31 March 2014

Revision Of The BEE Codes - Revision Of Attitude

KPMG, South Africa


KPMG, South Africa
The Broad-Based Black Economic Act and its Codes, gazetted in 2007, are said to have achieved a measure of success.
South Africa Corporate/Commercial Law
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The Broad-Based Black Economic Act and its Codes, gazetted in 2007, are said to have achieved a measure of success. The marked increase in the South African black middle class is argued to be a direct result of companies complying with the provisions of the Act. Under the provisions of this legislation, organisations were tasked with meeting black ownership targets, supporting and developing black-owned businesses, up-skilling and employment of black people in their organisations amongst other requirements.

However, the legislation has also received much criticism from organisations, politicians and the public. The old B-BBEE Codes of Good Practice were criticised for various reasons including:

  • The benefits of the legislation appeared to accrue to a select few individuals
  • Companies said the associated rise in bureaucracy increased cost of doing business
  • Ambiguous provisions in the legislation led to many different interpretations of some of the key provisions of B-BBEE

As a result the Minister gazetted the Revised B-BBEE Codes of Good Practice on 11 October 2013, effective 11 October 2014.

Reasons for the revision

The Department of Trade and Industry (dti), at various public meetings, notified attendees that the codes needed to be revised because many companies were achieving high ratings without engaging in any meaningful transformation of their organisations and the country at large. Using the Stats SA 2011 census as a tool to benchmark compliance levels, the dti argued that unemployment levels, particularly amongst Africans, are still unacceptably high, and that this demonstrates that the codes have not been producing the desired results. That is, if the majority of companies claim above-average compliance with codes (or legislation), why is there still a vast discrepancy in the levels of employment, especially insofar as African people?

The dti has indicated that the Revised Codes will tighten compliance and promote the objectives of B-BBEE as intended by the Act. In an economy that has a high unemployment rate, skills shortage and less than 2% GDP growth in its latest quarter, the business environment needs to improve. B-BBEE can play a significant role in addressing these challenges if correctly applied and monitored.

Changes to the Codes

The Revised Codes bring about many positive changes; one of which is that Companies with turnover below R10 million are now exempt from having to comply with BEE provisions. The inclusion of unemployed people as part of skills development initiatives is another significant win as companies will now able to earn points from training individual outside their organisation.

In addition, the new enterprise development criteria will encourage entrepreneurship and innovation in the South African environment.

In the new Codes, the overall weighting for management control and employment equity has been reduced from 25 percent to 15 percent.

It is important to note that the Department of Labour already monitors employment equity under separate legislation, and companies are held accountable to targets they have set.

Another important change has been the removal of adjusted recognition for gender. There are now specific targets and weights for female representation. In addition, the percentage representation by race is weighted equally. The equal weighting of Africans with other black groups may have an unintended consequence of less emphasis been given to employment of the African group because companies will still achieve a sufficiently high rating without necessarily filling positions with Africans.

As a result of the changes in the Codes, industry charters must also be revised within a year in order to comply with the new minimum requirements. Some of the charters written were not in alignment with the Codes gazetted in 2007. A prime example is the mining charter. It refers to historically-disadvantaged groups which include white women.

Which elements will be challenging to address?

Some companies have actively supported the Codes and we expect those companies will move quickly to align themselves with the new Codes. However, Supplier Development and Enterprise Development may be quite challenging to implement. Government requires potential suppliers of services and products to identify and 'mentor' smaller companies including competitors in some instances. In a capitalist environment, many companies would prefer to dominate, if not monopolise, their segment of the market. What is appreciated is that it will give companies an opportunity to be innovative, without compromising on intellectual property to ensure compliance with this element. This is one of the elements that if the subminimum is not met will result in discounting of the rating. We expect that companies will look for alternatives in the legislation that will allow them to obtain the maximum number of points with minimal negative impact to business.

One of the biggest gaps these revisions aim to address is fronting, defined by the dti as a deliberate circumvention of the B-BBEE Act or Codes.

It is only with the specific legislation against fronting that companies are now looking closely at their practices to ensure that this isn't happening.

How often should the codes be revised?

The Companies Act was revised for the first time after 35 years, while the Tax Act is reviewed and revised annually to ensure that the Act's intentions are faithfully preserved and that it adapts to meet continual changes in the environment. The Codes were revised five years after gazetting. Sufficient time has elapsed to allow legislators to identify loopholes and unintended consequences, and this revision is a first attempt at addressing potential gaps.

The dti is expected to establish a commission that will operate as ombudsman which will identify the gaps and monitor compliance with the Codes. One of the roles of the commission, we hope, will be to guide companies and verification agents, to ensure consistent application of the legislation as well as to review these unintended gaps and ensure that these are addressed appropriately. We believe this constant monitoring and periodic readjustment, as necessary, will help to bring clarity to the way in which the Act and Codes must be applied. However, once the Codes have achieved their objective of representative participation in the economy of the country for all South Africans, they may no longer be necessary.

This article first appeared in Financial Mail - Essentials, 2014 Issue.

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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