Rethinking BEE Charters

With the publication of the first draft Codes of Good Practice (codes) under the Broad-Based Black Economic Empowerment Act No. 53 of 2003 (BEE Act) in December 2004, the regulation of BEE has taken an interesting turn. It would appear that those sectors that have already adopted transformation charters (petroleum, mining, financial services, maritime transport and information and communication technology (ICT)) and the sectors currently negotiating transformation charters (liquor, tourism, healthcare and agriculture sectors, among others) may well have to give some serious thought to their approach to attaining BEE compliance.

At the heart of this turn of events is the treatment within the codes of transformation charters.

The charters have become a ubiquitous element of most South African businesses' understanding of BEE regulation. As regards the existing charters, it is common cause that they tend to treat the various indicators of BEE compliance in vastly different ways. By way of example, an identical BEE equity transaction represents a 104% level of compliance with the ownership provisions in terms of the Petroleum and Liquid-Fuels Charter and 17.25% level of compliance in terms of the ITC Charter. That represents in excess of a six-fold differential.

Differentials, albeit less dramatic, appear in respect of each of the other six common BEE indicators as measured using the existing charters.

It follows that the charters have, in attempting to advance the interests of the respective sectors while still promoting BEE, embedded significant inequities when viewed in the context of a cross-sectoral analysis. Indeed, if a photocopy machine supplier is required to do six times more than a petroleum company to achieve just its BEE ownership targets, something must be amiss.

The codes impose an obligation upon sectors to ensure the harmonisation of their charters with the codes in relation to the key elements of each charter with specific reference to the content of the charters, the indicators for the different elements of the charters, the targets for the different elements of the balanced BEE scorecard and the weightings of the different elements of the balanced BEE scorecard. There must be adequate justification for the setting of a target which differs from the target set out in the codes and that weighting attributable to each of the seven BEE indicators in the charters may not vary by more than 10% from those set forth in the codes.

That said, the most significant impact lies in the fact that codes 100 and 200 have established a basic template for the measurement of ownership and management and codes 300 -700 (which are to be published during the first quarter of 2005) will set out similar templates for the measurement of the human resource development, indirect empowerment and variable indicators. As such, there is an implicit challenge to those charters which have sought to measure compliance with the various BEE indicators using methodologies that differ from those employed in the codes.

Of more immediate interest is the fact that the codes have introduced a new level of stability, alignment and certainty to the tangle of existing charters. Read in conjunction with section 12 of the BEE Act, it is now clear that while the codes, once gazetted, will enjoy the status of law, the charters have been reduced to little more than sectoral pacts with government to realize the objectives of BEE. To the extent that those charters incorporate a scorecard and BEE indicators, these are only of relevance to the adopting sector (and possibly only the signatories to that charter). They do not, under normal circumstances, bind businesses in any other sector or the government. By contrast, a review of sections 9 and 10 of the BEE Act, which deal with the question of the codes, reveals that the codes are intended to establish uniformity and alignment of BEE compliance and measurement principles

Additionally, the fact that section 10 compels organs of state and public entities to take the codes (and not the charters) into account when performing administrative functions will ensure that the constitutional imperative to guarantee lawful, reasonable and procedurally fair administrative action will be upheld. By way of example, any application for a licence or similar authorisation must be adjudicated in terms of the codes and not the charters.

The most obvious question that follows this analysis, relates to the future of the charters in the aftermath of the gazetting of the codes. Simply stated, if sectors use BEE indicators and measurement mechanisms in terms of their charter that differ from those contained in the codes, they will not be prohibited from doing so. However, to the extent that a company in such a sector becomes subject to measurement by government, any latitudes or relaxations in respect of any of the indicators or measurement mechanisms embedded in their charter will not be carried over into government's assessment of their BEE compliance, and will in all likelihood result in substantial prejudice.

The sole exception to this rule is the Mining Charter which has been gazetted as a schedule to the Mineral and Petroleum Resources Development Act (MPRDA). For the limited purposes of mining companies achieving compliance with their transformational obligations under the MPRDA, the Mining Charter is unaffected by the codes. However, the mining sector will be obliged to reconsider its charter for all purposes unrelated to the application of the MPRDA.

The sectors that developed charters before the codes now find themselves under considerable pressure to reconsider those charters and to seek to achieve as great a degree of harmonisation with the codes as possible. All other sectors should be proactive in commencing an examination of their sector from a BEE perspective and in commencing dialog with black stakeholders in that sector, but to rush headlong into a charter drafting process is of limited benefit and may constitute a wasteful application of time and resources.

The codes represent the single most significant development in the regulation of BEE to date. Copies of the code may be downloaded from Cliffe Dekker’s website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.