BEE Blog 1

The Strategic Choice of an Empowerment Partner

The Codes attempt to redress economic exclusion of the past. Discrimination was not just about race but also about patriarchy, generational conflict, the rural-urban divide and a recognition that the first step on the ladder of wealth is the hardest. South Africa was everything but a level playing field where teams played a sport where the rules were designed for only one winner. The compounding layers of marginalisation were never more pronounced and reflected than in the element of Ownership.

In Ownership, various subsets of the black populace are recognised. Eight points are allocated for ownership by black people; four points for black women; three points for Designated Groups, employees and members of co-operatives and two points for New Entrants.  A further eight points are available for the transfer of Net Value which may be simply (and incompletely) summarised as: equity free of debt in the hands of black people.

Watered Down Equity

As with the times and the mindsets that brought, few shareholders volunteered to dilute their equity. Rather, the old-style BEE Ownership transactions focussed on the sale of shares to politically or commercially connected businessmen. Although these transactions nominally generated funding for the previously white companies, many were supported by loans underwritten by the companies themselves.  The paucity of black people wealthy enough or with access to sufficient debt to buy stakes in large companies meant that it was a buyers-market. Shares generally changed hands at a substantial “Empowerment discount.”

The irony of these highly dilutive transactions is that the large discounts were not matched by high numbers of empowerment points.  The strategic choice of empowerment partners turned out to be unstrategic from an empowerment point of view. This myopic view lead to the struggle that is currently very much at the forefront of the B-BBEE discussion.

The Possibility of 3%

Consider what would happen if a company issued 3% of its equity to a young black woman who had never been involved in empowerment before.  According to the scorecard, the company would achieve:

  • 3% / 25% of 8 points for black ownership plus
  • 3% / 10% of 4 points plus for black woman ownership plus
  • 3% / 3% of 3 points for Designated Group ownership (Youth) plus
  • 3% / 2% of a maximum of 2 points for New Entrant ownership plus
  • 3% / 25% of 8 points for Net Value Transfer (being the lower result of two formulae)

In other words, a 3% dilution would deliver 8.12 points.

In order to achieve the same number of points from a black man over 34 – who has already made more than R50m from empowerment –  it would be necessary to sell 12.6875% of your company.  Not only is this more dilutive but the empowerment discount is likely to be higher than the cost of an outright donation of 3% of equity.

This means that transferring 3% equity to a young black woman delivers 4.2 times more points than delivering the same equity to a wealthy black man would.

10% of equity optimally distributed would deliver 15.4 points where 10% transferred to wealthy black men would deliver 6.4 points.

A further implication is even in the context of a fully paid 25% transaction, it is possible to deliver up to an additional 6.2 points for 3% of equity.

The conclusion is that choosing an empowerment partner around the requirements of the Codes could save significant value and avoid unnecessary dilution. By calculating your organisations BEE scorecard can you truly understand who and how will benefit your business the most. The old-style sport is out and the new forward-thinking rules have been adopted, it’s up to you to choose the right team mates to play with now.