South Africa: The Weighting Issue – Will BEE Scorecards Fail the Broad-Based Test?

Last Updated: 20 July 2005
Article by Kevin Lester

In his 2005 budget speech, President Thabo Mbeki lashed out at the most common of all criticisms of current black economic empowerment models – that BEE is not "broad based" enough. In recent months, this so-called "broad-based" debate has resurfaced time and time again, with critics using the apparent lack of "broad-based" ownership participation in most BEE transactions as being evidence of an emergent cronyism favouring the politically well-connected black "oligarchs". But just how fair is this criticism? Does the serial acquisition of BEE equity by five or six black investors really imply that BEE is doomed to fail the "broad based" test?

In the opinion of the Department of Trade and Industry, as outlined in their draft Codes of Good Practice on BEE issued in December 2004, the attainment of a more equitable distribution of economic distribution is seen as resulting from four separate, but interrelated initiatives.

Weighted at 20 points towards a BEE scorecard of 100 points, efforts at addressing the poverty barrier to BEE are rewarded in the form of recognition of corporate social responsibility and employment equity/job creation. Weighted at a further 20 points, are efforts at promoting skills development for those already in employment seeking to address the skills barrier to BEE. Weighted at 30 points out of a possible 100, are efforts at supporting black and BEE businesses in the form of preferential procurement and enterprise development seek to address the opportunity barrier to BEE. Finally, 70% of the scorecard already having been accounted for, ownership and management control are introduced with a weighting of 30%.

This particular categorization of the elements of BEE is significant in that it is often relied upon as justification for the concentration of "broad based participation" elements at the poverty barrier level with that participation falling off the closer we approach to the "ownership and management control" aspects of BEE. Hence, the logic would hold, diversity in ownership is important from a BEE perspective, but poverty alleviation and job creation are better measures of the broad based nature of BEE.

It’s a compelling logic, well conceived and not without substantial merit. What is curious, however, is the fact that no attempt has ever been made to explain why 60% of the scorecard targets existing or emerging black or BEE compliant business while only 40% appears to be reserved for "broad based participation".

It would however be unfair to suggest that the DTI has not attempted to accommodate some significant recognition for "broad based participation" even at ownership and management control level. The Codes make several specific references to recognition for "broad based participation" at these levels. Indeed, close analysis of the Code on ownership indicates that the maximum level of recognition of an ownership structure not containing "broad based participation" elements or black women, stands at 32% of the total possible score for ownership, while those excluding "broad based participation" elements but including black women stand at around 50% of the possible score for ownership. Similar content (targeting particularly black women), is included in the Code on management control.

All this suggests that the president may well be correct in his assessment. While we may wish to argue that the weightings allocated to the various elements of BEE are not as supportive of "broad based participation" as they could be, there can be no doubt whatsoever that the condemnation of BEE simply because of a perceived lack of diversity in ownership and management structures is a gross over-simplification.

Kevin Lester is a director with Cliffe Dekker in South Africa. Lester specialises in commercial law. He has extensive experience in the interpretation of the regulatory context of empowerment and in the implementation of BEE in corporate transactions. He is the author of Cliffe Dekker’s "The Way to BEE", a publication that explains the regulatory context and has been distributed to more than 10 000 corporate decision makers. Cliffe Dekker is a leading BEE legal advisory firm that has advised clients on a significant number of major BEE transactions. The firm has been the principal legal advisor on the ‘Deal of the Year’ for the past two consecutive years.

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.

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