”
The 2 points mentioned above were skimmed off the Internship, Learnership and Apprenticeship headcount points without a reduction in headcount targets, but the employed and unemployed categories are now blended along with their targets to go from the previous 2.5% each to 5%.
However, with demographics as the basis of the calculation, it will be beneficial towards business, and the Coloured and Indian minority groups that were largely excluded from this opportunity in the past.
On 29 March 2018, the Department of Trade & Industry (dti) issued draft amendments to the amended Codes of Good Practice for public comment. One of the stunning proposals is that all black owned companies - of any size - are to be exempt from any obligation in terms of the BEE legislation. This was previously restricted to EME and QSE, meaning companies with revenue of less than R50-million. These companies now all obtain a Level 1 if they are 100% Black owned and Level 2 if 51% or more.
The dti proposes a number of clarifying restrictions that seek to ensure that “real black owned business” would be exempt; and not structured companies that make use of the many alternative allowances that companies could use to amplify their BEE ownership [link to: https://gestaltconsult.com/bee-ownership-services/]. This includes the modified flow-through principle, sale of assets, mandated investments, Private Equity Funds, BEE facilitators and more.
It’s not rocket science to understand why this happened - to a certain extent it was probably inevitable. The voice of Black Business is getting stronger and the argument is that they are supposed to be the beneficiaries of BEE, even if they are successful and large. It is common cause that the cost of BEE is high and often a serious financial burden on business. If it wasn’t, black business would not have bothered to lobby government for exemption.
As I see it, there is a real possibility that this seemingly simple concession to black-owned companies may cause some tectonic plate shifting, leading to the effective collapse of BEE as we know it. This decision leaves the cost of restorative BEE transformation squarely with white-owned companies - or non-black owned companies, to be more specific.
We all know that government is rightfully claiming huge success with the establishment and growth of black business and the shift in the economy toward black companies. At the same time, white businesses are increasingly excluded from government and SOE business opportunities, meaning this sector will continue to shrink and the cost of BEE will be picked up by a smaller (and shrinking) group of companies.
Fronting for compliance
One of the main drivers for the shift from narrow-based BEE to Broad based BEE (B-BBEE) many years ago was to counter the fronting that was happening – to be “compliant”, companies merely opened a “black version” of their operations and used that if clients asked for it.
While the exemption goes some way in defining “real black ownership”, it does not seek to define what such a newly-exempt black-owned company may do as their business. What, then, is the difference between a legitimate black-owned trading company that has been appointed as product distributor, and an opportunistic intermediary that would be classified, in my mind, as a “front”?
Some years ago, after the Amended Codes came into practice, I predicted that 2016 would be year for fronting - but perhaps 2019 will evolve fronting to its most sophisticated guise yet. Not that I want to put thoughts into anyone’s heads, as this is murky territory with dangerous consequences.
Expect to see a whole generation of sophisticated “intermediaries” that could effectively shield the white-owned business from compliance, using a form of self-structured “exemption”. If BEE compliance cost more than the cost of maintaining this additional business layer, would it not make perfect business sense for companies to consider it?
Here’s how I see it, having had years of dealing with BEE in all its iterations. There are at least three possible outcomes that could be triggered by this exemption of all black companies from BEE compliance:
- It could trigger the collapse of BEE as white-owned businesses increasingly withdraw from any form of BEE compliance and provide their products and services to black owned intermediaries, thereby ensuring nobody is left to comply with the Codes.
- BEE could simply “work itself out of a job” by shrinking the white economy to the point that government decides there is sufficient transformation to no longer being a political imperative. However, it is unlikely that Government will “cancel” the BEE Codes [link to: https://gestaltconsult.com/wp-content/uploads/2017/02/B-BBEE-Codes-of-Good-Practice-Interpretative-Guide.pdf] as there may be a fear that the economy might pendulum back to benefit white business.
- It could normalise to where the “BEE tax” on white business stabilises in a sort of “supply versus demand” balance; where the increased cost for white business balances with any structural inefficiencies of black business, similar to the “salary premiums” that were required to attract black talent in the early days of Affirmative Action.
If you believe – as many have said on various media platforms - that government has a more radical agenda and the destruction of the so called “White Monopoly Capital” is a real thing, then this release could simply be the end of the beginning.
The basis of this radical view would be that the current phase of transformation was designed to create sufficient black business so that white business could no longer dictate economic strategy. It would then be reasonable to argue that government will push to get to a point where the destruction of white business will not mean the destruction of the whole economy, therefore reaching critical mass in black business could shift the focus to destroying white capital.
On the other hand, if this radical agenda is nonsense, then a white business that takes transformation seriously and has a great scorecard would be able to compete equally with black business. This, though, does not appear to be the case. Consider the SANRAL announcement (subsequently withdrawn) that it would, in future, only deal with black owned companies, and it becomes clear what the intention of State Owned Enterprises are.
Time for comment on the issue is almost up. I’d suggest a careful look at your particular industry, and how the amendments will affect you and, in turn, the economy as a whole.
In the world of internet memes, the difference between a social activist and a social justice warrior is simple. The assumption is as follows: upon entering a building and noticing the absence of a wheelchair ramp, the social activist is inclined to go into action by ensuring that such a ramp is built. The social justice warrior, however, will insist on having the stairs removed so that able bodied people cannot get into the building either.
With 2018 trying to get out of the holiday spirit, and last year’s Women’s Month is long forgotten the pertinent question remains whether enough is being done for the empowerment of women. Considering the opening statement, the point one wishes to draw home is perhaps that the empowerment of women does not exclusively mean the disempowerment of men. That said, wherein does the responsibility to empower women lie? Does it lie with women themselves or with men?
Utilising two generic companies, Gestalt Growth Strategies interrogated the Amended BEE Codes [link to: https://gestaltconsult.com/wp-content/uploads/2017/02/B-BBEE-Codes-of-Good-Practice-Interpretative-Guide.pdf] to determine the extent to which they attempt to empower African women. This yielded surprising results.
If a hypothetical company brings an African woman in as shareholder and ensures that 10% of every level of management has representation from African women and the same percentage of total procurement awarded to an African female owned company versus doing the same with African men, the difference is staggering.
A company supporting women stands to get 27.52 scorecard points compared to 15.82. This is a 74% improvement, just on gender alone. If the women are under the age of 35, this increases to 34.47 points. In effect, the introducing a mere 10% of African women at every level of an organisation can contribute more than 1/3 of BEE scorecard points. Furthermore, the inclusion of a properly managed enterprise, skills and economic development strategy to the above plus the 10% objective will secure a level 4 BEE compliance.
If everything remained the same sans for the replacement of African women by African men the same company will, interestingly end up with a level 8 score.
That BEE legislation has African women’s best interests at heart is clear. This would therefore imply that this group is getting the lion’s share of benefits, correct? Unfortunately, that is not the case. A closer look at the participation of top, senior and qualified women in the workplace reveals a dismal picture.
If we look across all industries, African men are slightly ahead, with a 10% advantage over African women. However, Coloured women are doing twice as better and Indians ten times more. A comparative analysis of the African women’s representation in state owned & private enterprises shows a significant gap with all other groups. Up from a 6.1% representation in 2007, African women make up only 17.3% of top management in 2017. In the public sector, where government has the power to make recruitment decisions, African men are 22% more represented than African women.
But, has anything changed? Although coming from a very low base (Indian women +36%, Coloured women +19%, White women +73%, African male +38.5% & White men -31%), an 122% increase in the participation of African women over the past few years indicates that there is some headway.
Should women empower women or is it a man’s job, you may ask. Can the disempowered empower themselves? In a world that belongs to men, as James Brown once sang, women are still critical players in the creation of balance & growth. It is proven that companies with women at the helm perform better. However, when so many doors remain closed to women (African women particularly), who needs to take responsibility for changing the status quo? Should feminists be raising their voices higher? Would the voices of previously privileged women lend more credence to challenging this? Or could the adoption of a different approach to women’s empowerment by men from all walks of life be the solution?
Who should bear the brunt of empowering women? “We all should”, says Oberholzer.
Is BBBEE really benefiting its intended target market?
The term Black Economic Empowerment conjures up many positive and negative feelings for various reasons. South Africa’s government initiated Broad-Based Black Economic Empowerment (B-BBEE) in a bid to redress the inequalities of the past and empower the South African people. The programme has evolved significantly over the years and, while positive in many respects, has not been without failure or controversy.
While B-BBEE is envisaged to benefit those that suffered through the apartheid regime, it is not necessarily reaching those that it was intended for and who are most in need of help. The first part of the problem lies in the definition and classification of ‘Black’.
The BEE Amendment bill makes it clear that the term only applies to those citizens that were, or were entitled to be, South African citizens before 27 April 2004 and their descendants. If a person is Black and was in the country or arrived later but does not fall into that very clear definition, such a person may be a South African citizen or have a valid work permit but is not supposed to be recognised as Black or benefit from BEE. Neither are their children unless the other parent is Black by definition.
Who really qualifies for BEE?
According to Stats SA’s Quarterly Labour Force Survey (2nd Quarter 2012), South Africa’s population between the ages of 15 and 64 years currently stands at around 33 million people. Of this, about 88.5% are Black, consisting of 74.7% African, 10.8% Coloured and 3% Indian people.
What Stats SA does not publish and probably does not count, are the sections of these population groups that are not included in the BEE definition of Black.
Minister of Home Affairs, Nkosazana Dlamini-Zuma, confirms that Home Affairs has no idea how many illegal immigrants are in South Africa, but it is estimated to be somewhere between five and ten million legal and illegal immigrants.
A recently published article entitled ‘Refugees overwhelming South Africa’, by parliamentary correspondent Denise Williams, states that South Africa has the highest number of ‘asylum’ seekers in the world and that many more people enter South Africa illegally through our notoriously porous borders.
The main problem is therefore that the Black population contains a large percentage of people that are classified as Black by Stats SA and make up the demographics of the South African population, but they are supposed to be excluded from BEE.
As a result, there is a substantial category of the population that are ‘Non-BEE Black people’. If the estimates are even remotely accurate, this could be a larger group than the Coloured, White or Indian population groups.
Verification agencies can pick up from identity documents when a person is not born in South Africa and then insist on proof that the person is indeed BEE Black, but a major new challenge is arising. All of the children of the Non-BEE Black segment of the population that are born in South Africa, whether their parents are legally in South Africa or not, automatically become South Africans.
It has now been 18 years since 1994, these children are entering the job market and for all intents and purposes, they are indistinguishable from the children of BEE Black people. What makes this somewhat absurd is that the children of a recently immigrated Nigerian or German couple will enjoy equal benefit from BEE as their South African counterparts.
Verification agencies will not be able to determine who is supposed to be classified as BEE Black to reap the benefits and who should not.
A case in point; when visiting a popular South African coffee shop, I asked my waiter how many people were employed at the restaurant. It transpired that all 50 employees were Black, but only two were South African. When I asked if they planned to ‘go back home’ the answer was ‘never’.
The new draft BEE Codes that were released in October 2012 envisage that companies will be measured on targets based on the demographic profile of the population. This demographic profile does not differentiate between BEE Black and Non-BEE Black. Verification agencies will have to accept Non-BEE people born in South Africa unless government sets up some government authority on race classification.
As South Africa remains a welcome utopia for many people suffering in other parts of Africa, more and more will flock to South Africa and take their place ahead of our own BEE Black population fighting for jobs and survival.
According to eHow.com and jobsearch.about.com, it is a well-accepted norm that many teenagers in the US get their first job in restaurants and fast food chains. This employment gives them a start in their careers and offers the opportunity for permanent employment.
If the coffee shop I visited is anything to go by, that opportunity has already been lost in the South African hospitality industry.
The Broad-Based Black Economic Empowerment (BBBEE) Amendment bill that is under review after the period for public comment is expected to be released later this year. The bill seeks to address the gaps and unintended negative consequences of the Black Economic Empowerment Act of 2003. But government may find that by plastering up some of the cracks, new breaches will be uncovered.
An end to fronting?
The bill’s introduction of tough new measures to combat fronting has been welcomed by many businesses and verification practitioners and is long overdue. Fronting practices usually refer to misrepresentation or window dressing pertaining to ownership, management appointments and the use of artificial BEE compliant intermediaries.
Fronting will become a statutory offence punishable by fines or imprisonment and the revised regulations will go a long way towards preventing the proverbial puppet show and enrichment as opposed to real development and empowerment.
More red tape and new requirements
A new BBBEE commission will be put in charge of evaluating and monitoring compliance, investigating instances of fronting and prosecuting offenders.
However, the commission will need to provide clear guidelines on what constitutes fronting as opposed to empowerment and how the process of governance is going to work in practice. Companies that attempt to develop their black staff may find themselves on the wrong side of the commission. We can see that the future might have a CCMA type process to resolve these issues. What would the process be for a company that may be unfairly accused of fronting by a competitor or disgruntled employee?
Even more problematic than putting pressure on business is that the bill gives public sector bodies the power to determine and implement their own transformation policies, provided that they have the consent of the relevant minister.
Since these policies are set to take precedence over the BBBEE codes, this could be a recipe for conflicting legislation with far-reaching consequences, including untold confusion for the suppliers who will be at the receiving end. This particular amendment should not be allowed to make it into the final bill.
Tightening up on verification agencies
Verification agencies will have to implement greater vigilance and better measurement processes and heed the bill’s call to report instances of fronting. They themselves can be prosecuted if they fail to identify misrepresentation practiced by their clients.
State gets regulatory autonomy
The bill requires all public-sector entities and state-owned enterprises to use BEE compliant suppliers. This means that any company wishing to do business with government needs to validate their BEE compliance through being verified by an accredited verification agency or IRBA approved B-BBEE Registered Auditor. Exempt Micro Enterprises also need to provide proof of their exempt status and more companies are demanding the SANAS logo on EME certificates. This has unfortunately led to an increase in fraudulent certificates sold to unsuspecting emerging black business owners. Veri-Com recently uncovered one such a scam artist operating right outside of the dti offices at Campus Square selling fraudulent BEE certificates and tax clearance certificates.
Balancing regulation and growth
It is obvious that the South African economy should have a much larger participation by real black business and there are many programs set up by government to assist black companies to become successful and sustainable, but the ever-increasing administrative burden of compliance is taking its toll on all business. Hopefully, government will succeed in growing the economy without damaging it first. Deon Oberholzer is the CEO of Veri-Com and a specialist consultant in B-BBEE
They say employees are the lifeblood of all organisations… It’s true! You may believe that without customers, your business would not exist, but employees are the ones who keep your customers happy, and assist you with important decisions. This should give you even more reason to believe that, training and developing them should be one of your key priorities.
While training employees is central to any business' skills development strategy, coaching and mentoring sis key to help them integrate what they learn in training with what they do at work. It is also an effective way to maximise knowledge transfer - particularly those core skills that are unique to the business - and facilitate succession planning.
Of course, many businesses don't immediately see the value in coaching and mentoring. With budget constraints and fewer people available to carry out certain roles in the company, employers may find it difficult to sacrifice the time and resources needed for an effective programme.
But it doesn't have to be that way.
Coaching and mentoring falls under category G of the learning programme matrix. This means that initiatives relating to those factors can form part of recognised expenditure under the skills development element of broad-based black economic empowerment (B-BBEE). As per the proposed amendments to the scorecard, which were issued in March 2018, 25% of the leviable target amount is now recognised. This expenditure is related to the informal training of black employees, however, training via mentor programmes could also form part of recognised expenditure even if the mentors being trained are white.
How to go about implementing an effective coaching and mentoring programme
Coaching and mentoring programmes are especially effective for identifying and training the future leaders of the organisation, so it is important to identify suitable candidates. At face value, it would be ideal to identify black employees, particularly female black employees or employees with disabilities, who can be trained to occupy leadership positions. However, women employees in general should also be earmarked for development.
Here are some tips on how to effectively design and implement a programme.
- Differentiate between coaching and mentoring.
Leadership management books offer an easy way to differentiate the two. But the basic rule of thumb is that coaching is task-oriented, while mentoring is relationship-oriented. For example, a coaching programme will focus on concrete issues such as effective management, presentation skills, strategy formulation, and financial management. These require a skilled coach who can transfer such knowledge. It is short-term in nature - so it might involve three-day training sessions or online exercises.
By contrast, mentorship is long-term in nature. It involves a more experienced or seasoned leader in the organisation taking an employee under their wing while acting as an adviser. Typically, this will entail conversations around challenges faced in the employee's leadership journey. The mentor acts as a sounding board, helping the employee solve problems that may emerge along the way.
Coaching and mentorship should work hand in hand.
- Determine your objectives
What does the business want to achieve? Does it want to fast-track identified candidates to fill certain positions at a short-term level, or does it want to create a pipeline of future leaders to fill positions as they become available when current leaders move on?
Understanding the objectives will help employers determine the content and time frame of the coaching and mentoring programme.
- Formalise the programme
Employers should consider drawing up contracts and agreements in order to evaluate the performance of candidates. This will also assist in measuring the effectiveness of the programme and make it simpler to claim points in their BEE Scorecards.
Set aside funding for the programme. Align this with your overall skills development budget.
- Identify your candidates
Does the business have candidates already employed within the business or does it want to recruit potential candidates outside of the organisation? What are the skills and competencies required to be a candidate? This is especially important if the aim of the programme is to retain high-performing employees who currently occupy operational roles.
- Train your coaches and mentors
Identify existing employees who will carry out the programme. These will likely be current managers and executives in the business. Remember, their training can also be recognised as a skills development expenditure under the B-BBEE scorecard.
Aligning with your B-BBEE scorecard
The important thing to note is that businesses can maximise category G spending with an effective mentorship programme. This will allow businesses to ensure that they have a steady stream of future leaders, whilst bolstering B-BBEE compliance.
Contact Gestalt to assist you in the development and implementation of an effective mentoring programme for your business. We will assist you by assessing your needs as an organisation and provide you with expertise on how to make it part of your B-BBEE efforts.