There is no shortage of critics of BEE, from across the political spectrum. But what is to be done? That is where agreement is hard to find.
Last week Broad-based BEE Commission head Tshediso Matona made some interesting comments on potential reforms in an interview with Reuters. He talked of increasing the priority of skills and enterprise development, relative to ownership. While he did not provide any specifics, these hint in the right direction.
While many critics want to see BEE scrapped, that is the wrong answer. Racial inequality remains a serious and present danger to social stability (the unemployment rate among black South Africans is 35%, but 8% among whites; whites earn about three times more than black South Africans).
That background is a tinderbox that easily enables major social disruption. The 2021 riots in KwaZulu-Natal and Gauteng was the world’s most expensive social disaster that year. Sasria had R32bn in claims, almost all of which were paid out. Some businesses have not reopened. A study in 2022 found that losses by Durban businesses alone were R70bn. That shows just how serious a risk inequality is to investors and one they should have a significant interest in resolving.
Some describe BEE as a “failure”. I don’t agree. In fact, BEE had a significant impact in the black middle class, thanks to empowerment deals and employment equity. BEE deals created R317bn of net value for black beneficiaries, though by 2017 most deals had matured. This spurred the creation of a black capitalist class that has been critical to building black-owned businesses.
The shift in the demographics of the leadership in the formal sector is clear even if there is still some way to go. In the banks, 90% of junior management is now black, though this falls to 48% at executive committee level. Still, even at executive committee level, that can be compared with 36% four years ago. I doubt these changes would have been achieved, at least as quickly, without BEE.
Wealth creation
Of course it has had problems, and those change over time. Matona’s de-emphasis on ownership is interesting. Ownership faces a chicken-and-egg problem: black share ownership is the result of wealth as black savers would naturally end up holding shares, but the accumulation of wealth largely depends on having equity, that is the highest yielding financial asset.
We’ve been putting the emphasis in the wrong place, on ownership of large, listed, companies, instead of small entrepreneurial owner-managed companies, in which serious wealth creation is possible. Large companies have highly dispersed ownership, dominated by institutions such as insurers and asset managers. These are where the country’s savings are invested, but they are not vehicles for accelerated wealth creation the way entrepreneurship is.
A shift in focus towards skills and enterprise development could address this weakness. But, and here is the rub, the way we measure these is wrong. Ownership, at least, is a clear outcome. If people hold unencumbered shares, they are the owners. But what is the outcome we want from skills development and enterprise development? It is surely black people who are highly employable thanks to the marketable skills they have, and successful black businesses.
Key driver
Yet what we measure is neither of those things — instead we measure how much is spent on skills and enterprise development. We measure the inputs, not the outputs. So, a company can spend 6% of its payroll on skills development, getting maximum points, and yet have not a single black person with marketable skills at the end of it. There are some marginal qualifications — you do get extra points for internships and learnerships, and bonus points if they lead to employment, but the bonus points can only add 20% of the total.
This is similar for enterprise and supplier development. The key driver is how much a company spends on supplier and enterprise development out of after-tax profit (3% gets you maximum points). Whether this is spent on companies that go on to become major successes or failures doesn’t matter.
This means BEE has a major case of “inputitis” when it comes to skills and enterprise development. We need to turn this around and focus on outputs. Our measure of success should be the outcomes we desire, not the inputs.
For BEE this means we must define the outcomes we want and determine how we link incentives to those, instead of linking incentives to inputs. This also encourages innovation and efficiency in how we achieve those outcomes. If a company can spend less to achieve the same outcomes, that is a good thing. It means we are being more efficient.
These definitions and incentives are feasible — we’re already doing it for youth skills by recognising only jobs that are created, not the inputs. As we think about how to make BEE more effective, let’s cure it of the disease of inputitis.
Stuart Theobald is chair of research-led consultancy Krutham (formerly Intellidex).
This article first appeared in Business Day.
