Mitigating the risks, blind spots in BEE

As in any instance where legislation prescribes compliance by a specified date, steps are hurriedly being put in place to meet the prescribed outcomes or dictates, and shortcuts and short-term perspectives often become the benchmark.

This may be acceptable where the issues of compliance pertain to processes, systems, procedures or technical matters. However, in the case of BEE, the heart of the matter is all about people, communities and the country at large.

A number of fundamental premises underpinning BEE have to be acknowledged:

* The apartheid era resulted in large groups of people being disadvantaged, and being denied access to commercial and business opportunities and the commensurate earnings and wealth. While this should never be overlooked or underestimated in respect of the significance and extent of its effects, as a society we have to move forward. BEE legislation is an intrinsic part of this moving forward.

* There`s no such thing as an overnight sensation, no matter how great an effort there is to engineer one. There is simply no substitute for diligence, commitment and strategy.

* There can be no room for complacency on the part of any of the parties involved. Companies have to become black-empowered, and they cannot afford to drag their heels. At the same time, potential black partners cannot afford to overlook matters of fundamental and good business practice and policy in their pursuits.

* BEE is here to stay and until such a time as its introduction is completed and it has run its course, the pressure on non-black-empowered companies will increase dramatically.

* Finding the right black partner, whether this is an individual, a group of individuals, or a black-owned enterprise or investment vehicle, is far from easy.

* Black empowerment initiatives are really another form of mergers and acquisitions, but perhaps fraught with even more complications and higher levels of risk.

Trade journals are filled with surveys concluding that the majority of mergers and acquisitions fail to generate shareholder value. Some studies estimate a failure rate as high as 40% to 70%, while a KPMG survey of worldwide M&A activity indicated that only 17% of these transactions succeeded in creating shareholder value.

Historic evidence shows that organisations have failed to measure and manage the risks involved, particularly with regard to leadership and human capital disparities. Decisions have consistently been made on the basis of assumption and speculation rather than knowledge and insight, particularly with reference to the less tangible or seemingly less measurable components of the businesses. If more than two-thirds of merger and acquisition activity already fails, how much greater are the chances of it failing when companies look the other way with regard to due diligence so as to ensure a BEE deal goes through?

Companies have to take more time to strategise and qualify first who and what they are as a business.

Bryan Hattingh, founder and CEO of the Bryan Hattingh Group

The Department of Trade and Industry, and various industry charters, have cleverly structured BEE so that it consists of considerably more than equity ownership. It`s about having equity employment and corporate social investment policies in place too. But perhaps the most important accelerator of BEE is procurement. As corporate organisations strive to be BEE-compliant, they will review their suppliers and service providers and ensure as far as possible that these are black-owned.

In the process, a host of existing suppliers who do not meet the criteria will be given the boot. So unless the company has a unique service line that is critical, it runs the risk of becoming one of the casualties of the procurement refinement exercise. This obviously cascades downwards, impacting companies of all sizes.

Factors such as this are forcing companies to leapfrog the BEE timeline. The consequence is that in this window of compliance and opportunity, companies that do get their act together will enjoy significant competitive advantage over their counterparts, making it ever more difficult for them to join the race.

This can lead to a dangerous situation. In their haste to become black-empowered, some people will cut corners, ignoring certain factors that are critical to the sustainable growth and success of a business.

It also has to be acknowledged that there are a limited number of formal BEE partners. One of the consequences of black empowerment under our new regime is that certain small groups of people and individuals have become astronomically wealthy. In the context of a bigger South Africa this has done little to eradicate poverty, unemployment, or HIV/AIDS.

While it is gratifying to see an ever-increasing number of black entrants into the business world, the unskilled, unemployed masses have not been reached. The problem is that the growth in the number of meaningful players is not in proportion to the size of the demand for BE partners.

Furthermore, there are significant numbers of brave and hopeful black entrepreneurs and business people who are now in a privileged space because of new legislation and the commensurate assistance to open their own businesses.

Unfortunately, many do not have the corresponding level of business experience and acumen they might have needed had they launched those businesses under unlegislated circumstances. This is not to suggest that they do not have the talent and potential required to succeed - they simply do not have the years of experience that may be required to run a profitable and sustainable business.

Simply put, people cannot afford to build their businesses on the back of BEE, nor can organisations that incorporate them as their BE partners overlook the need to mentor and upskill these people and businesses as they move forward.

Another key point is that once all companies have become empowered, being empowered will no longer be a differentiator. It is vital that no matter what company it is or how the company is positioned, even if it is 100% black-owned, it is able to compete equally and provide products, services and solutions in an effective, efficient and price-competitive manner.

We need to have the foresight and vision as a nation to see beyond BEE and ensure we build a stable economy, society and business ethics so that our children and their descendants can be assured of being part of a growing world of opportunity.

We need to be doing things for the right reasons - to add value, to grow as individuals and help to uplift our society. This is the only way to create genuine vehicles to reduce poverty and to increase SA`s GDP significantly.

It is vital if we are going to compete on the global stage that our businesses are not the result of relations of convenience and short-term gain, but are built on the fundamentals of integrity, goodwill, meaningful long-term potential and merit.

Companies have to take more time to strategise and qualify first who and what they are as a business. What do they stand for? What do they want to become? What is their business and value proposition and what is the makeup of leadership team that needs to be in place for them to achieve their objectives?

Having done this, they will be considerably better prepared to put a meaningful BEE structure in place. There are many different ways of pursuing black empowerment and the nature, life stage and strategic intent and direction of the business will determine which is the optimal structure.

Everybody in the BEE equation has to move beyond issues of colour. There are much bigger challenges and goals ahead. If we allow separatism and factions to be set up as a result of BEE initiatives, we will have missed the boat. The trick is to make sure that you are engaging for the right reasons.

While BEE legislation is the reason people are seeking to become empowered, it must not be the goal. The goal must be the development of the business, and of the economy, with BEE being one of the vehicles required to achieve this. Otherwise, many of these initiatives will run the risk of failure.