Weak empowerment rules underpin fake business ownership statistics

A huge discrepancy marks figures on certificates and actual ownership disclosed in company reports

Reporting on the ownership element of broad-based BEE (BBBEE) has lost all credibility. This is due to political compromises made by the department of trade, industry & competition during the development of the BEE Codes of Good Practice of 2007 and 2013, as well as sectoral empowerment charters. In the political economy of the Financial Sector Charter (FSC) negotiations, which dragged on for about a decade, the National Treasury acted like a bouncer for the big banks and insurers, which then bullied the department and black professionals represented by the Association of Black Securities & Investment Professionals into submission. To their credit, the community constituencies, which included labour, left the process.

Like most political compromises, the result was a mess. There is now a huge difference between the fake black ownership statistics that are on BEE certificates and actual black ownership as disclosed by companies in their annual reports. At end-April the Banking Association SA released its transformation report for 2020, which used information from bank BEE certificates and 2019 annual reports and found that 19 banks had achieved an average black ownership of 23.7%. It did not provide black ownership statistics for each bank.

“Black ownership figures reflect strong gains among black women. Black voting rights remained static in 2019 but black ownership improved across all other measures, and scores on each measure are ahead of target,” the report reads.

However, analysis of black ownership statistics of the country’s top five banks (FirstRand, Standard Bank, Capitec, Absa and Nedbank), which account for 90.5% of the industry’s assets according to the Prudential Authority, shows a wide difference between black ownership on BEE certificates and actual black ownership as disclosed in annual reports.

Nedbank’s BEE certificate shows black ownership of 34.6%, but its latest annual report reads actual black ownership is 1.3%.

Standard Bank’s BEE certificate shows black ownership of 32.1%, but its latest annual report reads actual black ownership is 0.8%.

Absa’s BEE certificate shows black ownership of 12.9%, but the company has no black ownership. On its website it explains how it achieved the score: “In 2004 we allocated a 10% stake to black partners through the Batho Bonke consortium. The deal was partly unwound in 2009 (4.99%) and the remainder in 2012 (5.01%), after the consortia sold their equity. Our current ownership score is an aggregation of: once empowered always empowered principle, indirect ownership, and equity equivalents arising from surplus of BBBEE transaction financing.”

The mind boggles as to why the FSC allows a company to continue to receive recognition for a transaction that was unwound in 2012.

Capitec’s BEE certificate shows black ownership of 13%, but its latest annual report reads it has actual black ownership of 8%. FirstRand’s BEE certificate shows black ownership of 27.8%, but its latest annual report says it has actual black ownership of 9.3%.

The top five banks had a market capitalisation of R824.5bn at end-December 2020. The information on their BEE certificates implied that they had black ownership of R202.8bn, equivalent to 24.6% of their combined market capitalisation. This is impossible and absurd.

Actual black ownership as disclosed in their annual reports was R42.6bn, equivalent to 5.2% of their market capitalisation.

At FirstRand black ownership was R26.6bn, equivalent to 62.4% of the total within the five banks. At Capitec there was black ownership of R13.3bn, equivalent to 31.2% of the total within the banks.

BEE only applies to the SA assets of banks. According to my estimate, based on geographic segment information disclosed in their 2019 annual reports, the SA assets of the banks are worth about R692.8bn or 84% of their market capitalisation. Using this denominator, black ownership within the top five banks is about 6.2% of SA assets.

The numerous political compromises reached during the development of the BEE codes and the FSC resulted in a voodoo system of measuring black ownership.

For example, the modified flow-through principle allows 51% black shareholding to count as 100% black ownership under certain conditions. Companies can also exclude up to 40% of mandated investments by institutional investors and state companies from the denominator that is used to calculate black ownership.

Using these rules Telkom could exclude 80% of its shares and 6% black ownership would become 28%. This bizarre rule, whose rationale was never explained by the department, creates an effective 15% target for listed companies. The continuing consequences principle allows companies to recognise up to 40% of black ownership after the exit of black shareholders.

There were three versions of the FSC, in 2004, 2012 and 2017. The first two had targets of only 10% for direct ownership, lower than the 25% target in the BEE codes.

The 2017 code allows companies to recognise indirect ownership, which occurs where an institution or other investor owns shares on behalf of beneficiaries and there may not be direct participation by the beneficiaries in the voting rights. This is not allowed under the BEE codes.

‘GET OUT OF JAIL’ CARD

The financial sector’s “get out of jail” card is that it does not have to enter into new BEE transactions to make up ownership shortfalls against the effective 15% target and after the exit of black investors.

Companies can get “equity equivalents” by investing in so-called black business growth funding. This is an odd target for banks, part of whose core business is to fund the growth of enterprises. It is like rewarding a retailer for its sales to black people. Such compromises inflate the ownership scores of all listed companies.

Many companies hire consultants to go through their share registers to identify ownership by subsidiaries of financial sector companies, whose inflated black ownership scores flow through to the measured entity. Therefore, a company can get recognition based on the black ownership scores of its shareholders, who may have concluded BEE transactions with third parties who have no relationship with the measured entity.

For example, Pick n Pay is one of SA’s least empowered companies. It is a level seven contributor to BBEEE, the second-lowest level of compliance according to the BEE codes. The company has not concluded a black ownership transaction. Yet Pick n Pay’s 2020 BEE certificate shows black ownership of 16.95%.

This cynical gaming of the system makes a mockery of empowerment. BBBEE has become an exam that is too easy to pass. The leasttransformed companies can get high empowerment ratings.

The time has come for the government to rewrite the empowerment rules so they can measure actual black ownership.