South Africa: The Draft Codes Of Good Practice On Broad-Based Black Economic Empowerment

Last Updated: 1 April 2005
Article by Lance Fleiser and Sam Gumede

The draft Codes of Good Practice on Broad-Based Black Economic Empowerment ("Codes") were published by the Department of Trade & Industry in December 2004 for comment. In this article we set out some of the principles and requirements of the Codes.


The Broad-Based Black Economic Empowerment Act No 53 of 2003 ("Act") came into effect on 21 April 2004. Section 9 of the Act authorises the Minister of Trade and Industry ("Minister"), by notice in the Government Gazette, to issue Codes of Good Practice on Black Economic Empowerment ("Codes").

Certain sections of the Codes have now been released in draft form for comment.

Statement 040 of the Codes defines "black people" as "Africans, Coloureds and Indians" (the definition contained in the Act), but then limits the term to South African citizens.

The three core components of the broad-based black economic empowerment ("BBBEE") scorecard contained in the Codes ("Scorecard") are -

  • direct empowerment (encompassing ownership and management indicators);
  • human resource development (encompassing employment equity and skills development indicators); and
  • indirect empowerment (encompassing preferential procurement, enterprise development and residual elements indicators).

The Codes include statements relating to ownership and management. However, the draft statements relating to employment equity, skills development, preferential procurement, enterprise development and the residual element are still to be released.

Status of the Codes

Section 10 of the Act requires every organ of state and public entity to take into account and, as far as reasonably possible, apply the Codes.

The Codes require the private sector to take into account the principles and guidance contained in the Codes.

The Codes provide that they apply to all existing and future BBBEE charters.

Consistency between BBBEE charters and the Codes

The Codes require that BBBEE charters be, as between themselves, capable of comparison- in particular in respect of the indicators, the targets and the weightings, so as to facilitate the assessment and comparison of progress made by different sectors.

Only in certain limited circumstances may the indicators in a particular BBBEE charter scorecard differ from those in the Scorecard.

Adequate justification is required if a target contained in a BBBEE charter scorecard differs significantly from that in the Scorecard.

Deviations in excess of 10% from the weightings contained in the Scorecard are not permitted. Further, any deviation from the scorecard weightings requires adequate justification.

Section 12 of the Act requires the Minister to publish a BBBEE charter in the Government Gazette if he is satisfied that the charter has been developed by major stakeholders in the sector and advances the objectives of the Act. It appears that the Minister is required to publish such a charter for general information purposes even if it does not meet the principles and requirements contained in the Codes (in which event, notwithstanding publication, it will be overridden by the Codes to the extent that it fails to reflect such principles and requirements). If a BBBEE charter does meet such principles and requirements, the Minister can elect to publish the BBBEE charter in the Government Gazette as a "Code of Good Practice" in terms of section 9 of the Act.

On publication as a "Code of Good Practice", enterprises subject to the BBBEE charter will be assessed based on that BBBEE charter scorecard. Organs of state and public entities are then required to use that BBBEE charter scorecard for purposes of determining the BBBEE status of enterprises.

If a BBBEE charter is not published in the Government Gazette or is so published, but not as a "Code of Good Practice", organs of state and public entities are required to use the measurement criteria contained in the Codes, and not those contained in that BBBEE charter.

The Codes encourage all companies to develop their own economic empowerment plans, setting out the manner in which they intend to achieve the objectives of the Act and the Codes. A company is required to adopt the scorecard contained in a BBBEE charter which is relevant to it and which has been published as a "Code of Good Practice" in the Government Gazette or, if there is no such scorecard, to adopt the Scorecard.


"Ownership" is defined as the entitlement of black people to both voting rights and to an economic interest associated with an equity holding -

  • "voting rights" refers generally to the level of control exercised by a member over the affairs of an enterprise, such as the percentage of votes held by a shareholder of a company at meetings of shareholders;
  • "economic interest" is defined generally as a member's entitlement to receive any payment from an enterprise which arises by virtue of the member's holding of an equity interest, such as a shareholder's entitlement to payments on a winding-up and to dividends. Debentures and similar instruments that represent debt and certain preference shares are excluded from the definition of "equity interest".

The fundamental focus is on the effective economic interest or voting rights of black natural persons. Accordingly, where black natural people hold interests in a company indirectly through various other companies, the effective voting rights or economic interests of those black natural persons at the top of the chain is what matters. This is referred to in the Codes as the "flow-through principle". For example, if black natural people hold 52% of the shares (where there is only one class of shares) in company A which, in turn, holds 52% of the shares (where there is only one class of shares) in company B, the effective economic interest of black people in company B (for purposes of the Codes) will be 27% (ie, 52% of 52%). While this principle is logical in measuring the effective economic entitlement of black natural persons, it is questionable whether it is appropriate in calculating voting rights in a pyramid/control structure. Voting is largely about control and the flow-through principle ignores the actual level of control which black natural people have over company B in the example above.

Once the effective voting rights or the effective economic interest to which black people are entitled is determined, the next question is whether the voting rights or economic interest is subject to any restrictions. Restrictions include pledges, arrangements in terms of which the benefits of the voting rights or economic interest are reserved to some other person, arrangements which withhold, defer or restrict the exercise of the voting rights or the receipt of the economic interest, arrangements restricting the ability of members to elect a number of directors proportionate to their shareholding and undertakings in terms of which a person may be compelled to part with his voting rights or economic interest. It should be noted that any "lock-in" arrangement in terms of which a person undertakes not to sell his shares for a certain period of time is not regarded as a "restriction".

An economic interest is also regarded as being subject to restriction if the acquisition of the equity interest concerned was financed in whole or in part by a loan or similar financing arrangement or if the equity interest was purchased on credit.

The Scorecard sets a target of 25% plus one vote of all the voting rights, and a target of 25% of the aggregate economic interest, in the hands of black people (in an unrestricted form). It allocates a weighting of 20% to ownership which, in turn, is allocated as follows -

  • unrestricted voting rights in the hands of black people, where the target is 25% + one vote - 3% of the 20% weighting;
  • unrestricted voting rights in the hands of black women, where the target is 10% - 2% of the 20% weighting;
  • economic interest to which black people are entitled, where the target is 25% - 4% of the 20% weighting;
  • economic interest to which black women are entitled, where the target is 10% - 2% of the 20% weighting;
  • economic interest to which black designated groups (ie, black people who are workers, youth, people with disabilities or people living in rural areas) are entitled, where the target is 2,5% - 1% of the 20% weighting;
  • unrestricted entitlement of black people to receive their economic interest, where the target is 25% - 8% of the 20% weighting.


"Management control" is defined as the effective control of economic activities and resources and the power to determine policies as well as the direction of economic activities and resources. The exercise of such management control is normally to be measured at two levels, namely -

  • the board of directors (or equivalent structure); and
  • the executive management or highest executive body after the board of directors (or equivalent structure).

The focus is on those individuals involved in the determination of the strategy of the enterprise as well as the operational implementation of such strategy.

A substance over form approach is applied in determining whether a representative on the governing body actively participates in the strategic and operational aspects of the enterprise. Accordingly, provisions in agreements (such as management agreements) limiting the decision-making capabilities of representatives on the governing body are taken account of in determining management control. Appointed alternates on the governing body are not recognised in the determination of management control as such individuals are regarded as only able to operate when the nominator does not act personally.

The Scorecard sets a target of black persons comprising 40% of management and allocates a weighting of 10% to management control.

The Codes recognise the difference in operational decision-making capabilities of non-executive and executive representatives on the governing body as well as the operational decision-making influence of such representatives by awarding different weightings for purposes of determining management control, and also awards black women a 50% higher allocation, as follows -

  • Chief Executive Officer/Chief Financial Officer/Chief Operating Officer/Chairman – 3 points if a black woman; 2 points if not a black woman;
  • other executive members of the governing body/non-executive Chairman - 1.5 points if a black woman; 1 point if not a black woman;
  • non-executive members of the governing body - 0.75 points if a black woman; 0.5 points if not a black woman.
  • Black management representation is then calculated as follows -
  • the points allocated to each member (executive and non-executive) of the governing body are aggregated (A);
  • the points allocated to each black executive member of the governing body are aggregated (B);
  • B as a percentage of A determines the percentage of management represented by black executives (C);
  • the same calculation is carried out in respect of black non-executive members, save that the resultant percentage is limited to 10% (D);
  • C and D are aggregated, the total is divided by 40% (the target black management level) and multiplied by 10 (the weighting) to determine a score out of 10.

Other Indicators

As mentioned above, the draft statements relating to employment equity, skills development, preferential procurement, enterprise development and the residual element are still to be released.

The Scorecard assigns the following weightings to the other indicators -

  • employment equity - 10%;
  • skills development - 20%;
  • preferential procurement - 20%;
  • enterprise development - 10%; and
  • the residual element (including corporate social investment initiatives) - 10%.

The Codes provide that the government will use the total score under the Scorecard to rank enterprises according to their progress in achieving BBBEE, as follows -

  • excellent contributor to BBBEE – total score of 80% and above;
  • good contributor to BBBEE – total score of 65% to 79,9%;
  • satisfactory contributor to BBBEE – total score of 40% to 64,9%; and
  • limited contributor to BBBEE – total score below 40%.

The Scorecard also uses the distinction between procurement from excellent contributors, good contributors and satisfactory contributors as the basis to score enterprises for their progress in achieving BBBEE in regard to preferential procurement (ie in regard to their selection of procurement partners).

The rationale underpinning such ranking of enterprises is to distinguish between what is described in the Codes as "narrow-based BEE", which focuses solely on ownership and management (which according to the Codes, may result in "fronting") and BBBEE which covers all the elements of the Scorecard. BBBEE is described as the broadening of the beneficiary base to include all black investors, management, employees, suppliers and communities.

Nothing in this publication should be construed as legal advice from any lawyer or this firm. The articles published are general summaries of developments or principles of interest, and may not apply directly to any specific circumstances. Professional advice should therefore be sought before action based on any article is taken.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.