MAY 2009

To BEE or not to BEE

By Matthew Hamilton or Ayanda Khambule

Since January 2004, the provisions of the Financial Sector Charter have guided enterprises in the financial services sector in their efforts to transform the sector from a black economic empowerment perspective. The Charter has been gazetted as a transformation charter in terms of section 12 of the Broad-Based Black Economic Empowerment Act, 2003. Charters gazetted in terms of section 12 have no legal status – publication is for ‘information purposes’ only and confirms that the Minister is satisfied that the charter has been developed by the major stakeholders of a sector and generally advances the objectives of the Act.

On 9 February 2007, the Codes of Good Practice on Black Economic Empowerment were issued by the Minister in terms of section 9 of the Act. The Codes apply across the board to all sectors and provide a ‘generic scorecard’ against which enterprises can assess their quantitative degree of compliance with the objectives of the Act. The Minister may also, in terms of the same section, issue sector-specific codes of good practice which apply only to enterprises that participate in a particular sector. Such codes are arguably better able to cater to the peculiarities of particular sectors than the one-size-fits-all Codes can. The Financial Sector Charter Council (FSCC) has for some time now been engaged in efforts to convert the existing Charter from a non-binding transformation charter into a sector-specific ‘code of good practice’. Such conversion would then afford the Charter the status of a code of good practice, binding on all organs of state and public entities in their interactions with enterprises in the financial services sector.

For one year following the issuance of the Codes (referred to in the Codes as the ‘transitional period’), all enterprises could elect to use either the generic scorecard contained in the Codes or to make use of an alternative transitional arrangement. This transitional period was extended by the Minister, by notice in the Government Gazette, to 31 August 2008. All sectors wishing to submit proposed sector-specific codes in terms of section 9 of the Act were thus obliged to adhere to this deadline to avoid being subject to the generic scorecard. The Department of Trade and Industry had indicated that the process of vetting proposed sector-specific codes for compliance with the Act and publication in the Government Gazette for public comment would be finalised by 31 March 2009. The various constituencies comprising the FSCC have, however, to date failed to agree on a final draft form of the Charter, sparking widespread media reports that the Charter has collapsed and that enterprises in the financial services sector will have no choice but to fall-back on the generic scorecard contained in the Codes.

The generic scorecard comprises various components, one of which is ownership. The ownership component in itself is calculated by assessing the percentage of voting rights and economic interest that black people have in any particular enterprise. In terms of the generic scorecard, a fully compliant enterprise must have a minimum voting rights percentage of 25% (plus one vote) and a minimum economic interest percentage of 25%.

Although much of the Charter is aligned with the Codes, the sticking point in reaching agreement on the form of the final draft document seems to be the level of direct black ownership that a financial services enterprise will be required to target. It is important to note that the Charter currently lays down a minimum target of 25% black ownership (as essentially advocated by the Codes) measured at holding company level, by 2010. However the Charter provides that a minimum level of 10% of this target must be satisfied by way of ‘direct’ ownership by black people and the labour and community constituencies of the FSCC have refused to accept this minimum level of direct ownership for the purposes of the official sector code.

In supporting their stance, banks have argued that they are in a far more precarious position than other sectors with regards the structuring and implementation of empowerment transactions, particularly given the fragile state of the global economy. The Charter currently provides for additional broad-based measures (for example broader access to financial services) that are not contained in the Codes and may go some way in compensating for the reduced direct ownership component.

Black people may hold their rights of ownership in an enterprise as direct participants or as participants through some form of business, including a Broad-Based Ownership Scheme or an Employee Ownership Scheme that complies with certain minimum qualification criteria set out in the Codes. The Codes provide that, unless such schemes comply with certain additional qualification criteria set out in the Codes, the extent to which they will be allowed to contribute towards the ownership component of the generic scorecard will be limited to a maximum of 40% of the total ownership component (i.e. 40% of 25%). It is perhaps for this reason that many recent media reports have indicated that the generic scorecard advocates a 15% minimum level of direct ownership in an entity (being the remaining 60% ‘non-scheme component’ of 25%). However, where the additional qualification criteria are met, a scheme may contribute to the entire ownership component. Given that the additional qualification criteria are not at all onerous, this direct/indirect ownership distinction suggested by media reports is somewhat misleading, if not inaccurate, and the flow-through principles contained in the Codes remain of primary value in determining whether effective ownership of at least 25% of any particular enterprise is held by black people.

There can be no misapprehension that the Charter carries very little weight for the purposes of the Act and that enterprises in the financial services sector are now bound ‘by default’ to adhere to the Codes. Assuming that the Minister will entertain submissions after the expiry of the transitional period, it is still likely that the FSCC will in time reach some consensus and submit a draft sector code to the Minister. Given the forward-looking nature of the compliance targets contained in the Codes, it is uncertain as to how enterprises in the financial services sector will be expected to conduct themselves during this state of limbo.