Empowerment vital for fostering growth

There have been increasing calls in recent years for the asset management industry to transform, particularly regarding black economic empowerment.

The debate has ranged from a focus on the portion of assets that are managed by black firms to the proportion of black ownership in the industry.

BEE is a critical conversation for asset managers and one that must lead to impactful change, given that allocation of capital is essential for the growth, development and progression of the economy. Its success is essential if SA is to break out of the low-growth trap in which it finds itself.

Previously, I have argued for the need to shift the focus on the transformation of asset managers to look at the proportion of assets managed by black investment professionals at not only black firms, but also the number of black executives who are leading these businesses and the average level of black equity ownership in these businesses. On this basis, if some of the emotion is taken out of the debate, the industry has made significant headway regarding transformation. But there is still a long way to go.

An often overlooked element of the debate concerns the role asset managers should play in driving transformation of the underlying assets they hold. The issue will continue to receive considerable political attention in the build-up to the 2019 elections, but the rationale behind broader transformation should be clear for the asset management industry: a lack of socially inclusive growth or transformation will result in instability, which will lead to a further discount for South African markets and muted growth.

The connection between the markets and society means that there is an economic incentive for the industry to address the legacy of inequality through active ownership practices.

As much is riding on getting transformation right, asset managers should recognise that they have an important role to play in raising the bar across the market regarding broad-based BEE.

A significant step in the right direction has been the introduction of JSE requirements that companies must disclose their BBBEE status. This provides an important publicly available data point for investors as a basis to understand company efforts concerning transformation.

On the basis of our analysis of publicly reported data, about 23% of the shareholder weighted index (Swix) by market cap has no BBBEE disclosure, or their BBBEE status is reported as noncompliant. A further 10%, based on market cap, is reported at level 8. This means that collectively about 33% of the Swix by market cap is performing extremely poorly in respect of BBBEE.

Our research shows that transformation progress is better in those sectors where there is strong national control over the licence to operate, such as in mining, financial services and information and communication technology.

However, in areas such as retail, where government control over the licence to operate is small, the pace of transformation is slow.

Notwithstanding governmental leverage, the imperative to drive change is equally important across all sectors. Given the triple challenge of unemployment, poverty and inequality, there is an increasingly urgent need for companies to put their weight meaningfully behind the driving of inclusive growth and transformation in SA.

This can be achieved through enterprise development, skills development and the offering of inclusive products and services, all areas that are at present underrepresented in terms of BBBEE activity.

The launch of the Youth Employment Service programme is a great example of this.

However, there is still an overreliance on ownership as the key measure for transformation in the industry.

While an important consideration, many companies are missing the opportunity to drive enterprise and skills development and offer inclusive products and services due to this preoccupation with ownership.

In our business, we have identified the laggards across our investment holdings and are engaging with relevant company management productively to provide support on their journey towards greater transformation.

This is a critical means of generating return for clients and it is also important concerning the creation of long-term social system resilience, which is so desperately needed if this country is to thrive and grow.

TRANSFORMATION PROGRESS IS BETTER IN THOSE SECTORS WHERE THERE IS STRONG NATIONAL CONTROL OVER THE LICENCE TO OPERATE, SUCH AS IN MINING