A tick-box approach to the scorecard for the Revised Codes of Good Practice for Broad-Based Black Economic Empowerment (B-BBEE) will not normalise our society and fix past socio-economic injustices with the urgency it requires.
Social unrest is a symptom of the vast disparities and the poverty that exists in South African society, and a fixation with compliance to the B-BBEE scorecard will not create the jobs and wealth at a pace and scale that South Africa so desperately needs.
Given business’s central role in achieving transformation as a national economic imperative, the Department of Trade and Industry (DTI) would do well to take on a more collaborative ‘carrot approach’ to business versus the ‘stick approach’ that many private sector players have experienced to date.
Related: What To Look For In A B-BBEE Partner
The essence of transformation as laid out in the B-BBEE Act of 2003 – to transform South Africa’s economy and bring about meaningful participation in it by black people – has been side-lined by the technicalities of compliance. This tendency was further entrenched when the B-BBEE codes of 2007 were substantially amended in October 2013 and became compulsory from 1 May 2015.
The limitations of a narrow focus on compliance only, has particular relevance for Enterprise and Supplier Development (ESD) for two reasons:
- ESD is the main pillar of the codes, making up over one-third of the scorecard and worth 40 of the 105 total points;
- All stakeholders agree that meaningful job creation and economic growth in South Africa will come from the small and medium business sector.
Furthermore, because Enterprise Development (ED) is recognised in the codes as 1% Net Profit After Tax (NPAT) and Supplier Development (SD) as 2% NPAT, companies are bringing enterprises as suppliers into their supply chains far too quickly.
This practise assumes a steady stream of enterprises that are fully scaled and adequately prepared as suppliers, when in fact, they are not. It has only proved costly, compromised efficiency, placed businesses at risk and thwarted the success of small and medium black-owned businesses.
In implementing ESD, supply chains and business operations cannot be disrupted. This makes it imperative for ED and SD to be considered by a business together. They cannot have different objectives, different measures and different strategies just to meet compliance requirements. This will only see ED and SD go in different directions and compromise the competitiveness of the big business and the success of the emerging enterprises or suppliers.
The function of developing enterprises into suppliers must align with the strategic needs of the business. Therefore, ESD must have the full buy-in of company leadership teams. CEO, CFOs and CPOs need to understand exactly how supplier diversity adds value to their supply chains and makes their business more competitive. It is not something that can be simply delegated.
Businesses we work with want their workforce, suppliers and partners to reflect society because they want a strong economy.
In embracing the B-BBEE codes, and achieving success in ESD, their focus has been less on compliance and more on building enterprises as a funnel for their supply chains; on building the best suppliers; and on creating supply chains that have the full mandate of their procurement teams.
When supplier development is strategically driven, we see ED, SD and procurement teams working together to:
- Understand and analyse the business’s current procurement needs
- Establish what the specific barriers to entry into their supply chains are
- Identify where the future opportunities lie.
In turn, they are able to identify and build SMMEs that meet the current and future needs of the supply chain. And, they can develop joint B-BBEE scorecards while building strong enterprises and suppliers.
To expand the economy meaningfully, strategic supplier development must focus on developing suppliers that add value to the business and not on getting more points. Then, suppliers must be evaluated according to the same criteria and benchmarked against both best practice and each other. No one supplier should be given preference over another.
Transformation and business success go hand-in-hand. Transformation is not a business function, it is the future of an organisation; it is not a short-term development intervention, but a long-term strategic business fundamental. It is a pity this ethos did not underpin the DTIs BEE drive with business from the start.
It is well accepted, and welcomed, that the revised B-BBEE codes address fronting, which saw a relatively small number of black and white business people benefit hugely through superficially constructed broad-based groups in empowerment deals. We look forward to hearing from the BEE Commission that was set up to monitor and evaluate fronting.
We also look forward to seeing big business supply chains sustainably and progressively transformed to reflect the demographics of South African society.
It’s Do Or Die In BEE Compliance
What this means when doing business in South Africa.
More and more, we see businesses and BEE verification firms coming under the spotlight for fraud and non-compliance. BEE ratings are viewed as a ‘hot commodity’ and many BEE services firms have popped up over the past few years to accommodate the demand.
Pressure mounts on businesses to reassess their skills development spend, youth contributions, ownership and management structures in-line with the BEE scorecard, and the Government has been particularly verbal in highlighting the need for BEE compliance.
AJ Jordaan, Sales Manager for leading BEE-aligned Skills Development training company, LFP Training says that its more than compliance – it’s a way of life for businesses today. “Over time, businesses have realised that while they are doing almost everything right, what would make or break a deal could very well be their BEE rating,”
“Businesses receive additional points for doing business with BEE-compliant companies. Enterprise & Supplier Development is key to a firm’s business strategy. With legislation changing on a regular basis, we always advise that clients do it right from the get-go,”
Related: How Do I Become B-BBEE Compliant?
A scorecard is not a target – it should be incorporated into a business’s vision and growth strategy; it is just as important as any other top-line business matter these days. “With the need for more and more guidance in the realm of BEE, more suppliers have popped up to provide strategic counsel and it’s easy to get caught up in the ‘hype’. Terminology, weightings, paperwork and implementation are daunting tasks, but with so many businesses still failing their BEE audits – even under advisory – how do we know who to trust?
“Referrals by word of mouth are always great. I also believe that businesses must ask for a company’s success rate and previous customer testimonials. More than anything, the consultant/ BEE supplier that a company chooses must understand how to truly implement BEE strategies to achieve exactly what it’s there for – to empower the previously disadvantaged and help bridge gaps in society” says AJ.
With all the hype, we forget about what its there for. “Trading in points is not the intention; the end goal is economic transformation and fair opportunities for all,” he continues. “If a company fails its BEE audit, it’s essentially failed to promote exactly what BEE is all about. Money has been wasted and no transformation has really occurred. Partnering with a credible and knowledgeable partner is therefore key.”
BBBEE Share Schemes – A Ticking Time Bomb?
At the forefront of these mechanisms are employee share schemes.
Since the promulgation of the amended codes of good practice under the Broad Based Black Economic Empowerment Act 53 of 2003, as amended (“BBBEE” or “the Act”), compliance with the ownership element has become a compulsory compliance element for both Qualifying Small Enterprises (“QSE” having between R10 and 50 million annual turnover) and generic enterprises (over R50 million annual turnover). As a result, businesses have found themselves considering mechanisms which aim to address this element. At the forefront of these mechanisms are employee share schemes.
The first of these structures were constructed in the early 2000’s by JSE listed companies. The aim of these structures were essentially two-fold:
- An employee retention strategy similarly constructed as executive share schemes in many ways, and
- Compliance with BBBEE.
These structures have recently been under the spotlight again . Mainly because of the questions it raises in terms of whether it is true empowerment or not.
For businesses wanting to utilise these structures, a number of aspects are to be considered:
- Employers and employees stand in a vertical relationship with one another. This is because the employer directs the expectations and the standards of the services exchanged between them. Shareholders, on the other hand, are in a horizontal relationship as they are equally entitled to regulate and direct matters which may affect their shareholding or investment. So, to shift from a vertical to a horizontal relationship requires the necessary professional inputs, management and attention.
- These share schemes are separate entities that require the necessary attention and inputs. As such, it is not just a case of setting it up and it simply running itself.
- These structures need to have a shelf life in my view. In this regard, I mean that a clear commercially feasible strategy needs to be devised and implemented in regards to the trust. This would include a structured plan whereby employees would not only be entitled to dividends but would also have the opportunity to up-skill and to improve themselves in various ways. The financial benefits should aim to facilitate direct ownership.
It is important to remember that inviting partners to sit at the table, needs to fully embrace the concept. If it does not, it not only negatively impacts the relationship, but disempowers the people involved. The human aspect thereof is as devastating as the legal non-compliance which may even go as far as constituting fronting.
Related: The 5 Elements Of BBBEE
In order to avoid this, these structures need to be setup correctly and managed correctly, which means:
- The trust deed must clearly define the beneficiaries and the proportion of their right to receive distributions;
- The trustees must actively take part in managing the trust at a level similar to the management role of shareholders in a company having a shareholding;
- Based on the aforesaid, in my view, the trustees should be appointed by the beneficiaries;
- A written record must be kept identifying the beneficiaries as well as prove that they fall within the designated groups as defined in the Act. The trustees must have no discretion in this regard;
- A written record must be kept of fixed percentages of claims or outlining formulas for calculating claims. The trustees must have no discretion in this regard;
- The trustees must present the financial reports of the trust to the beneficiaries yearly at an annual general meeting of the Trust;
- The trust deed or other relevant statutory documents of the trust must be made available, or on request, to any beneficiary in an official language in which that person is familiar;
- On winding up or termination of the trust, all accumulated interest must be transferred to the beneficiaries or to an entity representing the interests of the participants or class of beneficiaries.
Expert professional guidance is therefore crucial in order to avoid these structures becoming your own ticking time bomb.
How Incubator Project National Gives Your Enterprise a One-Stop-B-BBEE Shop
Turn your B-BBEE compliance spend into investment spend in 2017.
- Contact: +27 (0)12 259 0057
- Email: email@example.com
- Visit: www.theinvestmenthouse.co.za.
B-BBEE does not have to be a one-sided redistribution of wealth and power. “There certainly is a way to turn your compliance spend into investment spend. This year we are giving corporates the one-time opportunity to be part of our unparalleled Project National,” says Jack Janse van Rensburg, director of The Investment House.
“Project National is a complex incubation model that provides a one-stop-solution to empower, develop and skill South African entrepreneurs.”
Related: How To Get Your B-BBEE Money Back
The Investment House’s incubator concept, Business Mastery Program, is designed for “strategic accelerated business serendipity,” according to Janse van Rensburg.
Project National is realised nationwide in multi-industrial hubs, which create a strategic accelerated business serendipity through establishing a complete supply chain, or ‘one-stop shop’ for the public, for large scale tenders and corporates.
The unique benefits for participating enterprises include:
- Increased opportunities to be part of complex tenders and contracts
- Immediate market access through internal hub usage of each other’s services and products
- Increased marketing and sales opportunities through beneficial location strategy (at convenient, easily accessible and visible shopping malls/office parks)
- The greater chance of interactions that give birth to new ideas and collaborations
- Increased learning and development opportunities through small, medium and corporate business partnership (business skills transfer, mentoring, industry-specific training).
Project National is an unparalleled incubator concept in South Africa that brings a wide array of business advantages and B-BBEE-ROI opportunities to corporates, who can choose to make either monetary or non-monetary contributions within their B-BBEE spend.
Related: To B-BBEE Or Not To B-BBEE
How your B-BBEE compliance spend turns into investment spend with Project National:
1Create a consistent supply chain
Through your involvement in Project National, your struggle with inconsistent and unreliable supply chains can be over. Project National provides you with suppliers who can supply on demand, in the right quantity, to the right quality and the right price. More control and insight into your supply chain creates better competitiveness for your business.
2Extend your sales arm into new markets
Project National entrepreneurs provide you with an extended and widened sales arm into various different markets and distribution chains through the development of entrepreneurs acting as resellers of your product.
3Diversify your product range
Buying and financing assets can be a difficult task, therefore it’s often not possible for companies to diversify their range. Project National’s black owned start-up enterprises are more likely to obtain funding for assets and equipment and can therefore be a great asset to you when becoming a supplier to your company, allowing you to diversify your product range by outsourcing production of new components.
4Allow for lower imports
It can be hard to compete with Chinese imports on a price and now even a quantity level. While the demand for low quantities and tailor-made products is high, it’s hardly profitable for many big corporates. Project National’s entrepreneurs leave the doors open for you as they are smaller and organisational overheads are lower; making it profitable to manufacture lower quantities.
Be part of The Investment House’s unique incubator concept and see your ROI on your B-BBEE spend flowing.
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