Anton de Wet explains why the right decisions in remainder of the 2016 financial year will be vital to any empowerment-sensitive business
It is important to note that the amended codes of good practice that became effective on 1 May 2015 only apply to businesses falling outside the scope of one of the sector specific codes of good practice. The following nine ‘old’ sector codes are still effective until 31 October 2015: Integrated Transport, Chartered Accountancy, Tourism, Construction, Property, Financial Services, Agriculture, Forestry, and Information and Communication Technology. Businesses falling within the scope of one of these sector codes are obliged to be measured in terms of such a sector code. The DTI confirmed that all nine sector councils will have until 31 October 2015 to align with the generic amended codes, issue for public comment, and then finalise the amended sector specific codes.
The fact that these ‘old’ sector codes remain effective until 31 October 2015 provides businesses in these sectors one last and valuable opportunity to be verified before then and maintain their current B-BBEE status for another 12 months starting then. Even if a business had a verification done recently it is suggested that one final verification is done that will buy the business at least six more months to implement an Equity Ownership transaction, about which we will elaborate below.
Owing to the significantly more stringent requirements of the amended generic codes that became effective on 1 May 2015, it became obvious that the vast majority of businesses would have been non-compliant if some sort of additional ‘transitional’ mechanism wasn’t introduced. The DTI in its clarification notice (Gazette no 38799) of 15 May 2015 therefore stated that going forward, business may still be verified in terms of the ‘old’ codes on condition that such verification is based on a financial year ending before 30 April 2015. This statement effectively provides businesses that have not yet been verified on their December 2014 or their February 2015 financial statements one final opportunity to be verified on that financial year and still in terms of the ‘old’ generic codes. It is foreseen that such verifications will continue to take place even into 2016 as a business which, for example, had a verification done in April 2015 based on its February 2014 financial statements will have its next verification done in April 2016 based on its February 2015 financial statements and still in terms of the ‘old’ codes.
The above is good news but, in the writer’s opinion, created a false sense of security in the market. What many businesses don’t realise is that this introduction of financial year-ends only impacts on the next ‘verification’ and does not remove the urgent imperative of implementation of enhanced initiatives in terms of the amended codes between now and the end of the 2016 (current) financial year!
Even though some businesses (those under the generic or sector codes) who have not yet been verified on their financial statements ending prior to 30 April 2015 might be able to have their next verification performed in terms of the ‘old’ codes, as discussed above, it is just a matter of time before the 2016 (current) financial year of every business will be measured in terms of the amended codes. Herein is the danger of a false sense of security if businesses are only thinking in terms of how long their certificate will be valid and not in terms of preparing for the amended codes. Certificates will eventually expire and will then have to be renewed in terms of the amended codes!
The generic amended codes consist of five elements which comprise the areas within a business that will be measured. Except for certain majority black-owned businesses, all businesses with an annual revenue exceeding R10 million will be measured on all five elements, namely Equity Ownership, Management Control, Skills Development, Enterprise and Supplier Development, and Socio-Economic Development. Although addressing all five elements is not compulsory, all five will be measured.
Whether late in 2016 of even early in 2017, the first verification performed on the 2016 financial year will asked such questions as:
- Does the business have black equity ownership in place?
- Are there black directors and managers in the business?
- Were SETA-accredited learnerships implemented in the 2016 financial year?
- Was there enough procurement from small black-owned suppliers in the 2016 financial year?
- Did the business do qualifying Enterprise and Supplier Development in the 2016 financial year?
For many businesses the answers to such questions will sadly be No, with the shocking result of finding themselves non-compliant at that point in time and for at least some time to follow. This could potentially have devastating effects in the form of potential loss of market share. Businesses that deal with large corporate clients, government or that are dependent on the revenue from a few large customers will be hardest hit.
PRIORITIES FOR THE REMAINDER OF THE 2016 FINANCIAL YEAR
By far the most controversial issue around the amended codes is that of Equity Ownership now being one of the five elements on the scorecard that could make or break any B-BBEE strategy. As one of the so-called Priority Elements not addressing this element representing 25 of the 100 main points on the scorecard, will – for most businesses – equate to B-BBEE non-compliance. Facing this requirement, business and their advisors are encouraged to review the new definition of ‘fronting practice’ in the amended B-BBEE Act to avoid finding themselves inadvertently guilty of this criminal offence. Care must be taken on deciding on an equity transaction that is both legitimate and makes business sense.
The first step on this mind-shifting journey of black ownership is to consider having a specialist perform a cost-benefit analysis based on your financial figures in order to see on paper whether such a transaction will make business sense or not. What will be the return on investing a part of your business into transformation? This answer is vital before considering any transaction. Step two would be to identify the black equity partner that will pose the least risk to the business yet offer some kind of value-adding contribution. Active shareholder participation on some level is very important in order to move away from the perception that B-BBEE enriches only a few black individuals. The DTI have clearly indicated that they prefer black ownership where individuals can actively participate in the said business and ultimately in the economy as a whole. A sustainable B-BBEE strategy would not ignore this government viewpoint. Once the right partner – whether an individual or institutional shareholder – has been identified and the best terms negotiated, a transaction should be implemented as cost-effectively as possible. Professional advice is strongly recommended.
Having said the above, black equity ownership should not be the top priority at the moment. The remainder of the scorecard should now be the focus during the remainder of this financial year. It is very important to realise that the Equity Ownership element is measured only at the time of verification and not at the end of the measurement year. It is important to determine when your first verification in terms of the amended codes will take place as an equity ownership transaction only has to be finalised by then. As the first verifications in terms of the amended codes will likely only start taking place in April 2016, such businesses still have until then to identify and partner with the right people. Businesses falling in the scope of a sector code and taking advantage of the six-month extension discussed at the outset, and many other businesses, will have more than enough time to plan for a proper ownership transaction.
What is however of vital urgency is to implement enhanced initiatives on the other scorecard elements between now and the end of this financial year. When this window period is missed the clock cannot be turned back. Businesses should therefore focus on things like rolling out structured, accredited training programmes and sourcing, developing and procuring from small, black-owned suppliers as a matter of utmost urgency. This will lay the foundation to later ‘round off’ the scorecard with the right black equity ownership transaction.
The amended generic codes as well as the expected amended sector codes have been designed in such a way that businesses will no longer be able to ignore even one of the five elements on the scorecard and this includes the controversial Equity Ownership element. This implies that black ownership by itself will also not render a business B-BBEE compliant. In fact there are many businesses that currently have black ownership that will be found non-compliant if they do not address the remainder of the scorecard in a meaningful way during the rest of this financial year.
What should be the B-BBEE priorities for any empowerment sensitive business in the next six months?
- Determine if the business qualifies for a final verification in terms of the ‘old’ codes.
- Perform a year-to-date assessment in terms of the amended codes to identify any gaps that can still be filled.
- Implement as a matter of urgency a strategy based on the above assessment.
- Determine when you really need to have an equity ownership transaction in place and start looking for a suitable black partner.
Don’t fall into the trap of a false sense of security!
Author: Anton de Wet CA(SA) RA is a B-BBEE specialist at Middel & Partners