Real economic transformation

REQUIRED: A FRESH WAY OF LOOKING AT THINGS

By ensuring a listed empowerment vehicle’s continuity and longevity, a restricted market provides continual broad-based economic empowerment.

The industry charters that defined Broad-Based Black Economic Empowerment (B-BBEE) structures as a transformation vehicle aren’t innovative enough. They’re riddled with old-style business thinking, predicated on debt funding and keep shareholders away from the heart of the business.

So, B-BBEE structures add complexity and cost to an already-fraught business environment. They have limited impact in truly benefiting society at grassroots.

Ironically, B-BBEE can be easily achieved by having grassroots people play a direct role in business success. They need their B-BBEE shares to be listed on a stock exchange and traded in a restricted market. This drives a new behavioural pattern, as individual citizens take an interest in the company, naturally building education levels, increasing share value, and turning the B-BBEE structure into a bottom-line contributor in which ordinary people have a vested interest.

A restricted market ensures shares remain in broad-based investor hands, guaranteeing wealth’s shared equitably and reaches places where it can have the greatest impact, ensuring real empowerment.

By empowering B-BBEE beneficiaries to trade in shares it reinforces, not dilutes, the profit motive. It’s in the sweet spot of business activity and fosters economic growth by broadening access and promoting investment. But it calls for a retail approach to shareholding.

Intellidex’s 2017 Empowerment Endowment report examined how much value created by SA’s largest BEE deals since 2002 went to public benefit organisations. The majority of black South Africans remain excluded from the benefits of investing in capital markets.

Of the JSE’s top 100 companies, 87 had conducted B-BBEE deals, 35 of which included public benefit organisations as beneficiaries. These deals had returned 16% of R317 billion in value, net of funding, at the end of 2014. Of this, R32.6 billion in endowments was held by 27 foundations.

But there’s more to the story: most B-BBEE deals are debt funded. The cost of funding deals has been enormous, reducing the overall potential value to beneficiaries and limiting each transaction’s broad-based reach.

Also, foundations established through B-BBEE deals are designed to exist in perpetuity and offer financial benefit to a broader component of society than immediately obvious. But, there’s a concentration risk.

The endowment’s based on a sponsoring company’s block of shares, an outcome, the report says, “of the current BEE regulatory environment which requires companies to maintain BEE-qualifying investment levels”.

It results in a serious lack of diversification. Being utterly dependent on a single company’s performance, the foundation’s at substantial risk.

Further, to retain its B-BBEE rating, the sponsoring company tends to maintain the right to approve future share disposals, constraining share value as they can’t be freely traded. A restricted listing, however, allows you to dictate a shareholder’s profile while allowing market forces to prevail.

Then there’s the problem of companies having difficulty preventing mandatory B-BBEE credentials from unravelling when B-BBEE shareholders cash in on shares.

In a restricted market, B-BBEE shareholders can sell their shares but, because they can only be sold to similar types of beneficiaries, the company retains its B-BBEE credentials and wealth redistribution continues.

Etienne Nel is CEO of ZAR X.

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