The burning question in the empowerment debate is probably how to define black ownership. How do you measure it? If you can't, how will you know when the appropriate level has been achieved? (See table on Ownership.)
The financial services charter (FSC) has agreed on two concepts: direct and indirect ownership. Direct ownership is that held directly by empowerment companies or individuals, while indirect ownership would include collective investments such as those held by pension funds.
The FSC, the only nongovernmental charter to be completed so far, calls for a minimum direct equity ownership by BEE individuals or companies of 10% (measured at a group level) by 2010. Those companies who achieve 13,75%, 17,5%, 21,25% and 25% direct black ownership will be rewarded progressively with "bonus points".
Indirect ownership occurs where an institution or other investor owns equity in a company on behalf of beneficiaries, and where there is no direct participation by the beneficiaries in the voting rights.
Listed companies in the financial services sector have high levels of indirect ownership. For instance, the Public Investment Commissioner (PIC) is estimated to hold 8% of the sector's equity on behalf of the government pension fund.
But indirect ownership will not be a panacea. Mohlaleng Investment & Management Consultants CE Andrea Brown says that "in terms of the FSC, indirect ownership can only count to the extent that one can calculate the beneficial black interests of the investor in question". Indirect ownership as high as 25% will carry only two points in the charter scorecard, compared with 12 points for direct ownership of 10%.
By mid-April the guidelines for calculating indirect ownership and measuring beneficial black interest still had to be finalised by the FSC core group. Whatever the method of calculation, it's clear that recognition of major indirect ownership will not cause a company to be considered black-owned, black-empowered or black-influenced. A black company is one with direct black ownership and "significant" black control. Control is essentially determined by board positions, the number and type of voting rights and the number of black people in executive management. So indirect ownership should not be confused or equated with direct ownership.
Still, there are benefits in recognising indirect ownership, principally in acknowledging the influence of fund managers, asset consultants and trustees. Already the PIC is indicating that it can play a role as a more active investor in the companies in which it has a presence.
Some confusion surrounds government shareholdings. It's been argued that government, through development finance institutions, is a black shareholder. The ownership table shows the huge investment that government has in Telkom - but this has not been included in the empowerment scorecard.
The question of ownership and control is complicated further by how a company is acquired. Says Brown: "The charter defines BEE transactions as all transactions for the acquisition by black people of direct ownership in an existing or new entity." There are other questions, though. Does the manner in which the equity is funded, for example through deferred options, influence the degree of empowerment?
The FSC does provides guidance on the nature of direct ownership and on the principles that should govern the structuring of BEE transactions. It encourages structures that facilitate "meaningful ownership" for BEE parties and promote longer-term shareholder relationships in preference to short-term portfolio investments.
Section 10.4 of the FSC states that if direct ownership is based on deferred ownership, where the black equity carries no upfront economic interest, this will not count for empowerment until that equity carries full rights. That would undermine both the Bidvest deal with Dinatla last year and the Imperial deal.
That raises questions about hurdles and possible delays in the transfer of equity. A potential weakness of the Absa empowerment deal announced in April is that a rising share price appears essential to the deal's success. The price increases needed to ensure BEE partners can pay for their equity do seem more easily attainable than in other deals where options were used, notably Bidvest. But there is the risk that a bear market could undermine the deal.
Brown argues that a more comprehensive method of measuring ownership is required. She recommends more indicators. Have the shares actually been issued to the BEE shareholder? Are there voting rights that translate into real control? What value has actually been transferred?
It seems the issue that is emerging is that, where possible, ownership must be real. It should not be deferred or dependent on bullish assumptions about markets that are inherently unpredictable. But the difficulties are clear from the table below, measuring empowerment by ownership, with only six companies achieving more than 50% in direct black ownership. That shows just how far we still have to go.
