Original publish date – Fri, 20 Aug 2010 10:53:12 +0000, Keith
There are two types of fronting taking place.
Fronting Activity 1:
The first, and most important, and most harmful is where a company allocates, or pretends to allocate shares to a black person, and puts him on the board, with the express intention of misrepresenting their business.
This is wrong, but happens in reaction to requests from predominantly government and public enterprises for details of the black ownership of the entity.
It is becoming commonly accepted that to do business with government or a public enterprise, you need to have anywhere between 25% and 60% black ownership.
There is no consistency: Various public enterprises and government departments have different requirements. Even within the same department, tenders have different requirements.
All public tenders are governed by the PPPFA (preferential procurement policy framework act) which lay down procedures and process from evaluating tenders. It even states that all tenders must take into account the empowerment credentials of each tenderer. It does not give any specific details on how those empowerment credentials will be evaluated, which is why each tender document looks different.
There is no clear interpretation of black ownership. As a result many unethical companies are creating front companies that are 51% black owned – where in some cases the black ownership has no idea he is even a shareholder, or has signed a proxy giving the other owners full rights to run the business as they please. There are cases where the new owner is only a temporary owner, and HAS to sell the shares back to the company some time in the future. While the ArcelorMittal deal is not necessarily fronting, this is exactly what their share deal is doing.
Fronting Activity 2:
The second type of fronting relates to the B-BBEE scorecard/certificate. A scorecard is usually only asked for by private enterprise, and measures the entities B-BBEE status against a wide rage of indicators – that is why it is called “broad-based”. Some companies will misrepresent their B-BBEE status to obtain a higher score than they would otherwise achieve. One recent example is of Shield Chemicals who forged their B-BBEE certificate – a fraudulent activity.
Because a certificate is based on up to 30 indicators, it becomes more difficult for a company to front, and it becomes easier for an analyst to identify that fronting. If a company used the dubious ownership methods mentioned previously, a consultant or rating/verification agency would quite easily pick it up and award zero points to the company as we estimated with the ArcelorMittal deal. The indicators are cleverly interlinked – if a company earns zero points on ownership and employment equity, it would be unusual, though not impossible if it earned full marks on management control and skills development, and these specific indicators would be checked by the rating agency.
A verified scorecard becomes a public document that is scrutinized, and is more likely to be caught out if fronting than where a company submits a tender to a government department, and includes falsified information. It is most likely that the customer will identify an invalid scorecard, or even a competitor. A verification agency will also examine certificates to see if there is an indication of fronting.
Most incidences of fronting are due to fronting activity 1, not 2. A broad-based scorecard is less likely to be fronting than a share certificate.
The best way to reduce fronting is for government to follow the B-BBEE scorecard approach.