Economic and social transformation in South Africa is an evolving and fluid issue, with the rules being written by, and through our actions. The revision of the Code of Good Practice (RCoGP) on Broad-Based Black Economic Empowerment (BEE) in 2013, is reflective of some of these actions over approximately the past seven years, both the good and bad, providing us with some indication of how The Department of Trade and Industry (dti) views the progress made to date. As a consequence, it is difficult to define best practice in absolute terms. There is no right or wrong approach as it is very dependent on the context. Having said this, this description offers a detailed step-by-step approach to understanding and implementing enterprise transformation. This description is based on the revised Codes of Good Practice and Transcend’s best practice experience to assist you in implementing BEE in a sustainable manner so that it delivers value to your business as you learn more about BEE.

The area of transformation remains a very emotive, complex, social issue. As a consequence, discussions on transformation still tend to provoke strong reactions with key stakeholders in business and politics sometimes having quite divergent views. While not discounting the importance of allowing these emotions to surface, be openly discussed and become mutually understood; this description does not set out to specifically explore the philosophical issues surrounding transformation in South Africa, or evaluate government policy, but prefers to concentrate on the necessary steps and best practice implementation based on the revised BEE Codes of Good Practice.

The authors have attempted to provide a cohesive framework and narrative for understanding, enabling, and achieving enterprise transformation and as an enabler, we provide a breakdown and explanation of the dti’s revised code of good practice (2013) and its scorecard measurements. We also provide a transformation process roadmap that serves as the foundation for a framework that captures the current state, envisions the future state, and determines actions needed for guiding transformation efforts.

B-BBEE stands for Broad-Based Black Economic Empowerment. It is often referred to simply as BEE - Black Economic Empowerment.

The government defines B-BBEE as; “an integrated and coherent socio-economic process that directly contributes to the economic transformation of South Africa and brings about significant increases in the number of Black people that manage, own and control the country’s economy as well as significant decreases in income inequalities.” – The dti

In layman terms, it simply means that B-BBEE is about the government using pieces of legislation and policy framework instruments to encourage a change (transformation) in the landscape of the South African economy to enable access of Black South Africans.

While this is a very rigorous definition it certainly does not just ‘roll off the tongue. So what is this all about? If we don’t learn more about BEE or know what we are dealing with and where we are trying to go with it, then we cannot even start the journey. What we are seeing in our society is that stakeholders are jostling with each other as to what the view of transformation is, so it depends on who asks the question. Black business, white business, government, and organised labour all have differing (but sometimes overlapping) views of what transformation is and what it is trying to achieve. The ‘thrust and parry’ of this debate informs the nature of B-BBEE and is an ongoing process and so one thing we are sure of is that B-BBEE in its essence is in rapid evolution, hence the revised version of the codes of good practice (RCoGP).

In this section, B-BBEE will be linked to transformation as it is an overlapping concept. ‘Trans – form’ or changing the form of the nature of South Africa’s capacity to enable its citizens to be the best they can be.

Here-in below when referring to ‘BEE’ it is inclusive of ‘B-BBEE’.

In formal legal terms the beneficiaries of BEE are ‘Black people’ which according to the BEE Act is “a generic term which means Africans, Coloureds and Indians, including only natural persons who are citizens of the Republic of South Africa by birth or descent; or are citizens of the Republic of South Africa by naturalization:

a) Occurring before the commencement date of the Constitution of the Republic of South Africa Act of 1993; or

b) Occurring after the commencement date of the Constitution of the Republic of South Africa Act of 1993; but who, without the Apartheid policy would have qualified for naturalization before then.”

Second-generation South African Chinese have also been subsequently added to the above definition.

It is also interesting to note that we have no legislative basis of defining ‘Black’ or ‘White’ South Africans, hence the entire process is built upon self-disclosure through the Employment Equity process (the EEA1 form). Hence the entire edifice of BEE is depending on the legal principle of people acting in a fair and reasonable manner. Anything else runs the risk of being seen as discrimination and against our constitution.

It also just makes good business sense to ensure that all employees are given the tools to contribute to the growth of the business. BEE recognises that some racial groups in South Africa have been significantly more disempowered than others.

BEE is also a mitigation strategy against South Africa’s social, political, and economic risks. Its aim is also to address the legitimacy of a mixed market economy and dramatically reduce the gap between the wealthy and the poor. South Africa has the highest GINI coefficient in the world at 0.7 (SA transformation report (2013)). Therefore, as a country, if South Africa can achieve an equal society (including specifically economic equality) then all the people of South Africa will benefit from such transformation as it brings with it a new set of shared values and increased socio-economic and political stability.

A Short Overview of The Revised Codes of Good Practice (RCoGP)
The original objectives of BEE were formed from the late 1990s to 2003, while the country, at a socio-political level, was driven by a Neo-liberal model. There was an understanding that BEE was predominantly focused on building and strengthening a middle class, rather than being a grass-roots poverty alleviation and access mechanism. This can be seen for example in the relatively low weighting given to socio-economic development.

It was tacitly understood that business would focus on the barriers to entry for those economic actors that were about to become active, thus stimulating quick growth and increasing the tax base, which the government could then use to enable those participants that were further away (in time and capacity) from becoming economically active.

Times and circumstances change and the Codes of Good Practice (CoGP) have a built-in process for updating best practice every five years to ensure a good fit with the emergent current reality… and have resulted in the Revised CoGP (2013), which this analysis includes.

After reviewing behaviour against the first five-year round of the CoGP as well as taking the global best practice into account such as Malaysia’s experiences in the 1980s. It was determined that the following principal changes were needed in the CoGP. The figure below shows a high-level view of the re-orientation of BEE under the Revised Code of Good Practice.

The diagram in Figure 1 refers to five key principle changes reflected in the Revised CoGP that need to be resolved in the right sequence as follows:

• We need to re-channel the focus on Social Economic Development (SED) out of education (which will be captured in skills development for unemployed people) and into other barriers to economic access, such as health, poverty alleviation and basic service delivery. Note environmental and infrastructure projects are now also explicitly part of SED contributions.
• We need to refocus our skills efforts to include non-employees (unemployed people hence over 18 years old), such that our future skills pool is developed and equipped to become employed. We need to ensure that our learnership and artisanship processes are effectively used as work preparation and employee courtship processes so that there is effective retention of our unemployed learners. We also need to be recruiting and training black people in proportion to the Economically Active Population (E.A.P) demographics, as this is how skills are now measured in the RCoGP.
• We need to refocus our skills efforts to include non-employees (unemployed people hence over 18 years old), such that our future skills pool is developed and equipped to become employed. We need to ensure that our learnership and artisanship processes are effectively used as work preparation and employee courtship processes so that there is effective retention of our unemployed learners. We also need to be recruiting and training black people in proportion to the Economically Active Population (E.A.P) demographics, as this is how skills are now measured in the RCoGP.
• We need to ensure that access to economic opportunity for small Black-owned businesses is enhanced through supplier development. This will benefit both entrepreneurs and the jobs that are stimulated through this process. Malaysia utilised this mechanism to overcome the “twin economies” behaviour evident in their economy in the late 1970s. In South Africa the same concept could apply; namely: bringing established businesses and small informal businesses into supply partnerships to stimulate growth and competitiveness towards mutual benefit. This also manifests as increased preferential procurement from a Black-owned small business as 92% of businesses in the country are small enterprises, with the bulk of these being Black-owned.
• We need to ensure as far as is economically viable that our supply chains are localised as outlined in the empowering supplier description. This is to enhance the value-added supply and job creation.
• We need to ensure that ownership (through employee ownership or strategic partners) exceeds the unencumbered sub-minimum of 40% of the Net value points.

In an environment where we have a worsening state of inequality, it is vital for the country to revise its efforts and focus wholeheartedly on promoting social inclusivity, in an attempt to deal effectively with varying expectations in South Africa.

When are The RCoGP applicable to our BEE process?

There are different lenses whereby one can understand this question as follows:

• They should be understood immediately
• They should be incorporated into your business’ strategic thinking immediately
• They should be implemented in your current financial year unless your business falls under an industry sector code, in which case that draft or revised sector code’s timeline applies

Developing a technical understanding of The Revised Codes of Good Practice

Now that you have developed an understanding of the context of BEE and its objectives, it is time to take an in-depth look into the detail of the key dimensions of the RCoGP.

We, at Transcend, have approached these technical compliance aspects in a way that deals with the mechanical and technical workings and criteria, integrating ways that reflect their value to the business in terms of how they relate to usual business practices so that they make business sense.

The toolkit used by Transcend allows you to capture the raw data relating to the scorecard and provides an indicative score based on the weighting and targets detailed above. This is available for all of the five pillars respectively. You will be able to understand what qualifies against each pillar on the scorecard, how is it measured, and lastly understand best practice approaches to correct the weaker position.

If a company is to not exceed the sub-minimum targets outlined below, it is awarded the points for those pillars that it is below the sub-min, but the resulting level of the company is discounted one Level for not meeting the sub-minimum. A large enterprise is required to comply with all of the priority elements.

1. Ownership - The sub-minimum requirement for ownership is 40% of net value i.e. (40% of eight points) based on the time-based graduation factor.
2. Skills Development - The sub-minimum requirement for skills development is 40% of the total weighting points for skills development (inclusive of learnerships but exclusive of bonus points for absorption).
3. Enterprise and Supplier Development - The sub-minimum requirement for enterprise and supplier development is 40% for each of the three categories within the Enterprise and Supplier Development element, viz, Preferential Procurement, Supplier Development and Enterprise Development.

The organisation’s transformation progress is assessed on its overall score achieved for each pillar, and graded into Level categories as outlined below:

Figure 2: The Scorecard Thermometer
A level 8 is at the base level of compliance but most customers would expect a Level 4 result to ensure sufficient positive support to their own preferential procurement targets on their BEE scorecard.

The issue of BEE ownership in a business is the dimension most often equated with transformation because of the way empowerment was viewed in the late 1990’s. We equated equality with equity, which while it has a basis; it is not the only aspect of transformation. The second reason ownership has such a high profile is that ownership is the criterion most impactful from a preferential procurement perspective. This means preferential procurement scoring is based significantly on Black ownership for the revised Codes.

Ownership options include:

• Employee ownership
• Direct shareholding
• Broad-based participation
• Black Economic Empowerment Group
• Sale of assets

Management control is divided into two natural sub-categories, which are:

• Board participation and executive management
• Senior, middle and junior management (including all other tiers of management and persons with disabilities)

Management control is not a priority element and there is no sub-minimum requirement.

Defining terms used in management:

• Executive management positions include the following: Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and other Executive Managers that serve on the Board of Directors.
• Other executive management positions include all executive management that does not serve on the board, such as human resource executive, transformation executive and other people holding similar positions
• Non-executive members – Companies Act makes no distinction between executive and non-executive directors insofar as fiduciary duties are concerned. One of the core fiduciary duties any director owes to his or her company is the duty to exercise reasonable skill and diligence.

This is a priority element and the 40% sub-minimum will be applied to the total weighting points of 20 points (excluding the five bonus points) viz. eight points.

Skills development is divided into two natural subcategories which are:

• Skills development spending as a ratio of payroll to provide formal equipment
• Learnerships, internships or artisanship which are descriptions of accredited work-based learning processes, measured in the number of learners to the total headcount of the company. Learnerships have sub-targets relating to the number of employed or unemployed learnerships being run.

Note: In the calculation for training and learnerships, the ‘effective EAP’ percentages will be used to derive the skills score to encourage companies to train according to the national demographics

Statement 300. Para 5.4 in the RCoGP: Skills Development Expenditure arising from Informal and workplace learning programmes or from category F and G learning programmes under the learning programmes matrix cannot represent more than 15% of the total value of skills development expenditure.

The denominator used is total Black spend and not total spend inclusive of white.

Enterprise and Supplier Development has two main subcategories, which are procurement and the development of Black-owned businesses also called Enterprise Development or if they are also suppliers being developed then Supplier Development.

Preferential Procurement

The calculation methodology for this element is complex but is based on the principle of awarding points for supporting suppliers that have a high contributor level as detailed in the table below, are Black-owned >51%, black woman-owned >30%, or are small/micro-enterprises.

Defining terms used in procurement

EME – Exempt micro-enterprise – means an entity with an annual turnover of R 10 (ten) million or less;

QSE – Qualifying Small Enterprise – means an entity that qualifies for measurement under the qualifying small enterprise scorecard with a turnover of R10 million or more but less than R50 million;

Generic – means an entity with a turnover of more than R50 million;

Start-up – means a recently formed or incorporated entity that has been in operation for less than 1 year. A start-up enterprise does not include any newly constituted enterprise which is merely a continuation of a pre-existing enterprise;

Black-owned (BO) 100% means an entity in which:

(a) Black people hold at least 51% of the exercisable voting rights as determined under Code series 100;

(b) Black people hold at least 51% of the economic interest as determined under Code series 100; and

(c) has earned all the points for Net Value understatement 100;

Black-owned (BO) > 51% means an entity in which:

(a) Black people hold at least 51% of the exercisable voting rights as determined under Code series 100;

(b) Black people hold at least 51% of the economic interest as determined under Code series 100; and

(c) has earned all the points for Net Value understatement 100;

Black woman-owned (BWO) > 51% means an entity in which:

(a) Black women hold at least 51% of the exercisable voting rights as determined under Code series 100;

(b) Black women hold at least 51% of the economic interest as determined under Code series 100; and

(c) has earned all the points for Net Value understatement 100;

BWO > 30% means an entity in which:

(a) Black women hold more than 30% of the exercisable voting rights as determined under Code series 100;

BDG > 51% BO means that any of the following groups have more than 51% ownership:

(a) unemployed Black people not attending and not required by law to attend an educational institution and not awaiting admission to an educational institution;

(b) Black people who are youth as defined in the National Youth Commission Act of 1996;

(c) Black people who are persons with disabilities as defined in the Code of Good Practice on employment of people with disabilities issued under the Employment Equity Act;

(d) Black people living in rural and under-developed areas;

(e) Black military veterans who qualify to be called a military veteran in terms of the Military Veterans Act 18 of 2011;

This sub-pillar involves the development of qualifying small enterprises or exempt micro-enterprises who are also Black-owned at least 51%. If the business being developed is a supplier then this is classified as Supplier Development, otherwise, it is called Enterprise Development. The beneficiary for these two elements hence cannot be the same company. The target for enterprise development is 1% of the companies net profit after tax, and the target for supplier development is 2% of the companies net profit after tax.

Defining terms used in Enterprise and Supplier Development

> 51% Black-owned (B/O) means an entity in which:

(a) Black people hold at least 51% of the exercisable voting rights as determined under Code series 100;

(b) Black people hold at least 51% of the economic interest as determined under Code series 100; and

(c) has earned all the points for Net Value under-statement 100;

Supplier Development beneficiary: suppliers that are exempted micro-enterprises or qualifying small enterprises which are at least 51% Black-owned or at least 51% Black women-owned

Enterprise Development beneficiary: exempted micro-enterprises or qualifying small enterprises which are suppliers and are at least 51% Black-owned or at least 51% Black women-owned

Benefit Factor Matrix: The purpose of the Benefit Factor Matrix is to incentivise spend on developing the enterprise across all eligible areas which are detailed in the benefit factor matrix detailed below;

The Enterprise and Supplier Development (ESD) course is mutually beneficial to both your organisation and your suppliers. It aims to lower procurement costs, increase the quality of a product, improve service delivery and positively impact the scorecard. Improving the ESD scorecard by socialising small Black-owned suppliers into the company supplier base and developing the relevant training programmes for such suppliers.

This pillar is focused on grass-roots social upliftment by supporting the economic access of Black South Africans. Monetary or non-monetary contributions that are implemented for communities, natural persons or groups of natural persons where at least 75% of the beneficiaries are Black people can be fully recognised. The objective of Socio-Economic Development contributions is the promotion of sustainable access for the beneficiaries to the economy as tested by the sustainable livelihoods approach. The target is 1% of the companies net profit after tax.

Socio-Economic Development contributions commonly take the following forms: development programmes for women, youth, people with disabilities, people living in rural areas; support of healthcare and HIV/AIDS programmes; support for education programmes, resources and materials at primary, secondary and tertiary education level, and support of arts, cultural or sporting development programmes

Beneficiaries – Social Development beneficiaries are either Black individuals or as is more commonly the case, communities or groups of people. In the latter case the percentage of Black people within the beneficiary group affects the amount of spend recognition in terms of the Codes:

• where 75% of the beneficiary group is Black, then the full value of contributions is recognizable
• where less than 75% of the beneficiary group is Black, then the value of the contribution multiplied by the percentage benefiting Black people