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August 24, 2016

Should my BEE Auditor consult?

Consulting & Auditing

First and foremost, Approved and Accredited BEE Auditors may not verify their own advice as covered in the Framework for Accreditation and Verification by All Verification Agencies gazette. This could lead to the infringing party losing their accreditation license.

There has been a growing practice of BEE Auditors and verification professionals opening up their own consulting or affiliated consulting practices. Unfortunately, this creates a conflict of interest and could also expose your business to some serious dangers.

IRBA have confirmed that they will no longer be involved with BEE Verification

There are currently two governing bodies for the issuing of BEE Certificates. The Independent Regulatory Board of Auditors (IRBA) and the South African National Accreditation System (SANAS). However, IRBA has confirmed that they will no longer be involved with BEE Verification and are expected to finalise their withdrawal by 30 September 2016. SANAS will remain as the governing body over BEE verification and accreditation.

SANAS has always rejected the practice of auditing and consulting by the same party. In theory, it seems to be more beneficial to the client to offer both services and become a “one-stop-shop”. However, when we look at the practice, there are some very definite challenges to this.

BEE is fast becoming a competitive edge in the marketplace. As a competitive business, you want to be certain that your BEE Certificate is accurate and best represents your participation in BEE activities. What many businesses miss is that their BEE credentials are not only under scrutiny by their own Verification Agency but by every agency of every client to whom the certificate is supplied. The number of falsified BEE Certificates is on the rise and many are discovered in the BEE Audit process by the agency conducting the BEE Audit. Therefore having an independent body audit already prepared documentation is becoming increasingly important for peace of mind and protection in the market.

Falsifying your BEE position or certificate knowingly or unknowingly carries hefty fines and as well as a 10-year jail sentence

We have already seen businesses “shamed” for misrepresenting themselves through inaccurate BEE credentials, some knowingly and others unknowingly. A situation that we predict will grow in frequency with the more challenging BEE Codes and increased competitiveness. Where, in the past, it was more embarrassing to businesses who were caught out with false representation of their BEE position, this now carries far more serious consequences. “Fronting” has become a criminal offence and while many believe this simply to be the act of creating a false “front” to the business, it is actually any transaction, arrangement or other act that directly or indirectly undermines or frustrates the achievement of the objectives or the implementation of any of the provisions of the 2003 BEE Act. Falsifying your BEE position or certificate knowingly or unknowingly carries hefty fines and as well as a 10-year jail sentence. Furthermore, BEE Auditors will be required to report any infringement that is discovered.

Another point to understand is that BEE Auditors do not necessarily make the best consultants.

Another point to understand is that BEE Auditors do not necessarily make the best consultants. Auditors must take a stance on an interpretation of the BEE Codes of Good Practice to allow for uniformity and standardisation within their verification process. They then must have a very clear structured process around the validation of evidence against data. Consulting requires a different mentality and greater understanding of the business operation and desired goals of the business. Consultants must think divergently with multiple potential correct answers and solutions to assist a business in leveraging the BEE Codes to achieve the best scoring outcome. Where consultants show their true value is their ability to go beyond the Codes and work towards the spirit of BEE with an improved return on investment and greater opportunity for the business. This is where we enter into the world of Transformation and Diversity Management. This is a topic all on its own.

So, what should you do when it comes to consulting and verification:

  1. Always, always, always use an approved, accredited BEE Verification Agency. (Going forward this needs to be a SANAS approved agency)
  2. Shop around, as not all agencies have the same stance or interpretation on the BEE Codes and this could have a material impact on your BEE Level.
  3. Keep your BEE Consulting separate and know that you are receiving unbiased advice that will reflect in an honest BEE Score and provide you with more power to defend your position in a BEE Audit.
  4. Protect your business by using experienced professionals, with a solid track record in each separate discipline.
August 18, 2016

What Leadership needs to know about Human Capital

What Leadership needs to know about Human Capital

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The first version of the B-BBEE Codes were designed and intended as Codes of Good Practice for Good Corporate Citizenship. They were specifically intended to drive corporate behavior towards becoming representative of the South African demographics and to participating in economic growth activities.

An unfortunate result was that Measured Entities had allocated the responsibility of B-BBEE to a support function

While there were dificulties faced it drove this bahaviour to a limited degree. On review of corporate South Africa’s implementation efforts it was found that Measured Entities had managed to achieve high B-BBEE Levels without fully meeting the original intention. An unfortunate result was that Measured Entities had allocated the responsibility of B-BBEE to a support function (usually under Human Resources or Supply Chain) who had managed to secure B-BBEE Points by initiating projects which did not require a material change to the business.

Many of the larger corporate’s BEE Managers had managed to secure more than 50 points from their existing Employment Equity figures and initiating Learnership projects, Enterprise Development projects and Socio-economic Development projects. While these projects did not involve or effect the majority of management or staff in the business their strategic alignment was often poorly considered if at all. This had a consequence of increased expenditure with often little to no return on investment and a negative view of B-BBEE by Leadership, who for all intents and purposes remained disconnected.

Transformation and the way that Measured Entities conduct business in South Africa requires change.

The rules have changed and the newly Amended B-BBEE Codes of Good Practice have been redesigned to achieve greater alignment to the original intention by learning from the first version of the Codes and changing the weightings and targets accordingly to drive the required behavior. While there will always be some teething problems  and varying interpretations the intention is clear. Transformation and the way that Measured Entities conduct business in South Africa requires change. In some instances radical while in others less extreme. To drive B-BBEE successfully in the business there is a required shift in Leaderships involvement and oversight of B-BBEE activities to allow for more strategic direction and therfore greater return on investment potential.

This is evidenced in the Human Capital elements where new targets and requirements have been introduced. There has been a move away from a general definition of “Black”, which resulted in an over representation of Indian Males, to the adoption of the ‘Economically Active Population’ (EAP) targets. The EAP targets require that B-BBEE points are only awarded for a maximum of the percentage that each race and gender group is representative of all economically active South Africa citizens. This can have a material impact on how a company trains and recruits its staff.

The EAP being adopted by companies as a ‘fairness’ tool. For example it is only fair that a Colored Women be prioritized for a vacancy if there is an under representation of colored women in that area of the business. Additionally, it is not fair to spend 80% of the Company’s Skills Development budget on Indian Men when Indian Men represent only 1.9% of the economically active citizens.

This will include challenging the traditional way training has been conducted within the business.

This is potentially challenging as EAP targets will change the way businesses are run. To score well on future B-BBEE Scorecards, Recruiting Managers must strategise over how they will achieve and retain their EAP targets at Junior, Middle and Senior Management levels. This will include challenging the traditional way training has been conducted within the business. There will have to be a shift towards more targeted training, which supports the company’s need to achieve EAP targets while maintaining performance and productivity levels. There is an upside to this as it provides an opportunity to improve performance and productivity thourgh reviewed training principles that can be redesigned to support optimized performance.

For assistance with your Human Capital Elements contact BEESA here.

Article by:

Andrew Bizzell – BEESA Transformation Director

CourseSpeaker-AndrewBizzell

August 17, 2016

Are Importers Out of the BEE Game?

 

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When the first set of BEE Codes were released in 2007, the idea was to encourage all businesses operating in South Africa to actively participate in contributing to Broad-based Black Economic Empowerment. By introducing a scoring system where getting more points made you more competitive and some of those points depended on the scores of your suppliers, very quickly we found that customers were asking suppliers to furnish them with a BEE Certificate. These suppliers would then request the same of their suppliers thus creating a knock-on effect that spread throughout the economy. The result being that unless you were in a specialised niche industry or selling directly to the man on the street, it became very difficult to conduct business without a BEE Certificate.

the system needs to be practical enough for every company to participate

Now, if you want every company in the economy to be making some sort of contribution to BEE, then the system needs to be practical enough for every company to participate. In the 2007 Codes this was true, but with the advent of the 2013 Codes this has become more of a challenge, particularly for those companies that import most of what they sell or those that buy most of their input materials from importers. The reason for this is the introduction of two new concepts in the 2013 Codes that were not there in 2007.

The first is the concept of an Empowering Supplier. This is a bit of a misnomer as its name would imply that you need to be a good contributor to empowerment, when actually it’s a question of how you are. Firstly, to qualify, the company has to be adhering to all regulatory requirements. Tax, Employment Equity and SETA compliance are the main requirements here, but it also includes any industry specific requirements such as health and safety. Then there are five criteria, of which companies turning over more than R50 million per annum are required to comply with at least three and the under R50 million (QSEs) with one criteria in order to qualify as an Empowering Supplier.

The Criteria to Qualify as an Empowering Supplier:

  1. At least 25% of Cost of Sales expenses excluding labour costs and depreciation need to be spent with local suppliers. (For service industry entities labour costs can be included up to 15%)
  2. 50% of jobs created need to be for Black people provided that the number of Black employees in the company has not dropped since the last verification.
  3. 25% beneficiation or transformation of raw materials.
  4. At least 12 days of productivity needs to be spent assisting small Black owned companies in improving their operational and financial capacity.
  5. 85% of labour costs should be paid to South African employees by companies in the services industry.

Now here’s the challenge for importers. The first criterion cannot be met as almost all cost of sales expenses are imports. The third criterion is only possible for local manufacturers that import raw materials. Anyone who imports ready-made, high end products (the bulk of this country’s imports) will not be adding any value locally. The fifth criteria would not apply  as importers of product would not fall into the services industry. So with three out of the five criteria out of reach most importers cannot qualify as Empowering Suppliers. This has nothing to do with their contribution to BEE, but is simply the effect of their business model not aligning to these requirements.

if a company is not an Empowering Supplier it is basically seen as non-compliant even if it is 100% Black owned!

Why is this so important? Well, the 2013 Codes require a company to be an Empowering Supplier for their BEE status to contribute to their customer’s BEE scorecard. In short, if a company is not an Empowering Supplier it is basically seen as non-compliant even if it is 100% Black owned!

So Empowering Supplier status is like the gateway to BEE. But even if an importer is able to make it through this gateway as those that do local value-adding could possibly do, there is a considerable speed hump waiting for them on the other side. This comes in the form of import substitution requirements.

In the 2007 Codes, imports could be excluded from the Preferential Procurement calculation on the basis that the imported products were not available locally or what was available did not meet brand or technical specifications. This exclusion now only applies to capital goods and components. For any other import to be excluded requires that some sort of Enterprise Development or Supplier Development plan has been developed to create substitutes for these imports. Now there may be some imports that are economically viable to make locally, but for the most part establishing a small company to substitute for what is being imported is just not realistic. Constraints like the size of the local market vs the investment required, ownership of intellectual property and the lack of skills in many areas makes the whole idea of import substitution non-viable for most imported products.

Without being able to viably exclude imports, these companies will score poorly in Preferential Procurement.

Without being able to viably exclude imports, these companies will score poorly in Preferential Procurement. As this is a priority element with a sub-minimum score threshold, not only will they lose the points, but they will most likely be discounted by a level as well. This would make it very difficult to achieve a decent BEE level and may lead them to simply choose to trade without a BEE certificate. Customers of importers would then struggle to achieve a decent Preferential Procurement score and the knock-on effect could then be felt all the way down the supply chain.

So although these additions to the Codes were instituted with the intention of increasing local content and local production, the effect may be that most importers continue to import, but they simply no longer contribute to BEE. So by trying to stretch the BEE rules to encourage localisation, we may have broken BEE.

 

Article by:

GUY TAYLOR – SPECIALIST BEE CONSULTANT

CourseSpeaker-GuyTaylor