ARTICLE ON BEE - BUSINESS DAY - OCTOBER 2007

Transformation comes to ‘celebrity BEE’

Is it better to conclude a BEE transaction with a black business leader or your own workers? Our series on private business BEE considers the pros and cons with insights from Darryl Horney, a director of Spirit Capital who is often consulted on BEE issues like this …

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Kevin Homann

BEE is all about transformation and one of the key transformations over the last 18 months has been the growing emphasis on broad-based empowerment, sometimes referred to as BBBEE.

Broad-based empowerment looks beyond ownership to wider benefits that may be expected to cascade to marginalised groups as a result of social investment and more inclusive deal structures. These groups would typically include women, the disabled and the rural poor.

Other components of broad-based BEE include people development through education and training, the promotion of black staff to positions of real managerial influence and enterprise development through preferential procurement and other forms of assistance to small, black-owned businesses.

In part, this broadening of the focus is a response to growing public concern about BEE deals that seem to ‘empower’ the same group of eminent business people. This prompted public debate on the subject of empowerment versus enrichment and alerted policy-makers to the need for more inclusive structures.

Government guidelines and the balanced BEE scorecard today support a much broader vision of empowerment. The process is about fundamental transformation from the bottom up rather than single-minded focus on equity transfer to a favoured few.

Even so, celebrity or VIP BEE has not exactly tapered off. The “usual suspects” continue to make headlines when major BEE transactions are concluded.

Why is this?

It all comes down to supply and demand. There is a limited supply of black business leaders with strong political connections and high levels of access. At the same time, white business owners demand these qualities (access, influence and stature) when looking for prospective empowerment partners.

The limited supply of potential partners such as these and perhaps a philosophical preference for “true” BEE have led some businesses to empower their own workers by forming trusts and transferring equity into these vehicles.

In this way, the workers take a share in the business and are incentivised to remain with the company and contribute to its growth. Low income earners from disadvantaged communities become the primary beneficiaries of economic empowerment.

It takes a certain amount of time for the employee’s shares to vest and trust rules usually stipulate that a worker selling his stake must sell the shares back to the trust. But in time, significant wealth transfer is fostered by this approach.

There is good anecdotal evidence that these initiatives are well received and contribute to worker loyalty and motivation. Such BEE schemes sometimes form part of talent retention strategies, thereby creating savings in training and recruitment costs. However, practical experience suggests there are also some shortcomings to employee BEE on this pattern.

As far as broad-based scorecards are concerned, this model enables the business to put a tick in the BEE ownership box. But a problem is created by the passive nature of this type of BEE equity participation.

Ordinary workers are not invited to join presidential task teams. They don’t have the ear of policymakers. They don’t maintain extensive networks among officials, regional and national political figures and business leaders.

In short, they are not in a position to make an active contribution when major tenders are submitted or contracts are renegotiated.

When high-profile intervention is called for or lobbying is needed, there is no substitute for VIP BEE.

To achieve the best of both worlds – community credibility and celebrity engagement – a merger of VIP and broad-based BEE is required.

Some ‘celebrity’ BEE figures are giving a lead in the creation of these balanced models. These individuals create a consortium comprising black business figures and representatives of various marginalised community groups.

The employees’ trust can then join this broader grouping.

The VIP individual and his colleagues are in place to take on a dynamic role in the quest for new business. The other groupings enjoy a stake in the business and are primary beneficiaries when wealth is created and distributed.

All the indications are that broad-based BEE and employee BEE will not eclipse VIP BEE. The models will co-exist and collaborate.

Therefore, the private business owner should not be thinking in terms of one versus the other. An inclusive structure is to be preferred. This may mean more preparatory work. More time and planning may be needed to put together a well balanced BEE platform.

This can be frustrating for a lean and agile private business that usually gets things done at pace. However, BEE is not meant to be a quick fix. BEE is a strategic issue. It’s important to get the balance right even if it takes time.

Homann is director of corporate and structured finance service provider Spirit Capital. This is the third in a series of articles on BEE.

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