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Module

4: Ownership and Management

1. Introduction
Ownership and management in the context of BEE are about allowing black people
to actively participate in the processes of owning and managing a company so they
can administer assets and resources and thereby drive empowerment from within
the organisation.

Both these elements are measured on the BEE scorecard to determine if a company
is BEE compliant. The way in which the concepts of ownership and management are
measured on the BEE scorecard will be discussed in this module.

In this module, you will:

Understand some of the different types of ownership and their effects on


BEE;
Understand how ownership is measured on the BEE scorecard;
Understand how the management element is determined and measured on
the BEE scorecard.

A: Ownership

2. Indirect and direct ownership


The Codes measure direct and indirect ownership to gauge the true benefit to black
beneficiaries. Direct ownership refers to complete ownership and is easy to measure
as there is an identifiable natural person who holds ownership.

Indirect ownership is ownership of equity instruments held through a third party. It


is more difficult to measure, as there is a need to assess whether the beneficiary
enjoys the full benefits of ownership such as economic benefits and voting rights.
Some examples of indirect ownership include mandated investments, broad-based
ownership schemes and government ownership.



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2.1 Mandated investments


These are investments made by or through a third party, regulated by legislation on
behalf of the actual owner of the funds; pursuant to a mandate given by the owner
to a third party, which mandate is governed by legislation.

An example of a mandated investment is a pension fund. If a black person


participates in a pension fund, which invests a portion of its value in a JSE-listed
company there is indirect black ownership in the JSE-listed company. The level of
ownership is difficult to measure here and the control that the black participant
normally has is limited.

2.2 Broad-based ownership


This is ownership held by an intermediary on behalf of a broad base of beneficiaries
who are usually not actively involved in the ownership. Beneficiaries usually dont
participate in voting and the economic benefits are diluted, which can be
problematic for BEE. The Codes try to establish whether the beneficiary has a real
right to ownership.

2.3 Government ownership


Government represents the citizens of the country. What government owns, citizens
indirectly own. Government is therefore neither black nor white because it exists for
the benefit of all inhabitants of South Africa and is excluded from the measurement
of ownership for BEE.

3. Measuring ownership
Ownership can be measured using the flow-through principle, the modified flow-
through principle and the exclusion principle.

3.1 Flow-through principle


The flow-through principle measures companies to establish actual black ownership
so that the objectives of BEE are not evaded through complex organisational
structures. It measures the flow of benefits using group-holding accounting
principles by following ownership upstream until an identifiable natural black person
holding the rights of ownership is found. It works out the share percentage that the
black person will receive from the companys economic benefits.



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Example:

Company Alpha is 30% black owned and owns 30% of Company Bravo.
Company Bravo owns 60% of Company Charlie. Using the flow-through
principle, Company Bravo is 9% black owned (30% of 30%) and Company
Charlie is 5.4% black owned (60% of 9%).

3.2 Modified flow-through principle


The flow-through principle affects the BEE ownership score of black companies who
want to source finance through selling equity to non-black people. To provide relief
for this, the modified flow-through principle was created. The modified flow-through
principle applies to BEE-owned companies (where black people have more than 50%
economic interest) and BEE-controlled companies (where black people have more
than 50% voting rights).

Allowing companies to re-value an ownership tier that is currently 50% black owned
to being 100% black owned provides this relief. This can be applied at one point only
on any tier in a chain of ownership, but cannot be used on the entity itself or for
measuring economic benefits and voting rights for black women or black designated
groups.

To apply the modified flow-through principle:

Using the flow-through principle, establish the ownership percentage at all


ownership tiers;

Identify ownership tiers that are more than 50% black owned;

Choose one majority black-owned tier (this is used in a formula); and

Re-calculate black ownership of the entity after taking into account the
converted
ownership tiers (where black ownership is converted to 100% in the chosen
tier).



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Example:

Company Alpha (51% black owned) owns 30% of Company Bravo, which owns 60%
of Company Charlie. Company Alpha is 100% black owned (as per the modified
flow-through principle). From this, we can then see that Company Bravo is 30%
black owned (100% of 30%) and Company Charlie is 18% black owned (60% of
30%).

3.3 Exclusion principle


The exclusion principle allows an entity to exclude certain types of ownership
without being rewarded or penalised for such exclusion.

Exclusion is applicable in three circumstances:

1. Government ownership: Government is neither black nor white, as it exists


for all the inhabitants of the country, so organs of state and public entities
are excluded.

2. Multinationals: Non-South African operations of multinational businesses


may be excluded.

3. Mandated investments: Mandated investments may be excluded. The


exclusion is limited to a maximum of 40% of the measured entitys total
shareholding. Where an entity elects not to exclude the mandated
investment, it may treat all of that ownership as non-black or obtain a
competent persons report estimating the black ownership in that mandated
investment. Businesses cannot selectively exclude mandated investments
excluding one mandated investment will exclude them all and including one
mandated investment will include them all.

4. The ownership scorecard


The scorecard provides the targeted percentage of black participation that the entity
must achieve to qualify for the maximum number of points on the indicator. If the
full targets are not reached, points are allocated on a pro-rata basis.



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Weighting Compliance
Category Ownership indicator
points target

Voting rights:

Exercisable voting rights in the
enterprise in the hands of black 3 25% + 1 vote
people

Exercisable voting rights in the


enterprise in the hands of black 2 10%
women

Economic interest:

Economic interest of black people in
4 25%
the enterprise

Economic interest of black women in


2 10%
the enterprise

Economic interest in the following


black natural people in the enterprise:

Black designated groups

Black participants in employee


ownership schemes; 1 2,5%

Black beneficiaries of broad-


based ownership schemes; or

Black participants in co-


operative

Realisation points:

See realisation
Ownership fulfilment 1
points



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See realisation
Net value 7
points

Bonus points:

Investment of black new entrants in
2 10%
the ownership of the enterprise

Involvement of black participants in


the ownership of the enterprise in:

Employee ownership
schemes; 1 10%

Broad-based ownership
schemes; or

co-operatives

Table 1: The ownership scorecard.

There are four indicator groups on the ownership scorecard:

1. Voting rights

2. Economic interest

3. Realisation of shareholding through net value

4. Bonus points

4.1 Voting rights (5/20 points)


Voting rights are the most powerful means for influencing the direction of an
enterprise. In the scorecard, they measure the ability of black people to exercise
control over the economic resources. The flow-through and modified flow-through
principles are used to measure these rights.

A section of the voting rights is allocated to black women, who have historically been
excluded. The voting rights of black women can be measured using the flow-through
principle.



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A target of 25% + 1 vote of the total voting rights needs to be held by black people (3
points) and 10% of the total rights need to be in favour of black women (2 points). A
black womans vote counts in favour of both the black women measurement and the
black people measurement.

4.2 Economic interest (7/20 points)


Economic interest measures black peoples rights to share in the economic fruits of
an enterprise. The intended beneficiaries include three groups:

1. Black people

2. Black women

3. Black designated groups: minors, unemployed and disabled groups, black


participants in employee ownership schemes and black participants in
cooperatives.

Where the target of 25% of the entity is owned by black people, four points are
added to the ownership scorecard. Where the target of 10% of the entity is owned
by black women, two points are added to the scorecard. One point will be added
where the target of 2,5% of the entity is owned by black designated groups. The
measurement of black designated groups can only be done using the flow-through
principle.

The ownership scorecard does not recognise economic benefit arising from debt
instruments (anything that does not fall into the definition of equity). In other words,
debt finance by a black person to any operation is not seen as an economic interest.

4.3 Realisation of shareholding through net value (7/20


points)
This measures the actual capital held by black people: the net economic interest
after deducting monies owed. This is necessary because often debt undermines the
benefit of ownership. For example, the BEE party may benefit from legal ownership,
but the economic benefits of that ownership may still be in favour of the original
owners where interest is benefitting the original owners and black owners have no
access to the working capital.

The net value is the current value of the business.

Two other factors need to be taken into consideration here:

1. Deemed net value: this is the value of the part of the business that the black
shareholder owns minus any outstanding financial obligations (as a result of



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purchasing the company), expressed as a percentage of the current value of
the company.

2. Graduation factor: The target contribution is to achieve 25% black ownership


debt free, but this has been staggered over ten years according to a
graduation factor to make it realistic. So, net value is measured according to
a graduation factor. The graduation factor allows the entity to score full
points on the net value even when there is significant debt. The target
increases each year until the BEE stake is debt free. Using the graduation
principle, the deemed net value is measured against preset annual targets.

Ownership fulfillment (1 point) is achieved when black shareholders are released


from all third-party obligations that restrict their shareholding rights.

4.4 Bonus points (3/20 points)


There are three bonus points on the ownership scorecard. This is to encourage
measured entities to include new entrants and broad-based schemes in ownership.
To receive full

bonus points, 25% of the economic interests must be held by black people. The
bonus points are allocated on a pro-rata basis.

5. Continued measurement of ownership


The Codes give provision for an entity to receive continued recognition for
ownership where a BEE party exits a deal through the sale of shares or defaults on
borrowings against the shares in the entity.

5.1 Sale of shares


An entity can recognise a portion of black ownership after a black participant has
exited through the sale or loss of shares if the following conditions are met:

The black participant must have held the shares for a minimum of three
years;

Transformation must have taken place in the entity;

Value must have been created in the hands of black people; and

Black participation resulting from continued recognition can only contribute


up to
40% of an entitys score on the scorecard.



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5.2 Loss of equity through guarantee


If there is a loss of shares by a black investor or a default on borrowing shares, the
measured entity will not be penalised and may continue to recognise black
ownership (continued recognition) if:

A written agreement exists between the entity, the BEE party and the
lender;

The entity gave consent to the BEE party to use the equity as security; and

The period over which the points were allocated will not exceed the period
over
which the shares were held. If the shares where held for two years prior to
loss, then the entity may only claim recognition for them for up to two years.

6. Sale of assets
BEE ownership can also be recognised through the disposal of businesses and assets.
Entities are able to sell operational assets, a business or equity instruments in
another business to empowerment parties as an alternative to selling an equity
stake in the measured entity. This is known as the sale of assets. The seller sells an
asset to a BEE party and claims ownership points, although the BEE party does not
own a portion of the sellers primary operation.

For ownership points to be recognised, the transaction must result in the creation of
sustainable businesses or business opportunities and the transfer of skills or
productive capacity for black people.

B: Management
7. The management element
Management in a company relates to the control of day-to-day operations in an
enterprise, such as directing employees and taking care of the enterprises
resources. For BEE purposes, measurement is based on how much control black
people have in the organisation.

8. The management scorecard


An outline of the management scorecard and the weighting points for each category
is shown below:


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Weighting Compliance
Category and management control indicator
points target

Board participation:

Exercise voting rights of black board 3 50%


members using the adjusted recognition
for gender
2 50%
Black executive directors using the
adjusted recognition for gender

Top management:

Black senior top management using the 3 40%


adjusted recognition for gender
2 40%
Black other top management using the
adjusted recognition for gender

Bonus points:

Black independent non-executive board 1 40%


members


Table 2: The management scorecard.

Companies must involve black people at executive and operational levels to effect
successful transformation in the economy. For BEE measurement purposes, the
management scorecard is broken down into three indicators:

1. Board participation

2. Top management

3. Bonus points

8.1 Board participation (5 points)


A Board of Directors controls the enterprise through voting rights. These voting
rights are measured by the number of votes that black directors have and not by the
number of black directors on the board. The target is for black people to hold 50% of


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all voting rights on the board. The measurement is subject to an adjusted recognition
for gender: to score full points, black women would need to hold 25% of the total
voting rights.

8.2 Top management (5 points)


The Code measures the number of black people in top management positions. This
includes senior top management positions (heads of major functions with decision-
making powers) and other top management roles (power to influence policy-making;
and support the operational capacity of the company). Participants cannot be
measured in both groups. The target for senior top management is 40% black
people. Black women must hold 20% of the total top management positions.

8.3 Bonus points (1 point)


A bonus point is awarded for including black independent non-executive directors,
where 40% of the independent non-executives are black people. These are board
members without ownership or management interests.



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Example of a successful black entrepreneur: Patrice Tlhopane Motsepe

Patrice Tlhopane Motsepe (born Jan. 28, 1962, Soweto) is a South African
businessman and the countrys first black billionaire. Motsepe made his fortune
through mining interests that eventually expanded in 2004 to form a successful
multifaceted mining company, African Rainbow Minerals (ARM).

In spite of having grown up in the apartheid era, Motsepe fared better than many
other South African blacks. His father, once banished for voicing opposition to
apartheid, became
a successful liquor distributor by affiliating with South African Breweries.
Throughout his youth Motsepe worked at his fathers store and beer hall, a job
that gained him essential lessons in business management and exposed him to the
lives of the mine workers who bought their daily provisions from him. Largely
because of his fathers opposition to South Africas segregated public school
system, which provided the countrys blacks with poor educational opportunities,
Motsepe and his six siblings attended a Roman Catholic boarding school in Eastern
Cape province. Motsepe then earned a bachelors degree in law from the
University of Swaziland and a law degree from the University of the
Witwatersrand, Johannesburg. He joined the law firm of Bowman Gilfillan in 1988
and became a partner in 1993, having worked as a visiting attorney with the
American law firm McGuire, Woods, Battle & Booth in 199192.

Motsepe left to apply his business acumen to the mining trade. He believed that
he could use management techniques, such as low base pay coupled with
production incentives, to transform less-productive shafts into moneymaking
operations. Even more important, he found ways to benefit from the countrys
Black Economic Empowerment (BEE) laws, which required companies to have a
minimum 26 percent black ownership before a mining license would be granted.
In 1994 Motsepe founded a mine services company, Future Mining, and applied all
of his life experienceknowledge of the mining trade and its workers, school
connections, understanding of political and legal structures, and a shrewd spirit of
entrepreneurshipto his new work. In 1997 he launched ARMgold, which in 2003
merged with Harmony and acquired Anglovaal Mining (Avmin). Motsepe was
named chairman of the newly reorganised ARM in 2004, and by 2006 the
company had expanded beyond gold and other metals into coal mining.

Extract from: http://global.britannica.com/EBchecked/topic/1473964/Patrice-


Tlhopane- Motsepe



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9. Summary
In this module on ownership and management, you:

Learnt about indirect and direct ownership;

Learnt about how the ownership element of the scorecard is measured;

Learnt how the management element of the scorecard is measured.



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