6 Discussion
6.2 Discussion of Key Findings
6.2.3 The focus on ownership
A third key finding discussed here, which links conceptually to the wealth creation philosophy and the policy contestation findings above, concerns the intense focus, even “obsession” in the words of one interview participant, with the ownership pillar. From the information presented in Chapters 2 and 3 and from the Findings in Chapter 5, the level of black ownership of companies in the Financial Services sector, and the economy more generally, has been a constant feature of academic writing (see Alessandri et al., 2011; Miller, 2012; Moyo & Rohan, 2006) and press articles through the years before and under review. Perhaps this focus stems from the underlying desire for an economic transition to follow the 1994 political transition, where the “commanding heights” of the economy – the Financial Services sector – is under the control of the majority of the population (i.e. black control). Or perhaps it stems from the early examples of the 1990s “narrowly” defined equity transactions highlighted in Chapter 2.
The fact is that the share registers of large banks and insurance companies (and large listed companies in general) in South Africa are not dominated by individual, retail shareholders, as was reported by National Treasury to Parliament (Carrim, 2017). It is institutional investors (retirement funds, collective investment and long-term savings schemes for example) that make up the significant majority of the shareholdings of these companies in South Africa, a situation that was discussed in the same Parliamentary hearings (Carrim, 2017). Furthermore, a number of these institutional shareholders are foreign, with their inward investments representing important Foreign Direct Investment into the country. The structural nature of company shareholdings in the sector was debated at length between the trade associations and ABSIP in 2003 during the Charter negotiations and, with the insight of the SARB, consensus reached on low direct (i.e. individual) shareholding targets of 10% (versus the generic target of 25% that stands in the CoGP). The input of the SARB highlighted the principle of a shareholder of reference: that is a significant institutional shareholder/s to provide the company (e.g. a bank) with additional capital in times of need; retail shareholders are typically not able to provide such capital at scale.
Without getting into the detailed mechanics of how a B-BBEE transaction is set up (see Annexure 7 for a more detailed explanation), in brief the concept is that all existing ordinary shareholders have to take an cut in their shareholding (e.g. 10 shares for every 100 held) to accommodate the new black shareholders. This type of transaction represents a transfer of existing wealth to the new beneficiaries, usually at a cost to existing shareholders (both retail and institutional). Whether that new beneficiary is able to build wealth from this new shareholding is then dependent on the financial performance of that company relative to the costs (to the new beneficiary) of funding the acquisition in the first place. As both Alesandri et al (2011) and Miller (2012) demonstrated, shareholder value is often created as a result of B- BBEE deals over time, but there are also cases where the poor financial performance of the company has left ownership deals “under water” with no value created for beneficiaries.
While many of the listed companies in the Financial Services sector have concluded successful ownership deals (per Theobald et al., 2015) between 2004 and 2018, their absolute level of direct black shareholding has subsequently diluted as original participants monetised their gains after a predefined holding period. Interestingly, there is no demographic tracking of
shareholders in South Africa (by race or by gender), and the ability of institutional investors to report on the “indirect” shareholders by race or gender through their members and policyholders is also not easily achieved. Thus many of the debates take place (as evidenced in the SCOF submissions and report) using proxies or educated guesses. By contrast, the Employment Equity pillar of the Charter, which also stipulates race and gender targets for companies by job grade, is able to track such statistics due to provisions of the Employment Equity Act (1998) which require the collection and reporting of such demographic data by companies. There is consequently far less debate around the data in this area as it is largely accurate and can be tracked through human resources systems.
Partly due to this lack of reliable ownership data, there a persistent debate in the Financial Sector (and other sectors too) about whether companies are sufficiently “transformed” and in respect of the concept of once empowered, always empowered (“OEAE”). As it is not possible to always identify the race of the buyer of the shares (as these are often sold on the open market in the case of a listed company) the OEAE principle created the idea of a high water mark that the company would not have to “top up” when original black participants exited. As was evident from the interview participants, this issue has remained contentious and unresolved.
The 2012 Financial Sector Codes and the 2017 revisions thereto have progressively moved away from the OEAE principle. Industry has concerns that the high cost of ownership transactions impairs its ability to lend to other sectors of the economy15. Calls for higher ownership targets or more ownership deals to benefit new groups of shareholders carry a high degree of self-interest that again, would merely transfer existing wealth from one shareholder to another, with little value add to the real economy.
One area where ownership concepts have matured from the early 2000s is around the broadening of the base of participants or beneficiaries in such transactions. Research by Patel and Graham (2012) noted how companies were seeking to move beyond “narrow” deals with select individuals and introduce employee schemes, community schemes and even public subscriptions for black citizens. To encourage this, the JSE has developed a dedicated BEE
15 Under the country’s capital adequacy regime for banks, the availability of capital to lend is disproportionately reduced by a self-funded ownership transaction backed by its own shares as security
sector where only registered black retail investors can trade amongst each other. Unfortunately, the handful of counters (i.e. companies) listed on this sector suffer from price discounts to the main traded share, and there is limited liquidity (low trading volumes), issues attributable to the low levels of disposable income for discretionary (and risky) direct investing for many South Africans. Up to 2019, no financial services companies have listed their shares on the BEE board.
While direct levels of shareholding therefore remain low in South African listed companies, what has been taking place however over the past 20 years is that with workforce demographics changing in line with the Employment Equity targets set for companies across the economy, so too has the underlying makeup of retirement savings schemes begun to be more demographically representative (a feature of the South African workplace is the compulsory membership of a retirement fund of some kind). This in turn has, by the simple factor of time and the high level of institutional shareholding in the sector as mentioned previously, raised the level of black “indirect” shareholding in many companies, including the Financial Services sector.
While the OEAE principle was removed in the 2012 Codes, alternative “top up” or “equity equivalent” mechanisms were negotiated in the form of further funding for black industrialist and other business groups. Having negotiated these alternatives, and perhaps out of principle, the companies in the sector have not yet conducted a second round of ownership transactions.
For many interview participants, the unfortunate outcome of this constant focus on ownership is that the other pillars of the Charter and Codes are not given enough prominence. Interview participants maintain that it is the other pillars of the (now) Codes where real transformation can be effected. It is also why under the Charter document, ownership was dealt with towards the end. As noted by Vuyo Jack, the CEO of verification agency Empowerdex, the “4th phase of empowerment is now upon us” where procurement and supplier development are likely to take centre stage (27four, 2018), not least because the ideological debates around ownership surfaced in this thesis are not likely to be resolved.
There are two particular consequences of this constant focus on ownership, implications which arose from the analysis of the interview findings in the Chapter 5. The first of these is the impact on entrepreneurship, while the second relates to the loss of narrative by the “custodians”
of the Charter over the latter part of its application period.
As mentioned above, inherent in the typical model of B-BBEE ownership schemes is a transfer of pre-existing wealth from one shareholder to another. While this outcome may suit the ideals of some proponents of economic transformation in the country, as observed by Participants #5 and #8, the concept has had a negative impact upon existing (and emerging) black entrepreneurs. Noting how being an entrepreneur is a challenging and demanding pursuit, Participant #8 states that it is far easier to for a black business person in South Africa to set up an investment company and secure equity stakes in other (existing) companies who are seeking a black ownership partner than to go through the grindstone of being an entrepreneur. At a time in the country’s development when there are persistent calls for more jobs to be created (Presidency of South Africa, 2018) due to growing levels of unemployment (see Chapter 1) it is ironic and deeply problematic that one of the most ideologically important tools of transformation may be having a negative impact on job creation by offering an easy way out for both established and emerging black entrepreneurs, who could be building businesses that create new employment opportunities.
The second matter alluded to above relates to how those who were intimately involved in the Charter’s development and early years of implementation (that is, the trade associations of the financial services sector, ABSIP, government and the nascent Council) have never succeeded in a collective effort to maintain an enduring narrative about the successes and challenges that have arisen from the efforts of companies to implement the various pillars of the Charter. Given the enormous effort that went into delivering what at first must have seemed a highly unlikely outcome, this early momentum could well have been perpetuated by means of a co-ordinated reporting campaign. It emerged from the interviews that this reporting function was one of the planned roles of the Council, but the issues that have characterised that body’s existence, as documented in this thesis (primarily whether it was to be a watchdog or a reporting body), have evidently rendered such a function difficult to achieve. It was thus left to the annual reports of the companies themselves to report on their own individual scorecards and implementation
progress. These individual accounts however, are easy to criticise as being corporate spin, lack the consistency of a universal message to state that businesses in the sector have been involved in trying to rectify the social issues in the country in a significant way, and had made big strides in getting there, even if the implementation had its issues, as alluded to by various interview participants.
There were, as noted by the interview participants, high hopes and aspirations for what the Charter might achieve. It was in many ways seen as a progressive and “catalytic” charter. But the fact that a lengthy report was prepared by the SCOF based on many negative verbal and written submissions from a wide range of stakeholders is, in itself, evidence that an alternative (negative) narrative had arisen in the country in the absence of a more balanced story that recognised achievements but affirmed the need for the sector to do more to foster economic transformation in the country. This may in turn have contributed to the feeling of disillusionment amongst interviewees with the state of the sector’s transformation project.