27four Investment Managers
2nd February 2018
Financial sector code a unique transformation initiative
Financial institutions support the sector empowerment code because it encapsulates the principles for their continued relevance.
The financial sector code (FSC) outstrips even the stop-start CEO Initiative in its promise to effect societal change. Gazetted late last year, it places financial institutions in the forefront for delivery of radical economic transformation. The institutions, and myriad operators within the sector, have committed themselves to the means without the blights.
Think not only of the money — potentially many millions of rand annually from stipulated proportions of institutions’ net after-tax profits are involved — but also consider defined scorecard monitoring and measurements to accelerate the pace in correction of inequalities. These range from support for smaller enterprises to empowerment financing, consumer education, preferential procurement and infrastructure investment.
The list is exhaustive, yet targeted. Where aspects of the code are voluntary, as with the obligations on retirement funds, there’s a clear “comply or else” implication. Funds are allowed time, for instance, to get their supplier programmes and trustee boards into shape — notably to deepen the pool of competent trustees available to serve.
The FSC takes broad-based black economic empowerment (BBBEE) to a new level, way beyond ownership. Traditionally the phrase sings political correctness, sometimes propagandistic and sometimes meaning what the term implies. Around it a veritable industry of codification, compliance, measurement, enforcement, consultants and certification has been spawned.
They all come at a cost, to be considered worthwhile only to the extent that BBBEE is realistically, in substance overriding form, the end result.
This isn’t always the case. One example is the skewing of benefits to arbitrarily selected elites, disproportionately to broader bases. Another is the dilution of shareholdings held by retirement funds, which are the largest depositories of black peoples’ long-term savings, as companies issue new shares to elevate ownership recognition.
The new FSC is a quantum leap from what’s gone before. What are reasonable tests for success? Surely among them must be whether they help many more black people to participate in the economy by providing access to capital, with leg-ups in skills transfer and supplier development.
These should facilitate economic growth, which is painfully absent and without which there’s scrapping for morsels. And where rivers of money are swilling around as ends lacking efforts, temptations to flaunt consumption distort the nobler objectives of wealth redistribution.
Codes of good practice, for companies to know and agree on the actions expected of them, are necessary interventions. The more comprehensive and meticulous the negotiation, the greater the likelihood of fruitful implementation. The code, which is now law under the BBBEE Act, stands out for the ultimate accord reached by a representative cross-section of the industry’s drafting participants.
In a better world, there shouldn’t be a need for legislative compulsion of BBBEE — it makes such obvious sense for business models to be adapted for penetration into target markets by boards and managers finely attuned to them. Demographic representation does carry a certain logic, much as it perpetuates racial classification in order supposedly someday to defeat it.
It is undeniable that SA’s demographics are swiftly changing. In relative terms, the white population is ageing and contracting; the black population is younger and growing. Rapid emergence of this urban middle class, salaried and aspirational, itself motivates “transformation” in companies’ ownerships and operations allied to it for businesses’ own futures.
This may happen, with varying levels of enthusiasm, in the natural course. BBBEE codes of good practice are intended to advance the process.
There are defects when application is limited to those in jobs or seeking to find them, eluding the jobless and impoverished communities. Similarly, because of racial quotas in line with demographics, it discriminates against whites where they might be objectively assessed as better qualified for employment and promotion. A lacklustre economy, becoming protracted in SA, exacerbates competition for scarce jobs.
Then take sector comparisons. They belie a uniform judgment on the efficacy of BBBEE as a whole. As much as the charter for the mining industry is inherently bad, and opposed by miners because it will stymie investment, the FSC is inherently good and supported by financial institutions because it encapsulates the principles for their continued relevance.
To a greater or lesser extent, and in their own business interests, institutions can already claim to be off the mark in what the FSC requires of them. What the code really does is standardise the markers for economic inclusivity to be promoted.
As set out in its preamble, the FSC “commits all participants to actively promoting a transformed, vibrant and globally competitive financial sector that reflects the demographics of SA which contributes to an equitable society by providing accessible financial services to black people and by directing investment into targeted sectors of the economy”.
Unique to the sector is its ability to provide empowerment financing and access to financial services: “They empower the previously disenfranchised through the provision of affordable housing, financing of black [small, medium and micro enterprises] and agricultural activities, and investing in various types of infrastructure that help to create the necessary platform to grow the economy on an equitable basis.”
Also unique, because of such regulatory requirements as the capital adequacy of banks and life offices, entities can top up ownership points through the “equity equivalent” of providing commercial-risk capital to black industrialists. The need for top-ups will arise on the exit of existing empowerment shareholders, thus offering a riposte to the “once empowered, always empowered” contentions.
The scope of the FSC embraces the industry’s gamut, from the largest banks to the smallest stockbrokers. Some compliance elements will complement established businesses; financial education, which is integral to socio-economic development, is a case in point. Some elements could be disruptive; preferential procurement of services from black-owned firms is an example (see box below).
Up for measurement are ownership, management control, skills development, enterprise and supplier development, and socio-economic development. For compliance, each element is weighted and awarded scorecard points in a matrix of definition and detail.
Indeed, the detail dazzles. Spend a few hours on the website of the Financial Sector Charter Council to start coming to terms with it.
A summary notes that, though the BBBEE Act and codes do not impose legal obligations on firms to comply with BBBEE targets, a business’ BBBEE status affects its ability to tender for public-sector work and to obtain licences in certain activities. Also, many private-sector businesses require their suppliers to have a minimum BBBEE rating in order to boost their own BBBEE rating: “BBBEE is accordingly an important factor to be taken into account by any business in normalising and conducting business in SA.”
What then of retirement funds? Since many aspects of the BBBEE dispensation aren’t relevant to them, and there is no body authorised to have represented them in the negotiations, the top 100 funds (including umbrella funds) have been incorporated on a voluntary basis only.
However, it is recognised that retirement funds “have a critical role to play in the financial sector itself, largely by the appointment of private-sector service providers”. The proposal is therefore that the funds measure themselves annually against relevant aspects of the code’s BBBEE scorecard, namely that large retirement funds compile and publish annual scorecards for the elements of preferential procurement and management control.
Trustees have little or no influence over membership demographics. So it’s suggested that large funds not be scored on the ownership aspects but report annually on the proportions of fund liabilities attributable to black male and female members. Further, because of the roles played by trustees and principal officers, the funds should annually disclose details of the amounts spent on training for each office bearer and staff member.
In addition, initiatives in member education should be disclosed in terms of both the number of members trained and the amount spent relative to the size of membership, with a narrative on the BBBEE score achieved and future plans for improving it. If sufficient disclosure is not obtained, the charter council will consider revising the dispensation.
There’s no stipulation that retirement funds, whose primary purpose is after all to provide retirement benefits, should entertain the added layers of cost. Rather let them be carried by the service providers, under their incentives, for them to earn the scorecard points.
Get the FSC working for the stimulation of economic growth and inclusivity. Then the coming year, into the years ahead, could offer lift-off from the stagnation of the last. View the FSC as potentially the most formidable private-sector initiative, whatever the government.
• Greenblo is editorial director of Today’s Trustee, a quarterly magazine mainly for principal officers and trustees of retirement funds.