Implementing laws that are essential to transformation

LAWS are hard things to implement. Within South Africa, we have many examples of truly fantastic pieces of legislation; concepts that are progressive and well-structured, but which don’t impact the lived reality for those it intends to protect or help.

The story of South Africa very often reads as “fantastic idea, poor implementation”.

For the millions of South Africans who have been ill-served by our democracy, economic transformation is one of those very good ideas that has failed to be properly implemented over the past 24 years.

However, should you spend some time reading the 107 pages of the 2013 broadbased black economic empowerment (BEE) code 1, along with the latest 55-page amendment 2 that came out this year (which relate to enterprise and supplier development), you will see a well-drafted concept.

If the codes were applied and followed by all players within the economy, it would create wide-sweeping, positive changes with regard to developing skills, creating jobs for black people and generally uplifting the quality of life of most South Africans.

The problem lies in that the BEE codes are completely voluntary; it is akin to a nice suggestion on how companies should behave. If you don’t feel like abiding by the codes, you need not, because it is only if you need the government for licences or do trade with the government that the codes have any bearing on your business.

Sometimes the reason for not transforming a company can relate to practical operating constraints, as in the case with some micro or small businesses, but in regard to medium and large businesses, it’s because the company leadership either simply don’t care enough about the people within this nation or are overtly racist.

For those who aren’t familiar with the codes, let me simplify how the codes work and how they focus on creating greater economic participation and transformation of the economy for black people.

The codes specify how companies earn points, that when totalled lead to their BEE level, along the following lines:

How much a company contributes towards developing black enterprises and suppliers, as well as buying goods and services from black businesses (this is the largest portion of the codes, accounting for just under 40 percent of the total score), how much shareholding and control within a company is in the hands of black people (which accounts for about 20.5 percent of the total possible score).

And how much a company contributes towards developing skills in the country (about 20.5 percent of the total possible score), how much black management control there is across all levels of management, within a company (about 15.5 percent of the total possible score), and how much general socio-economic development a company does (the smallest portion of the codes, with around 4 percent of the total possible score).

Creating justice

At every level, the codes are a good attempt at creating greater justice in a society that is structurally, brutally, unjust.

In order for the codes, which are already entrenched in our culture, to realise their potential, they must be linked to corporate income tax (CIT) in a way that says “should you comply to a high degree, you get to keep paying 28 percent on the profit your company makes. But if you don’t transform, you will pay more tax”

Taxation is a powerful lever for behavioural change, as all profit-making companies are obliged to pay it, with little room to escape such an obligation. As the saying goes, the only things that are certain in life are death and taxes.

The motivation behind such a specific change to taxation would not be to increase the level of taxation, but rather to increase the level of transformation, with increased taxes only being paid by those companies determined not to participate fully in what can be considered a national duty for all South Africans.

There are many versions of this approach which are possible to be created, but by a staggered approach wherein a level 1 and/or level 2 company would still pay the current CIT rate of 28 percent, but level 3 companies would see an increase to 29 percent, level 4 to 30.5 percent, level 5 to 32.5 percent etc is a reasonable route to follow.

The number of large companies that remain 24 years after democracy, heavily untransformed, for example Pick n Pay, Mr Price and Remgro, to name a few, all have a BEE level 8 which is testament to the reality that there are many business owners who are not motivated to act in the best interests of South Africa.

Even Spur, a brand beloved by both racists and non-racists alike, has such poor levels of transformation that it is non-compliant, not even managing to get a paltry level 8.

As companies move along the scale from less transformed to more transformed, some interesting things can be observed (these observations are derived from the substantial amount of data related to thousands of different companies’ compliance to the codes), with regard to the nature of how they interact with the society they are a part of.

First, level 1 and level 2 companies often have a level of black ownership that exceeds the requirement for points – meaning that companies typically go beyond the letter of the law here, as they become more transformed.

Second, while management control and skills development steadily and gradually increase, companies undertake much more significant enterprise and supplier development. Enterprise and supplier development are back-breaking work, but the type of work that ultimately reshapes the nature of the economy by directly supporting black businesses grow.

Using tax as a mechanism to awaken the sleepy consciousness of executive management teams, boards and shareholders is something that should have happened a long time ago, but perhaps the previous leadership within the government were overly considerate of the feelings of capital, over the needs of ordinary South Africans. My hope is that the new leadership in this country understands the needs of its constituents better than what came before.

Yashodan Naidoo is chief executive of Precium Investments. It invests in agribusiness, property and financial services sectors. He is also the founder of the Forum for Radical and Practical Change, an incubator for social impact initiatives.