We support dti clamping down on dodgy broad-based schemes

The intention of the problematical notice issued by the dti on 5th May 2015 is to clamp down on dodgy broad-based/employee ownership and other schemes like trusts. We have been asking for this for a long time and support any initiative intended to stop abuse of the transformation process. Unfortunately we do not see the troublesome clause 1(d) as having the desired effect – instead it will have unintended consequences.

Clause 1(d) stated:
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.

This implies that a broad-based or employee ownership scheme will not earn full points – will not even be regarded as ownership. This is patently wrong – genuine ownership schemes should be seen in the same light as any other form of ownership.

We reported on this recently, see http://www.econobee.co.za/news-and-opinion/news-and-opinion/newsletters/dti-interpretations-catches-president-in-lie-econobee-newsletter-25-february-2015

In this newsletter we said that the President was caught out in a lie by some weird interpretations of the dti. We specifically pointed out that while there are some very good broad-based and employee ownership schemes, some are merely shams intended to earn points without passing any benefits to the black person who supposedly owns the shares, but never sees the benefits. We have seen employee ownership schemes where the employee is never able to sell his shares. We have seen schemes where an employee loses his shares if he is dismissed or leaves the company. This clearly implies that the person never receives economic interest. We have seen broad-based schemes where participants get no benefit from being part of the broad-based scheme. In some cases the participant gets a small benefit, but never participates in share appreciation, and loses his shares when he exits the scheme. We call this floating beneficiaries which is patently not in line with the intentions of the codes. We have seen situations where the participants are simply described as “black people” but never identified. This is wrong and not in line with the codes, never mind the substance and spirit of the codes, or the Act or strategy. The verification industry has tended to be very lenient on this – often not reading the relevant trust documents (which admittedly can be 50 pages of legalese), or relying on a competent person’s opinion (as allowed by the Verification Manual), without confirming that the competent person is fully aware of the Codes.

The fault lies somewhat with the verification industry but especially the dti, SANAS and IRBA never issuing any practice notes and condoning such practices over the past years. The verification industry would have followed any clarification notice about how to evaluate a broad-based or employee ownership scheme. Of course had the BEE Commissioner been operational he could have issued those practice notes. Anyone who supports transformation would agree that those bad schemes should be identified and earn no points. It however makes no sense to lump all schemes together and remove all points.

If a scheme is bad it makes no sense to allow it to earn even earn 1 point. If the scheme does not meet the rules and substance of the codes then it should be totally rejected and not points even on 2.2.3 of the scorecard. If the scheme is right, it should earn all the points it deserves. The dti has the right intentions – their implementation and the minister’s notice is wrong. We need the minister to correct the clause because this type of fronting is so prevalent.

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