The Code of Good Practice on Black Economic Empowerment

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The Code of Good Practice onBlack Economic
Empowerment
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STRUCTURE OF THE CODE OF GOOD PRACTICE
AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK
ECONOMIC EMPOWERMENT
STRUCTURE OF THE CODE OF GOOD PRACTICE
CODE 000 IMPLEMENTATION FRAMEWORK
CODE 100 EQUITY OWNERSHIP
CODE 200 MANAGEMENT
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Progress on the B-BBEE Process

• Current Achievements
• BBBEE Act provides an enabling framework
• The BBBEE Strategy stipulates the BEE intents and
  principles of Government
• Massive increase in BEE across all sectors of the
  economy
• BEE is recognized as a business imperative and
  deals are more broad-based than previously
• BEE Charters in strategic sectors (Mining, FSC,
  ICT, Tourism, Liquor, Agriculture, Transport,
  Health)

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Concerns and Risks around the B-BBEE Process

• Lack of full understanding and appreciation of
  the principles of broad-based BEE
• Inconsistent application of BEE
• Extensive debates could result in delays
  biggest risk is slow or no progress on BEE
• Disparity in Charter Definitions and Targets
• Lack of Implementation Guidelines can result in
  Fronting or Sham transactions promoted

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Code of Good Practice as the BEE Implementation
Framework
Broad-based BEE Act No. 53 of 2003
Legislative Enabling Framework
Broad-based BEE Strategy
Strategic Framework
Codes of Good Practice
Implementation Framework and Guidelines
Generic or Sector-specific BEE Scorecards
Interpret BEE Definitions
Set BEE Indicators, Weightings and Targets
Guidelines to draw up BEE charters
Guidelines to maintain Institutional Framework (BE
E Council /Accreditation Agencies)
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Agenda
AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK
ECONOMIC EMPOWERMENT
STRUCTURE OF THE CODE OF GOOD PRACTICE
CODE 000 IMPLEMENTATION FRAMEWORK
CODE 100 EQUITY OWNERSHIP
CODE 200 MANAGEMENT
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Code of Good Practice (Structure)
Each Code explains all issues pertaining to a key
BEE element and can consist of one or more
statements
A Statement include a related set of principles
that guides the implementation of one BEE issue
Code 000 Framework
Statement 000 Conceptual Framework
Code of Good Practice
Phase 1
Statement 010 Charter Guidelines
Code 100 Ownership
Statement 020 BEE Council
Code 200 Management
Statement 030 Broad-based BEE Implementation
Code 300 Employment Equity
Statement 040 Glossary
Phase 2
Code 400 Skills Development
Statement 050 BEE Rating agencies accreditation
Code 500 Affirmative Procurement
Code 600 Enterprise Development
Statement 100 Ownership
Code 700 CSI and Industry Specific
Code 800 BEE Practice Notes
Statement 200 Management
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Structure of the Code of Good Practice

• Structure of the Code
• The Benefits of the Adopted Structure
• Logical Flow of the Structure The Code is
  structured according to the logical flow of BEE
  scorecard.
• Flexibility of the Structure It enables the
  Minister and DTI to expand, amend or remove
  individual statement as and when required,
  without having to re-issue the entire Code of
  Good Practice.
• Best Practice The structure is similar to those
  used by the Generally Accepted Accounting
  Practice internationally.

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Agenda
AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK
ECONOMIC EMPOWERMENT
STRUCTURE OF THE CODE OF GOOD PRACTICE
CODE 000 IMPLEMENTATION FRAMEWORK
CODE 100 EQUITY OWNERSHIP
CODE 200 MANAGEMENT
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Code 000 Implementation Framework

• Objective of this Code
• This code comprises of statements that
• Establish the conceptual framework
• Summarizes the indicators, weightings and
  targets for
• each element of the Scorecard
• BEE elements
• Provide application guideline for the generic
  BEE
• Scorecard
• Establish different institutional framework
  to facilitate the
• implementation of the Strategy and the Code
  of Good
• Practice.

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Code 000 Implementation Framework

• Statement(s) currently contained in this Code
• Statement 000 Conceptual Framework
• Statement 010 Sector Transformation Charters
• Statement 020 BEE Advisory Council
• Statement 030 Implementation of Broad-based BEE
• Statement 040 Glossary
• Statement 050 Accreditation Agencies

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Statement 000 Conceptual Framework
Key Principles Description Implication
Substance over Form Broad-based BEE must be measured and reported according to economic reality rather than legal form Penalize the use and reporting of fronting or sham BEE structures and entities. Prevent BEE from becoming a box-ticking exercise and lose its socio-economic substance.
Broad-based BEE Scorecard BEE is an integrated socio-economic process which aims at empowering all black people BEE is measured based on seven core elements ownership, management, employment equity, skills development, affirmative procurement, enterprise development and residual
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Old scorecard vs New scorecard
Old New
No targets included Targets included
No points allocated for women Points allocated for women
Preferential procurement based on black ownership Preferential procurement based on BEE contribution
No bonus points for over-performance Bonus points given for over-performance
Indicators limited More options for indicators
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Statement 010 Sector Transformation Charter

• Outline the process to be followed in
• formulating a sector charter
• Establish the status of sector transformation
• charter
• Identify principles to be applied to harmonise
• the different charters
• Outline the process of constituting Charter
• Councils and prescribe the powers of these
• Councils

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Statement 010 Sector Transformation Charter

Key Principles Description Implication
Qualification Criteria Only sectors interacting directly with the government, as determined by government are encouraged to develop sector charters. Ensure that charters are only developed in key economic sectors. Preclude entities from avoiding the application of the generic scorecard through sector charters.
Guideline for setting targets, weightings and indicators The charters cannot deviate from the definitions and principles of the Code. Prevent sectors from circumventing the BEE principles of the Act, Strategy and the Code through charters Reduce confusion resulting from multiplicity of definition for the same BEE principles in different charters.
Publication of charter in the Gazette Minister to publish in the Gazette as a charter if meet all s12 requirements. Minister can also elect to publish charter as a Code (s9) if it meet all requirement of the Strategy and this Statements. Gazetted Charter are an evidence of sector commitment to transformation On the other hand, Charter gazetted as a Code of Good Practice has same status as a Code (can be used in determination of BEE status)
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Statement 030 Implementation of Broad-based BEE

• Identify policy instruments and initiatives
  that
• can promote broad-based BEE
• Align the implementation of policy
• instruments and initiatives to broad-based
• BEE

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Statement 030 Implementation of Broad-based BEE
Key Principles Description Implication
Policy Instruments Identifies policy instruments and initiatives that can be used to promote broad-based BEE Increase awareness of public and private sector decision maker of when broad-based BEE status can be applied
Application of Broad-based Principle Differentiate between the use of broad-based measures (based on the scorecard) and narrow-based measure (based solely on ownership). Identify the risk of narrow-based application to the BEE process and the economy. Provide implementation and reporting guidelines to align policy instruments to broad-based BEE Raise the awareness of the risks and potential conflicts around the use of narrow-based BEE measures Promote the adoption of the scorecard as contained in the strategy and the Code.
Transitional Provisions Entities currently applying measures that are either narrow-based or that are contrary to the Code will be given 12 months to adapt their decision-making and reporting mechanisms. Align all public and private sector policy instrument and initiatives to broad-based BEE over 12 months Enhance the multiplier effects as envisaged in the broad-based BEE model
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Other Statements within Code 000
Key Principles Description Implication
Advisory Council (020) Establish the guidelines for the creation and the operations of the BEE Advisory Council Facilitate the creation and operation of the BEE Advisory Council
Glossary (040) Provide a standard glossary of all terms and definitions used in the Code of Good Practice Collate all BEE terms and definitions used in the Code of Good Practice Provide a centralized source of BEE definitions that can assist sector organizations, entities and practitioners
Approved Accreditation Agencies (050) Establish the technical and BEE qualification criteria for accreditation agencies. Create an approval mechanism for dti to approve accreditation agencies. Create a framework whereby Government can leverage the work and information of the accreditation agencies to accelerate BEE Provide an approval framework to ensure that all accreditation agencies have the necessary technical and BEE credentials to evaluate BEE
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Agenda
AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK
ECONOMIC EMPOWERMENT
STRUCTURE OF THE CODE OF GOOD PRACTICE
CODE 000 IMPLEMENTATION FRAMEWORK
CODE 100 EQUITY OWNERSHIP
CODE 200 MANAGEMENT
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Code 100 Ownership

• Objective of this Code
• This code comprises of statements that inform
  the recognition
• and measurement criteria for black
  ownership.
• The code also ensures that the BEE process
  can result in the
• transfer of genuine, substantive and
  sustainable ownership to
• black people.
• The Code also aims to reduce fronting and
  misrepresentation of
• black ownership by companies through the
  stipulation of a
• standard set of principles and guidelines
  for its measurement
• and reporting.

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Code 100 Ownership

• Statement(s) currently contained in this Code
• Statement 100 Recognition and Measurement of BEE
  Ownership
• Objectives
• To increase the number of black people that
  manage, own and control enterprises and
  productive assets.
• Provide recognition and measurement criteria for
  black ownership
• Provide key principles to be used in determining
  ownership by black people

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Statement 100 Ownership
Key Principles Description Implication
Ownership as Economic Interest and Voting Rights Ownership is measured as an entitlement to both voting rights and economic interests. Prevent transactions where black people are given voting right but no economic interest. Prevent fronting transactions where no real economic transfer take place.
Flow Through Principle Ownership is included if it is held by natural person. In the case of holding by a juristic person such as a company, only the portion of ownership in that entity by a natural black person will be included. Pierce through pyramid holding structures that are been used to inflate black ownership in entities Measures and reports the actual levels of economic ownership held by black people Will determine what are the actual economic benefits flowing to the BEE equity holders.
Restrictions Identifies and exclude any equity subject to any rights limitations Penalize transactions where the rights attached to the equity holding of black owners are limited Reduce Fronting transactions
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Flow Through Principle
Effective black ownership in Company C is
515151 12.5 percent
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Determinant of Ownership Score
Determinant of Ownership Score
All Black S/H
All Black S/H
Voting Right
Ownership (20 of BEE Scorecard)
Black Women
Black Women
Economic Benefit
Broad-based Groups
Broad-based Groups
Unencumbered Interest
New Entrants
New Entrants

• MEASUREMENT PRINCIPLE
• Recognize and reward companies for the ability of
  black people to exercise and benefit from
• ownership rights, as well as the extent of the
  beneficiary base.
• (2 Ways to allocate scores for BEE Ownership)
• Allocation by black peoples ability to exercise
  ownership rights including
• unrestricted voting right
• the right to receive economic interest such as
  dividends and capital gains
• unrestricted and unencumbered entitlement to
  economic interest
• Allocation by the beneficiary base, taking into
  accounts participation by
• black women
• new entrants, and
• black designated groups (such as black workers,
  black youth, black people with disability and
  black people living in rural areas)

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Ownership Score Allocation
Allocation by categories ensures that only
companies with black women and designated group
participant get 100.
Allocation by ownership right differentiate
between the rights accrual to black investors
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Ownership measured through the matrix table,
allocating point for different categories of
rights and different beneficiaries
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Key Principles

• Options and Contingent Claims Where an option is
  used where the economic interest is contingent
  upon a future event, the economic interest will
  be projected on a fair and reasonable basis, but
  will be recognized as restricted economic
  interest.
• Organs of State, Pension Funds and Superannuation
  Schemes The BEE ownership by organs of state,
  pension funds and superannuation schemes are
  specifically excluded from the calculation from
  both numerator and denominator. The amount
  excluded from total ownership (denominator) is
  limited to the lower of 25 percent or the level
  of economic interest owned by black people. An
  enterprise with more than 75 percent ownership by
  the state is specifically exempted from the
  application of this statement.

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Key Principles (Continued)

• Bonus Points The statement provide for
• one (1) bonus point to be awarded for new
  entrants, where the black people buying into the
  enterprise have not entered into a previous
  transaction where the fair market value of the
  company exceed R 20 million in value.
• The statement also provide one (1) bonus point to
  be awarded to company who have exceeded the 25
  percent target for voting right or economic
  benefits
• Non-Circumvention
• The non-circumvention principle allows for
  identification of fronting or other structures
  which aims to misrepresent the level of
  ownership. Rating agencies are required to
  maintain a database of such structures. In order
  to ensure that ownership information is not
  misrepresented, enterprises are required to
  provide appropriate documentation to evidence
  their ownership.

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Agenda
AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK
ECONOMIC EMPOWERMENT
STRUCTURE OF THE CODE OF GOOD PRACTICE
CODE 000 IMPLEMENTATION FRAMEWORK
CODE 100 EQUITY OWNERSHIP
CODE 200 MANAGEMENT
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Code 200 Management

• Objective of this Code
• This code contains the statements which guide
  the
• recognition and measurement of black
  management
• representation. Management represent the
  second leg
• of direct empowerment component of the BEE
• balanced scorecard.
• Statement(s) currently contained in this Code
• Statement 200 Recognition and Measurement of
  
• Management

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Statement 200 Management

• Provide Recognition and Measurement Criteria for
  Management

Key Principles Description Implication
Weighted Measurement Criteria The measurement criteria for management is weighted to give recognition to key executive (2), executive (1) and non-executive positions (0.5) Reward enterprises for appointing black management into key executive rather than non-executive positions Prevent black management requirement from becoming a numbers game
Management Target The management target is currently set at 40 percent of the weighted score Similar to mining charter requirements Percentage score calculated as a percentage of the target
Limitation of non-executive recognition The statement limit the recognition of non-executive to 10 percent of the scorecard Prevent enterprise from achieving quota by only appointing black non-executives Counters market trend in appointing black non-executives rather than executives
Additional Recognition for Women Black women management at all levels are allocated more significant weightings Provide bonus and reward enterprise which appoint black women management
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Thank You