BEE path is paved with good intentions but comes to a dead end
From obvious if illegal fronting to meaning well but achieving nothing, black empowerment needs to be better managed
I recently came across a “transformed” 51% black-owned company that flashed its level 2 broad-based BEE (B-BBEE) credentials to all and sundry as it stood at the front of the tender line, successfully winning and retaining contracts with large corporations it did business with prior to its “transformation”.
I say “transformed” because on closer investigation the company’s status was found to come from a 51% shareholding held by a “creatively” registered trust for black employees of the business. The 49% white shareholders and directors were trustees of the trust, while the black employees, as beneficiaries, had neither veto rights nor any say in the running of the business or decision-making of the trust.
The most disappointing part of this is how a typical case of fronting had gone undetected for so long while the government came up with multiple programmes, regulations and legal requirements to ensure the economic freedom, inclusion and transformation black people have fought for and still long for.
In 2016, the department of trade and industry found that a shocking 70 out of 109 companies surveyed that year were fronting and circumventing the B-BBEE Codes of Good Practice. In my line of work, there are many companies that are said to be “black owned”, yet the ostensible black owners are nowhere to be seen. They are not in control of those companies, nor gaining the executive experience or economic benefit that equates to their shareholding.
In fact, two out of 10 companies seeking certification with the SA Supplier Diversity Council are found to be fronting in some manner. The sad part of this is that some of the black individuals involved in these schemes do so knowingly, while others fall victim to such practices through ignorance. Of course, ignorance of the law is no excuse. On the other hand, the perpetrators are quick to claim that they were advised by their lawyers or accountants to structure the companies the way they have, and they believed all was above board.
This raises the question of whether B-BBEE is the yellow brick road to the much-needed empowerment and transformation we are striving for as a country. While the current BEE policy environment seeks increased participation of black South Africans in the mainstream economy through access to markets and exposure to economic opportunity, it is sometimes hard to see if the policy is really bearing any of the intended fruit.
There have been various amendments to the B-BBEE Act and its associated codes to help ensure the scales are tipped more in favour of black citizens, but in so doing, new loopholes have been created. I therefore conclude that the yellow brick road to empowerment is paved with good intentions.
There are a few ways to interpret this, and its application to fronting in the context of B-BBEE:
- People often intend to do good then fail to do anything at all. Many corporations publicly declare their support and commitment to transformation in the country, including their support for small, medium and micro-enterprises and black businesses through procurement. Many have, in the past, and still do, promoted ownership transformation of white-owned exempt micro-enterprises and qualifying small enterprises, often by incentivising them to achieve 51% black ownership. Once this is done by these targeted suppliers, the corporates continue to do business with them without interrogating the legitimacy of the new ownership structure. By doing so they fail to open up opportunities for new, legitimate black-owned businesses.
- People often hide behind good intentions. They commit an action that results in a bad outcome under the guise of doing good. A case in point is white businesses owners who transform their business to 51% black-owned by “gifting” a 51% shareholding to loyal black employees, either directly or in the form of employee trusts. Nothing else changes in the business — there is no skills transfer and capacity building, and economic benefit is restricted to the bare minimum required to comply with the legislation.
- Even the best of intentions can have unintended negative consequences. In 2013, the government implemented amendments to the B-BBEE Act to criminalise fronting practices while revising the B-BBEE codes to provide black-owned exempt micro-enterprises and qualifying small enterprises with enhanced recognition (level 1 and 2) and removing B-BBEE compliance cost barriers to small businesses, especially small and medium, black-owned ones, through the introduction of sworn affidavits. At the same time, these revisions included increased spend targets of measured entities for them to procure more from exempt micro-enterprises and qualifying small enterprises, and especially black-owned entities.
The SA Supplier Diversity Council aims to achieve the economic inclusion of black businesses by leveraging corporate procurement market access through sustainable supplier diversity.
Business owners are able to be certified through the council so that corporates can commit to doing business with them. Through these linkages we believe we can bring about real economic inclusion of black businesses, and economic transformation aligned to the goals of the National Development Plan.
Even though fronting is a criminal offence, many still find loopholes and other ways to game the system. The sad reality is that these collective acts of selfishness are keeping our country on the verge of a real socioeconomic crisis, one that will continue to affect our children and future generations to come.
• Mtsetfwa is manager of member services at the SA Supplier Diversity Council.
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