The Johannesburg Stock Exchange. File picture: Siphiwe Sibeko

JOHANNESBURG - The need for meaningful transformation in equity ownership continues to be a subject of national discourse in the quest for inclusive economic development.
Of note is the issue of ensuring meaningful participation and inclusion of the majority black population in this important sector of the economy.

A few years ago a number of somewhere between 24percent (on the optimistic side) and 3percent (on the not-so-optimistic) side was thrown around as being the true reflection of economic participation by black people in South Africa. To date, no conclusive evidence to support this optimistic view has been brought forth.

When clients, local and foreign, ask us to explain what Black Economic Empowerment (BEE) ownership refers to, we must explain why BEE ownership must exist before we even venture into how it’s calculated. In a country where equity ownership remains in the hands of those who benefited from the apartheid regime, it is very important that we explain this very carefully, lest we are misunderstood.

BEE ownership is essentially the measurement of the voting rights, the entitlement to economic benefits, being the dividend participation and the capital appreciation, as well as the debt free ownership in a company held by black people. That is what BEE ownership measures in simple terms. However, no equity structures are designed so simply. There are a multitude of equity structuring tools that must be accounted for when measuring the participation of black people in the equity structure of a company.

There is, for example, the matter of the institutional investors whose treatment depends on a listed company’s preference, for example to be excluded (up to a maximum of 40percent of the shares in issue), to include the black proportion as estimated by a competent person, or to assume that there are no black beneficial shareholders in the institutional investor.

Listed companies to varying degrees depend on the application of the rules in respect of institutional investors. What one must realise is that the exclusion of these types of investors has a positive effect on the proportion of black shareholding in a listed company as that company would be measured off a reduced base. In some instances, the measurement is based on only 60percent of the equity where the institutional investors hold a sizeable proportion of equity.

BEE measurement

Another example would be the ability for multinational companies with operations outside of South Africa to exclude the value generated from those operations from the BEE measurement - provided they are in fact recorded in the South African books.

That is, for the BEE ownership scorecard, measuring only the equity that can be attributable to the South African operations. Of course, this is good for the BEE participants, if they are in fact holding equity in the entire group rather than in the South African operations only.

The unintended consequence of this principle is that it seems to be better for multinationals to increase the volume of business outside of South Africa - thus reducing capacity in the country as they will earn better BEE ownership points from following this strategy.

Other matters to be considered are the indirect ownership principles of asset sales, the continued recognition of black shareholders who have exited, etc.

In the 2017 Most Empowered Companies Survey results, we have included the equity ownership scores as reported by the various accredited B-BBEE Ratings Agencies for this year’s participants.

And as you will see, the reported ownership includes all the allowable equity enhancements, which are not well understood. This is made clear when a listed company presents its BEE ownership score and a procurement officer fails to understand the complex components making up the percentage of black ownership indicated on a scorecard.

An education process on financial modelling and the concept of substance of legal form must be undertaken in order to ease the discomfort felt by those who award contracts, and those who design these complex structures.

Perhaps it is also important to determine a baseline of actual debt free direct equity across the economy, before all enhancements in order to understand the actual equity in the hands of black people as this is likely the truest measure of unencumbered equity to which black shareholders are entitled.

Nomzamo Xaba is a research and advisory executive of Empowerdex.