Legal and regulatory compliance by the private sector over the past decade has increasingly become more difficult and costly, absorbing more and more time of management. The last thing they want is to also have to comply with badly worded requirements that are clearly ill-considered.
The “Notice of Clarification” announcement (GG 38764 of 5th May 2015) by DTI that the amended Codes of Good Practice came into effect on 1 May 2015, clarified a few issues and created confusion and uncertainty on others.
Apart from belatedly announcing that the new Codes are now effective – itself a reflection of incompetency by the Department’s officials – two of the four aspects dealt with in the announcement reflect bad, bungling requirements which indicate that the Minister and his officials have little knowledge and understanding of how the business world operates.
1. Publishing Code changes for public comment
Worse still, these two aspects represent significant amendments to the draft Codes issued since October 2013 which should, in terms of section 9(5) of the Act, have been published for public comment to allow interested persons a period of 60 days during which to comment thereon. It would be interesting to see the reaction of DTI to this oversight.
The troublesome two aspects are the following:
2. Item (1a) in the announcement relating to when the verification exercise is to be conducted
This aspect will probably not have a significant ongoing effect on enterprises, but nevertheless reflects something that could have been done better.
The issue of when the financial year-end occurs was not a point of reference under the old Codes and enterprises could elect their verification period as they wished.
The wording “Clarify that all B-BBEE verifications conducted using the financial year ending before 30 April 2015….” as used in clause (1a) indicates that enterprises would in future be able to claim that they have used their respective financial year-ends as a yardstick under the old Code, and to then be entitled to continue doing so going forward.
This could either create a practical difficulty for many enterprises as completion of the annual financial statements and audit may occur many months after the actual year-end date, or could be an opportunity for enterprises to deliberately delay the completion of the accounts and audit so as to delay the verification exercise.
Indeed, many enterprises have completed their verification exercise before 1 May in terms of the wording of the previous Code, only to now find that they potentially could have done so at a more leisurely pace after completion of their accounts and audit.
3. Item (1d) in the announcement relating to black participation in BBOSs and ESOPs
This aspect is of serious concern and has been commented on extensively during the past two days.
The wording “Black participants in Broad-Based Ownership Schemes and Employee Share Ownership Programmes holding rights of Ownership in a Measured Entity must only score points under paragraph 2.2.3 under the Ownership scorecard” as used in clause (1d) not only could create absurd situations, but flies in the face of the stated aims of Government per the Act. More about that under point 4 below.
If an enterprise is owned by, or has as significant shareholders one or more qualifying BBOSs and/or ESOPs, the BEE points will now be limited to a maximum of 3, while the points relating to voting rights and net values will fall away. The enterprise could potentially be forfeiting as many as 22 points through this change in the Code.
It is a well-known fact that many enterprises have gone to the trouble and expense of structuring BBOSs and ESOPs in terms of the old Code, beneficially accommodating individual employees and community members in ownership structures that carried the approval of Government.
It is likely that these schemes will now have to be reviewed. It is more than likely that many of them would prefer to take the announcement of DTI on review in the High Court, if not for failing to give them adequate notice and an opportunity to comment thereon as required in the Act, then to consider if the announcement of these changes were administratively lawful, reasonable and procedurally fair in terms of the Constitution.
4. Who are the likely losers?
Firstly, the losers will be the thousands of employees and community members who, through no fault of theirs, may see some of these BBOS and ESOP schemes liquidated and discontinued, if possible. DTI appears to favour direct equity participation by black people in preference to a more broad-based approach which is able to accommodate thousands of individuals on a fair and equitable basis.
Interestingly, the definition of Broad-based black economic empowerment per section 1 of the Act reads as follows: “…..means the viable economic empowerment of all black people, in particular women, workers, youth, people with disabilities and people living in rural areas, through diverse but integrated socio-economic strategies that include, but are not limited to—
(a) increasing the number of black people that manage, own and control enterprises and productive assets;
(b) facilitating ownership and management of enterprises and productive assets by communities, workers, co-operatives and other collective enterprises;
(c) human resource and skills development;
(d) achieving equitable representation in all occupational categories and levels in the workforce;
(e) preferential procurement from enterprises that are owned or managed by black people; and
(f) investment in enterprises that are owned or managed by black people”.
Any BBOS or ESOP scheme is designed to facilitate ownership through investment in the equity of the enterprise. While ownership, control and management of such an enterprise by black individuals is important, it cannot come close to the positive impact that large numbers of individuals accommodated under such schemes, would have.
Secondly, enterprises who are currently, or who may in future have considered this as a viable route to empower their stakeholders and to garner BEE points, are most certainly not going to do so anymore. Their stakeholders will be the losers. Apart from the time and expenditure invested in the design, creation and administration of these schemes within the provisions of the Code, much of this work may have to be redone – again at company expense.
Lastly, the credibility of the DTI is severely compromised by this ill-considered announcement relating to point 3 above. It negatively reflects on the abilities, experience and competence of the senior officials and the Minister.