There is no shortage of critics of BEE, from across the political spectrum, but while many want to see it scrapped, that is the wrong approach, writes Stuart Theobald in Business Day.

He says broad-based BEE commission head Tshediso Matona last week made some interesting comments on potential reforms in an interview with Reuters.

‘He talked of increasing the priority of skills and enterprise development, relative to ownership. While he did not provide any specifics, these hint in the right direction.’

Theobald believes that racial inequality remains a serious and present danger to social stability (the unemployment rate among black South Africans is 35%, but 8% among whites; whites earn about three times more than black South Africans).

‘That background is a tinderbox that easily enables major social disruption…’

He points out that some describe BEE as a ‘failure’, but that he doesn’t agree.

‘In fact, BEE had a significant impact in the black middle class, thanks to empowerment deals and employment equity. BEE deals created R317bn of net value for black beneficiaries, though by 2017 most deals had matured. This spurred the creation of a black capitalist class that has been critical to building black-owned businesses. The shift in the demographics of the leadership in the formal sector is clear even if there is still some way to go. In the banks, 90% of junior management is now black, though this falls to 48% at executive committee level. Still, even at executive committee level, that can be compared with 36% four years ago. I doubt these changes would have been achieved, at least as quickly, without BEE.’ 

While, acknowleging that BEE has had problems, he feels Matona’s de-emphasis on ownership is interesting.

'Ownership faces a chicken-and-egg problem: black share ownership is the result of wealth as black savers would naturally end up holding shares, but the accumulation of wealth largely depends on having equity, that is the highest yielding financial asset.'

'We’ve been putting the emphasis in the wrong place, on ownership of large, listed, companies, instead of small entrepreneurial owner-managed companies, in which serious wealth creation is possible. Large companies have highly dispersed ownership, dominated by institutions such as insurers and asset managers. These are where the country’s savings are invested, but they are not vehicles for accelerated wealth creation the way entrepreneurship is.’

Theobald states in the Business Day analysis that a shift in focus towards skills and enterprise development could address this weakness.

‘But, and here is the rub, the way we measure these is wrong. Ownership, at least, is a clear outcome. If people hold unencumbered shares, they are the owners. But what is the outcome we want from skills development and enterprise development? It is surely black people who are highly employable thanks to the marketable skills they have, and successful black businesses. Yet what we measure is neither of those things – instead we measure how much is spent on skills and enterprise development. We measure the inputs, not the outputs… This means BEE has a major case of “inputitis” when it comes to skills and enterprise development. We need to turn this around and focus on outputs. Our measure of success should be the outcomes we desire, not the inputs.’

Theobald says this means the outcomes must be defined and we must determine how we link incentives to those, instead of linking incentives to inputs.

‘These definitions and incentives are feasible – we’re already doing it for youth skills by recognising only jobs that are created, not the inputs. As we think about how to make BEE more effective, let’s cure it of the disease of inputitis’.

Full analysis in Business Day