Fit­ting the Bill

Finweek English Edition - - Cover -

THOUGH SOUTH AFRICA’S Con­sti­tu­tion doesn’t dif­fer­en­ti­ate be­tween races, Banzi Malinga, di­rec­tor at Hofmeyr, Herb­stein & Gi­h­wala, refers to the Broad-Based Black Eco­nomic Em­pow­er­ment Act (53 of 2003) that de­fines black peo­ple as a generic term, which in­cludes Africans, Coloureds and In­di­ans.

That clas­si­fi­ca­tion is jus­ti­fied in The Bill of Rights Hand­book, writ­ten by Iain Cur­rie and Jo­han de Waal. It ex­plains equal­ity and dis­crim­i­na­tion in­tended by the Con­sti­tu­tion. Sec­tion 9(2) of SA’s Bill of Rights al­lows mea­sures – even if they dis­crim­i­nate – to achieve equal­ity. There­fore, dis­crim­i­na­tion is al­lowed – but un­fair dis­crim­i­na­tion is out­lawed.

It’s on the ba­sis of “fair” dis­crim­i­na­tion that the leg­is­la­ture has passed leg­is­la­tion, such as the Em­ploy­ment Eq­uity Act and the Broad-Based Black Eco­nomic Em­pow­er­ment Act.

As for clas­si­fy­ing peo­ple, the re­quire­ments are a bit murkier. Says Malinga: “Though we don’t have statutes that clas­sify peo­ple ac­cord­ing to their race, to re­dress the racialised disad­van­tages of black peo­ple re­quires a ref­er­ence to the apartheid racial grid. Apartheid pi­geon­holed South Africans into clas­si­fi­ca­tions such as “Bantu”, “Coloured”, “White” and “In­dian”. “I don’t think that South Afri- cans or the State have set new cri­te­ria to de­ter­mine those clas­si­fi­ca­tions; it cer­tainly is the ref­er­ence to the past racial clas­si­fi­ca­tion, with the as­sump­tion that chil­dren born by par­ents who fell into one of those cat­e­gories sim­ply fall into the same cat­e­gory as their par­ents.”

“There are mar­ket ser­vice providers that clas­sify share­hold­ers ac­cord­ing to race. But their ac­cu­racy of look­ing at names and sur­names and postal codes can be ques­tioned,” says Im­pala Plat­inum com­pany sec­re­tary Alan Snashall. “Is it pos­si­ble to re­li­ably clas­sify a share reg­is­ter of more than 15 000 share­hold­ers with those sub­jec­tive meth­ods?”

Adrian Arnott, com­pany sec­re­tary at FirstRand, RMB Hold­ings and Makalani Hold­ings, echoed those sen­ti­ments and asked how you might sep­a­rate pen­sion fund own­er­ship by colour. Do you look at the num­ber of mem­bers or the value of their con­tri­bu­tions or the size of their in­ter­est in the fund’s in­vest­ments; the em­pow­er­ment sta­tus de­ter­mined on the colour of the pen­sion fund’s trustees; or on the em­pow­er­ment sta­tus of the fund’s as­set man­ager?

Says Arnott: “If a com­pany is a share­holder, do you rank it ac­cord­ing to its em­pow­er­ment sta­tus or to the com­po­si­tion of its board – which in all like­li­hood would con­sist of the peo­ple de­ter­min­ing how the com­pany would vote?” He also says that unit trust man­agers were un­able to ad­vise him of the colour of their clients. The JSE was also un­able to pro­vide any guid­ance.

Arnott says that un­til clear guide­lines from ei­ther the Char­ter Coun­cil or the De­part­ment of Trade & In­dus­try were gazetted, dif­fer­ent com­pa­nies would use dif­fer­ent cri­te­ria – mak­ing com­par­isons very dif­fi­cult.

Apart from share­hold­ings there are other ways for in­di­rect share­hold­ers to be ac­tive in trans­form­ing a com­pany. As a sig­nif­i­cant share­holder in many listed com­pa­nies, the Pub­lic In­vest­ment Cor­po­ra­tion (PIC) has used its re­sul­tant in­flu­ence to en­cour­age black board rep­re­sen­ta­tion and own­er­ship in such com­pa­nies.

Most re­cently, the PIC’s un­hap­pi­ness

con­cern­ing the slow pace of trans­for­ma­tion at Bar­loworld led to sig­nif­i­cant an­nounce­ments at the com­pany’s an­nual gen­eral meet­ing.

Pre­vi­ously, the PIC brought pres­sure to bear on Sa­sol to ap­point black direc­tors and as­sisted an em­pow­er­ment con­sor­tium to ac­quire a size­able stake in Telkom.

On 6 De­cem­ber 2006 the Cabi­net ap­proved the gazetting of phase one and two of the Codes of Good Prac­tice. There was no in­di­ca­tion whether the in­di­rect share­hold­ing is­sue would be clar­i­fied. How­ever, it does seem that the so­called ex­cluded eq­uity prin­ci­ple will be a way of deal­ing with in­di­rect in­vest­ments of pen­sion and other in­vest­ment funds.

The ex­cluded eq­uity prin­ci­ple means that cer­tain shares may be elim­i­nated when cal­cu­lat­ing an em­pow­er­ment share­hold­ing. That ef­fec­tively means over­seas or in­di­rect share­hold­ers don’t need to be taken into ac­count when mea­sur­ing the ef­fec­tive em­pow­er­ment share­hold­ing.

For ex­am­ple, 11,2% of MTN is cur­rently owned by the PIC. MTN’s cur­rent em­pow­er­ment share­hold­ing (ex­clud­ing the PIC) is 10,6%. Ap­ply­ing the “ex­cluded eq­uity” prin­ci­ple would mean that the PIC’s 11,2% is ex­cluded from to­tal share­hold­ing when cal­cu­lat­ing the em­pow­er­ment share­hold­ing. There­fore, MTN’s em­pow­er­ment share­hold­ing on the ex­cluded eq­uity prin­ci­ple will in­crease to roughly 11,9% (10,6%/88,8%). If you treat for­eign share­hold­ing in ac­cor­dance with the “ex­cluded eq­uity” prin­ci­ple, the em­pow­er­ment share­hold­ing will in­crease to 15,7% (10,6%/67,6%).

That would dra­mat­i­cally in­crease the em­pow­er­ment share­hold­ing of Old Mu­tual from 4% to 16,7 %, as only 32% of its share­hold­ers are South Africans, with the PIC rep­re­sent­ing a fur­ther 6%.

In­di­ca­tions are that any share­hold­ings by Gov­ern­ment will also be treated in ac­cor­dance with the “ex­cluded eq­uity” prin­ci­ple. The de­tails of the codes should pro­vide fur­ther clar­ity.

Mea­sure­ment in terms of spe­cific em­pow­er­ment deals proved rel­a­tively sim­ple and it’s also rel­a­tively easy to work out the fig­ure in re­spect of staff share op­tion schemes. That’s what most com­pa­nies pro­vided and there­fore you can con­sider the rat­ings to be very con­ser­va­tive, as shares ac­quired by pre­vi­ously dis­ad­van­taged groups in the “or­di­nary cause of busi­ness” – plus ben­e­fi­cial share­hold­ings by pen­sion funds or other in­vest­ment funds (in­di­rect own­er­ship) – won’t be re­flected.

A headache for man­age­ment is brought about when em­pow­er­ment share­hold­ers de­cide to sell their share­hold­ings. That might re­sult in the com­pany not be­ing “em­pow­ered” any­more if it means that less than 25% of eq­uity is left in the hands of blacks. That sce­nario is ex­pected to in­crease as sev­eral em­pow­er­ment part­ners’ re­stric­tions on their share­hold­ing are re­duced over time.

The most fa­mous ex­am­ple is the Mzi Khu­malo/Har­mony 2002/2003 em­pow­er­ment deal, where – through shrewd ma­noeu­vring – Khu­malo ac­quired 100% of the em­pow­er­ment stake that at some stage was worth more than R2bn with­out debt. That stake was even­tu­ally sold and Har­mony was forced to make a sec­ond em­pow­er­ment deal with ARM in 2004.

Though the new codes of good prac­tice pro­vide com­pa­nies with some re­lief if an em­pow­er­ment deal has been done in the past and the part­ners have since sold their shares, in­di­ca­tions are that it will only amount to 40% of the points on the generic score­card.

Em­pow­erdex gath­ers em­pow­er­ment in­for­ma­tion each year. Its re­search stretches across own­er­ship, man­age­ment, em­ploy­ment eq­uity, skills de­vel­op­ment, pref­er­en­tial pro­cure­ment, en­ter­prise de­vel­op­ment and a resid­ual el­e­ment. Ques­tion­naires are sent to com­pa­nies. If a com­pany doesn’t want to par­tic­i­pate, mar­ket in­for­ma­tion is used. We’ve in­cluded avail­able Em­pow­erdex val­ues for the top 40 com­pa­nies.

How­ever, sev­eral com­pa­nies pointed out that our re­sults may dif­fer from those of Em­pow­erdex. First, Em­pow­erdex’s num­bers were sup­plied to­wards end-2005 and the be­gin­ning of 2006, while our re­search is more re­cent. Sec­ond, Em­pow­erdex re­lied on ques­tion­naires to the com­pa­nies as well as me­dia re­ports or other pub­lic in­for­ma­tion. But that could have been in­ter­preted dif­fer­ently.

A fi­nal re­mark: as there are no set cri­te­ria or re­li­able data to mea­sure em­pow­er­ment own­er­ship – that can range from or­di­nary shares, hold­ing com­pany to pref­er­ence and hy­brid shares in a sub­sidiary com­pany – dis­crep­an­cies are not un­likely.

For ex­am­ple, Mal­herbe in­di­cated that the num­ber of 8% ar­rived at by Em­pow­erdex for San­lam was out­dated. San­lam had three ma­jor share buy­back pro­grammes in which Ubun­tuBotho’s share­hold­ing in­creased to 8,17% in De­cem­ber 2004 to 9,38% in De­cem­ber 2005 and to 9,66% in June 2006.

Ac­cord­ing to Jack Hochveld, of Bid­vest group com­mu­ni­ca­tions, Em­pow­erdex re­cently cer­ti­fied Bid­vest to have a 41,3% em­pow­er­ment share­hold­ing. The main rea­son for that high rat­ing, says Hochveld, was that as a multi­na­tional Bid­vest’s off­shore as­sets are ex­cluded when cal­cu­lat­ing the Em­pow­erdex num­ber.



Source: Ernst & Young

Banzi Malinga

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