New BEE Codes will have significant Impact on Multinationals

The new Broad-based Black Economic Empowerment (B-BBEE) Codes that have been gazetted for public comment on 11 October 2013 identify B-BBEE ownership as a priority element. Multinational companies operating in South Africa need to be aware of this, and of the fact that non-compliance (black ownership below 10%) with this and other areas could mean a one-level drop in their B-BBEE compliance scorecard.

h3. Primary BEE Elements

The revised codes list ownership, skills development, and enterprise and supplier development as priority elements,” said Ralph M Ertner, chief executive officer of the B-BBEE advisory firm, Into SA. “Failure to reach the sub-level thresholds as laid out in the new codes will cause any company that otherwise scores sufficient points on the scorecard to quality for a level 4 recognition, automatically to be lowered to a level 5 – and depending on their turnover even to a recognition level 6!” The remaining BEE elements – also referred to as secondary BEE elements – will in future only account for 20% of the possible points to be scored.

h3. Equity Equivalence Programmes

The criteria for most elements have also been increased, making it more difficult for most companies to maintain their current B-BBEE recognition levels. Developing and implementing an equity equivalent programme, an option open to multinationals, may be the best course of action for such organisations to take in the face of these more stringent B-BBEE compliance requirements. An equity equivalent programme, which will need to be submitted to the Department of Trade and Industry (DTI) for approval, can include enterprise creation or investments in social advancement initiatives. In essence, multinationals are measured against the value of operations in South Africa. Contributions to equity equivalent programmes are set at 25% of the value of South African operations, or at 4% of the total revenue from a multinational’s operations in South Africa over the period of continued measurement.

h3. Employee Share Ownership Schemes

Another vehicle is the creation of Employee Share Ownership Schemes (ESOP), also referred to as Black Employee Trusts (BET). They were in the past a useful vehicle for Black Ownership as well as for motivating employees by incentives distributed to them as beneficiaries. Since the new policy that is reflected in the new codes focusses on true and un-inhibited empowerment on the ownership side, it will have to be re-evaluated in which format ESOPs can still be accepted as ownership vehicles for multinationals.

h3. Action instead of Re-action

At present, very few multinationals have embarked upon this route. Across the board, companies can expect to have higher targets in terms of employment equity, skills development and procurement spend. It is essential that companies take B-BBEE compliance seriously in light of the new codes and that they do not only consider B-BBEE when renewing their compliance certificates as retrospectively scoring and complying will be an impossible endeavour.

An in depth analysis of the new codes and corresponding strategies will be published by Into SA shortly.

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