Pinnacle ticks the boxes but fails the test
Corporate social investment is masquerading as empowerment
IN June, Pinnacle Holdings announced its decision to conclude a broad-based BEE transaction in terms of which it would sell 29.9% of its wholly owned subsidiary, DCT Holdings, to a broad-based BEE partner.
An analysis of DCT’s financials shows its sole purpose was to hold Pinnacle’s investment in listed ICT group Datacentrix. By January this year, DCT owned 55.3% of Datacentrix after a mandatory “share for share” offer to shareholders valued at R4.90 per Datacentrix share. Nowadays, Datacentrix trades at around R5 a share, valuing DCT’s investment at more than R600-million.
So when the company announced a broad-based BEE deal that will see a 29.9% stake sold to a black investor, as well as a restructuring of all its South African assets under DCT to create a black-empowered operational IT business, it made sense. It had just sold two of its South African operations, Infrasol and Merqu, to Datacentrix for cash and increased its shareholding to absolute control.
ICT is one of those industries that has struggled to show meaningful transformation. It is notorious for the implementation of equity equivalents, which essentially excuse IT companies from selling shares to black people in return for “overdelivering” on other elements of the balanced scorecard. Of course, the equity equivalents provisions were specifically meant for the multinationals, whose global standards provided only for wholly owned country operations and made no room for local shareholding — think IBM, Dell, HP and the like. For local companies, the broad-based BEE codes and ICT Charter have been unequivocal — you must sell equity to black investors.
All was well in my reading of the Pinnacle transaction until I saw the details of its broad-based BEE partner. Basically, Pinnacle has done a broad-based BEE deal with the corporate social investment department of Pinnacle. Pinnacle’s broadbased BEE vehicle is a trust set up by a Pinnacle subsidiary. As if that’s not weird enough, Pinnacle is also the founder of this trust.
According to the company’s announcement, it will be “responsible for the appointment of the relevant trustees, of which at least 50% will be independent from the founder, at least 50% will be black people and at least 25% will be black women”.
So half the trustees will be appointed by Pinnacle and only half of these have to be black. This means half of the other decision-makers could be white. Why would Pinnacle see the need to specify that half the decision-makers of what is meant to be a black shareholder can be any race other than black?
The beneficiaries of this trust will include schools, charities, welfare organisations, emerging ICT entrepreneurs and suppliers, bursaries and women in ICT.
The transaction will be fully funded by Pinnacle and will result in an unencumbered 29.9% shareholding for the trust in DCT. According to the company, “taken together with the current flow-through black ownership contribution received from Pinnacle, it is expected to result in an overall effective black ownership of DCT Holdings in excess of 51%, and black women ownership representation in excess of 30%”.
Pinnacle calls this transaction “real and sustainable empowerment aimed at empowering previously disadvantaged stakeholders with a focus on broad-based groupings”. I beg to differ. There is no doubt that supporting initiatives that support the poor should be core to every citizen, most notably corporate citizens.
As an ICT company that generates its profits in this country, it is Pinnacle’s responsibility to play its part in supporting ICT entrepreneurs, providing bursaries to ICT students, donating ICT equipment to schools, and providing access to ICT facilities to as many South Africans as possible. It seems Pinnacle is committed to being a responsible corporate citizen. Its report for the year ended December 2015 shows its strategy includes “the socioeconomic upliftment of the South African populace with particular reference to educational assistance to the poor, downtrodden and needy” and community development initiatives.
There is a phrase for this: corporate social investment. It is not broad-based BEE.
I am certain the company paid good money to advisers to structure this transaction and confirm that this so-called broad-based BEE deal ticked the boxes of the codes. If ticking the boxes is what Pinnacle wanted to achieve, well done. But this is not what South Africa is trying to achieve with broad-based BEE.
Broad-based BEE is a government programme aimed at accelerating the effective participation of black people in the economy.
How is this effective participation when the company to be empowered is the one writing the script for the broad-based BEE shareholder — founding its trust, appointing its trustees, specifying that half the trustees need not be black and dictating its beneficiary initiatives?
Deals like this undermine transformation and prove that there remains a “tick the box” attitude towards broad-based BEE. I am afraid this attitude will remain for as long as broad-based BEE is seen as a “best endeavours” project that relies on nonexistent good faith.
Enough is enough. It’s time for the stick.
Khumalo is chief investment officer of MSG Afrika Group and presents “Power Business” on Power 98.7 at 5pm, Monday to Thursday
Why specify that half the decisionmakers of a black shareholder can be any other race?