Fitting the Bill
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.
BEE VALUE & VOLUMESSource: Ernst & Young