BEE in the Know

Employee Share Ownership schemes hold key to transformation

Riaaz Essa Riaaz Essa

Employee Share Ownership schemes hold the key to true transformation

Companies and fiduciaries to blame for failures of empowerment schemes

Since the implementation of the Amended Codes of Good Practice in 2013 there has been a flurry of Black Economic Empowerment (BEE) deals taking place within all industries. Government has sent a clear message to businesses, either to create more ownership in the hands of black people, or suffer an automatic drop in the company’s Broad-Based BEE (B-BBEE) level, regardless of the score attained.

However, as Business Day reported on 16 August 2016 there has been an influx of cases that have reached the Broad-Based Black Economic Empowerment Commission – most of these related to disgruntled employees in Employee Share Ownership Schemes.

According to the article, since being established in September last year, the Commission had already received about 100 complaints about fronting and other abuses. Most of the complaints were from shareholders — most often employees — who were allocated significant shareholdings in order for their companies to achieve higher empowerment scores and a greater overall level of empowerment in terms of the codes of good practice.

Subsequently, the employees were sidelined, denied access to financial information, not informed about meetings and did not derive any benefit from their stakes. In some cases, the employees had no idea what they were required to sign, while in others, the shareholders were forced to exit the company once it had been awarded the desired licences or contracts on the basis of its enhanced BEE status.

This slew of complaints begs the questions – are these employee share ownership schemes risky to implement due to their susceptibility to fronting? Secondly, are these share schemes still useful to transformation?

In my opinion these schemes are certainly relevant and hold the key to true broad-based empowerment – as long as appropriate and sustainable oversight mechanisms are in place, as well as the required policies needed.

The requirements for a valid employee share ownership scheme are strictly defined to ensure that participants receive their claim and distributions. The rules stipulate the requirements for the appointment and conduct of fiduciaries as well as the rights and responsibilities of participants.

Fiduciaries failing transformation

So who is to blame for the current state of affairs? In my experience, schemes of this nature have failed because of poor management on the part of fiduciaries. In many cases fiduciaries have not presented the financial reports of the scheme to participants or they have not explained the contents adequately enough to participants so that they can make informed decisions about the management of the scheme.

Alternately, fiduciaries have denied participants an active role in the shareholder management of the company; and not adequately represented the interests of the participants at shareholder meetings to ensure that their investment was fruitful.

The question then becomes just how do we create meaningful transformation while still addressing the ownership requirement?

The answer lies with companies first acknowledging that BEE is an economic and social imperative. Secondly, companies must understand and appreciate the value that their own employees can bring to such relationships. Finally, fiduciaries need to face greater penalties – monetary fines as an example – if found to have neglected their duties to the schemes.

The benefits of Employee Empowerment

Employee Ownership Schemes are designed to reward black employees with an opportunity to own shares in the company they work for. By implementing such a scheme, black employees are able to enjoy the fruits of their hard work and contributions in addition to their remuneration.

The benefits of these schemes include increased productivity; greater employee retention; attracting future talent which could result in increased scoring on management control; and businesses are saved from the difficulties of finding a suitable BEE partner.

Critics could argue that implementing an employee share ownership scheme has the same effect as merging with a small black-owned company because the scheme would have minority voting rights and therefore employees of the scheme have little say in the decision making powers.

This isn’t the case. Employees who are beneficiaries and recipients of economic interest through an Employee Ownership Scheme will ensure that they contribute to the success of the business through their individual skills that they were hired to perform in the first place. Even if the shareholding was a mere 25%, these employees’ voices would be heard at shareholder meetings and companies would be wise to listen.

A scheme of this nature is also an investment in the business itself as a result of the additional potential revenue that can be generated from a higher B-BBEE score.

For the system to work fiduciaries elected to look after the interests of their participants must do just that, look after their interests. In addition, companies that wish to form such schemes need to do so with the intention of enabling real transformation and not simply as a front through which to increase profits.

Directors and owners of companies would be wise to familiarise themselves with section 13O of the Broad Based Black Economic Empowerment Act 52 of 2003 as amended - because this section clearly outlines that fronting will lead to a fine and/or to imprisonment for a period of up to ten years.

Until there is a significant change in mind set and acceptance about the value of true BEE, complaints will continue to mount on the steps of the Commission. Until then, the only winners will be those unscrupulous companies that will continue to abuse the system at the expense of the majority of disenfranchised black South Africans.

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