BEE must have flexible targets
February 24, 2009
By Chia-Chao Wu
What are the most important determinants of success? This is the provocative question Malcolm Gladwell attempts to answer in Outliers: the Story of Success.
By examining the lives of successful people throughout history, he demonstrates that the opportunities presented to an individual are often more important than the individual's own talents and skills in shaping their paths to success.
As an example, Microsoft would probably not exist today if the Mothers' club at Lakeside Junior High School, which Bill Gates and Paul Allen attended, failed to buy a teletype machine when the two Microsoft founders were in school in 1968.
The astonishing opportunity to access this early computing machine at such a young age stimulated Gates and Allen's interests in software programming and resulted in them dropping out of university to build the software behemoth a few years later.
If success is largely determined by access to opportunities, then affirmative action and black economic empowerment (BEE) are necessary because of the historical economic exclusion of black South Africans, and also because such exclusion affects more than one generation.
The most severe and frightening legacy of apartheid economic policies is that they devastated the ability of many black South Africans to build the necessary experience and business networks that are needed for their children to access the necessary opportunities for success, and this limitation of opportunities will be inherited by multiple generations unless something is done proactively to break the cycle.
Affirmative action and BEE create effective opportunities for those people whose economic options are limited by history.
Does affirmative action really work? Many commentators in the US, where the policy was practiced intermittently for more than 30 years, often use the fact that affirmative action candidates score lower average academic grades than their privileged peers as an example of why the programme does not work.
However, Gladwell presented interesting findings on the successes achieved by beneficiaries of the US affirmative action programmes later in their professional careers and in their lives. His evidence suggests that despite scoring lower academic grades prior to accessing the programme, the beneficiaries regularly achieve equal or better successes in their careers.
The results show that most individuals are able to build successful businesses and meaningful careers if they are given a robust platform, adequate support and ready access to suitable opportunities.
Similarly, a company's experience and track record build its reputation and brands. Without an initial breakthrough allowing them to establish a track record, companies find it very difficult to compete with incumbents, as potential customers will almost always doubt their ability and capacity to perform.
Therefore, access to business opportunity is often the most crucial precondition for a company to attract more business and become sustainable and successful in its fields.
For these reasons, affirmative action and broad-based BEE are two very important policy instruments that endow black individuals and companies with the access to breakthrough opportunities for them to reach their full potential.
If the correct policies and frameworks are implemented, affirmative action and broad-based BEE will add significant value to our economy.
To determine whether South Africa's current affirmative action and broad-based BEE policies will achieve these objectives, one must explore their underlying principles and frameworks.
Effectively, both policies are based on the principle of "competitive growth sharing", which encourages companies to share the benefits derived from their growth by allocating more job opportunities to black people and more business opportunities to suppliers that contribute positively towards every elements on the BEE scorecard.
Theoretically, companies are rewarded for "sharing the cake" through improved business opportunities from the government and other corporates, effectively allowing BEE-compliant companies to grow faster than those that do not participate and contribute to BEE.
In a competitive market, when a company achieves a higher BEE score, it will prompt its competitors to match or better their contributions until the BEE status of all competitors is at the same recognition level, effectively promoting peer review and self regulation.
Although this framework has significantly accelerated the adoption of BEE and affirmative action over the past six years, the scorecard-based, compliance approach does contain a fundamental flaw, in that the quantitative targets narrow the focus of companies to finding the routes of least resistance to attaining the relevant BEE compliance targets. Companies will prefer this to innovating more effective ways to ensure sustainable transformation.
One can prove this by graphing the total value of BEE transactions against the JSE all share index over the past 10 years. It is very apparent that there are more BEE transactions when equity prices are very high, which lowers the long-term returns to the BEE shareholders in future, and almost no BEE transactions when equity prices are cheap enough to offer significant long-term value.
Moreover, affirmative action focuses companies purely on the ratio between the number of black and white managers, which may result in companies being rewarded even if they retrench and cut jobs, as long as the racial composition after the job cuts reflects the ratio set out in the employment equity compliance targets. There are no rewards for companies that retain or create jobs, which are desperately needed in this economic environment.
Without regular reviews of the appropriateness and unintended consequences of the targets, BEE and affirmative action may be characterised by unsustainable initiatives, especially if such an initiative enables a company to compete favourably for the next major contract.
On the other hand, if the BEE targets can be reviewed, it may create opportunities to reward deal makers for developing BEE deals that inject cash and resources into the target companies when they are most needed - in an economic downturn. Likewise, affirmative action could reward firms that create more and better jobs.
Regular reviews of BEE and affirmative action targets are needed to ensure they will not follow the words of Bertrand Russell and attain what they strive for in a form that destroys their original ideal.
Chia-Chao Wu is the executive director of empowerment rating agency Empowerdex
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