Every year since 2010, the Johannesburg Stock Exchange (JSE) has released a report on black ownership within the JSE’s Top 100 companies, which has served no purpose except to mislead and confuse the public and start an annual ritual of statistical mudslinging that does not shed light on any important issues. This year the report was released a day after a speech delivered by President Jacob Zuma in parliament in response to the debate that followed his state of the nation address. The JSE report said black South Africans owned at least 23% of the shares of the exchange’s Top 100 companies. The day before, the president responded to a question from African People’s Convention leader Themba Godi, who had pointed out that the government had not fundamentally changed the structure of the economy in order to effect true transformation. The president agreed with Godi and said: “Twenty years into freedom, we are still grappling with poverty, inequality and unemployment. Inequality is still staring us in the face. Census 2011 informed us that the income of households has hardly changed and that the income of white households is still six times more than that of black households. In addition, the black majority still owns only 3% of the JSE, pointing to the need to move faster to achieve meaningful economic emancipation.” Solidarity, the conservative white union, then used the JSE’s figures to accuse Zuma of fuelling racial tensions. In previous years, the Free Market Foundation, the extreme right wing think tank, has also latched onto the JSE figures to advance its libertarian views on various issues.
The JSE’s statistics have become an effective political tool used by fringe groups on the right to support an anti-transformation agenda. The time has come for South Africans to become familiar with the arcane intricacies of measuring black ownership. The amended Black Economic Empowerment (BEE) Codes of Good Practice of 2013 provide a comprehensive framework for measuring black ownership in the economy. The ownership scorecard has a target of 25% for direct black ownership. There is no target for indirect ownership, which occurs where an institution or other investor owns shares in a company on behalf of beneficiaries and there may not be direct participation by the beneficiaries in the voting rights. The ownership scorecard has 25 points, of which six are for the economic interest of black shareholders – the shares they are entitled to. There are another six points for voting rights.
Therefore, the government wants to achieve black ownership that also has voting rights. The 3% figure shows how little influence black shareholders have in the running of the South African economy. Contrary to perceptions, there are very few trade union-controlled funds. But the government has power to effect change. Public sector pension funds account for about 45% of all retirement funds and 25% of the country’s investment and savings industry, which was worth R6.5 trillion in 2013. The rest of the scorecard has: three points for the participation of broad-based groups; two points for new entrants and eight points for net value, which measures the extent to which black people have paid the debt that was used to acquire their shares.
There is no mechanism within the scorecard to reward companies for indirect ownership. There are good reasons for this. Firstly, indirect black ownership in the economy through pension and provident funds depends on macro-economic drivers, which are beyond the control of companies. These include the black unemployment rate, the extent to which black people are employed in companies that provide such pension and provident fund benefits and the distribution of income between black and white households. Secondly, the Government Employees Pension Fund (GEPF), which had assets of R1.4 trillion in March 2014, probably accounts for a large portion of JSE’s black indirect ownership. But the GEPF is a defined benefit fund, where pension payments are specified upfront based on a percentage of final salary and not the performance of the shares. The beneficiaries do not stand to benefit from an increase in the fund’s assets or suffer from a decrease in their value. The fund’s assets belong to the government and not the public sector employees.
Finally, if indirect ownership were to count the average JSE listed company would be almost fully compliant with most of the indicators on the ownership scorecard and do nothing to achieve direct ownership. The status quo would remain with the same white males from the financial institutions exercising the voting rights of the black beneficiaries to maintain the same white leadership at the companies they are invested in. Therefore, it would be absurd to allow companies to achieve almost full compliance with most of the ownership scorecard due to macro-economic trends that are beyond their control or because of a fortuitous event of the government deciding to buy their shares. According to the rules, the government is neither black nor white. But it can count as black if it facilitates a BEE transaction.
The BEE Codes were the result of political compromises between the government and the stakeholders who participated in the drafting process, including established and emerging black businesses. Like most political compromises, the result was a mess. There is now a huge difference between measuring actual black ownership and measuring black ownership for the purposes of scoring points on a BEE scorecard. The flow-through principle measures actual black ownership. It strips out non-empowerment shareholders at each level of an ownership chain. The political compromise – the modified flow-through principle – allows 51% shareholding to count as 100% ownership only once in an ownership chain. Listed companies can also exclude mandated investments (by pension and provident funds) and state shareholding up to a maximum of 40% from the calculation of black ownership. This bizarre rule, whose rationale was never explained, has resulted in an effective 15% target for listed companies compared with a 25% target for unlisted companies.
Decoding the JSE’s one-page press release is almost impossible because it does not show in detail how it arrived at the 23% figure. A presentation that accompanied its 2011 report provides some clues. There are a number of flaws in the JSE’s methodologies. Firstly, the JSE adds direct ownership (10%) to indirect ownership (13%) to arrive at the 23% figure. This is not allowed according to the Codes. Setting aside indirect ownership, because it is irrelevant, one then hits a brick wall when trying to interrogate the 10% direct ownership figure. This is because there are no company-by-company figures or any details about the methodologies used. Secondly, the extremely limited information provided suggests that the JSE is trying to have its cake and eat it. Having incorrectly added indirect ownership to direct ownership, to increase the numerator, the top part of the equation, it then reduces the denominator, the bottom part of equation, by appearing to exclude indirect ownership. The result is 39% black ownership, the press release says. Such voodoo accounting would become legal if indirect ownership were to count on the scorecard.
In response to the mini furore that followed Zuma’s speech, the presidency issued a statement that said: “The President stands by his assertion, which was based on the measure used by the National Empowerment Fund (NEF) to assess direct black ownership and control in the South African economy, using the JSE as a proxy. The NEF relies on the work done by Who Owns Whom, an independent research organisation. Direct black equity control over the JSE's average market capitalisation of R11.9 trillion as at 30 June 2014, stands at 3% (R358 billion). To reach 25% of black control it requires an additional 22% worth R2.6 trillion at current estimated market capitalisation of the JSE. This is a gap that still needs to be addressed and funded in order to achieve transformation of up to 25% of JSE market capitalisation.”
The first part of the statement - the 3% figure - is correct. In an official statement that was read out on CNBC, the JSE eventually conceded that the figure was correct. The JSE must still explain how its 10% figure suddenly became 3%. What had it excluded from the denominator to arrive at the 10% figure? However, this 3% figure does not tell the whole story. Both the JSE and NEF methodologies exclude many companies such as Anglo American, SAB Miller, Kumba Iron Ore and Naspers that have sold unlisted assets to black shareholders. The second part of the statement – the R2.6 trillion funding shortfall - is patently wrong. Since BEE policies apply only to domestic assets, it is necessary to exclude the value of foreign assets owned by JSE listed companies. I have conducted an analysis of black ownership on the JSE Top 40, which accounts for about 80% of the JSE’s market capitalisation, that addresses some of these shortcomings. I have used the flow-through principle since monitoring implementation can only be done with actual ownership figures.
At the end of December 2014, gross black ownership (before taking into account debt incurred by black shareholders to purchase shares) within the JSE Top 40 was R208bn, which was equivalent to 2.3% of the JSE’s market capitalisation. This figure includes many companies that sold unlisted assets to black shareholders. (However, it still excludes some Anglo American assets that were sold, but whose values were not disclosed). After excluding 65% of the market capitalisation of the JSE Top 40, which relates to foreign assets, gross black ownership within the JSE Top 40 was 6.5% of the value of South African assets. The rough estimate for net value was R107bn or 3.4% of the value of South African assets. There is still a very long way to go to achieve the 25% direct ownership target, which obviously refers to net value. Mining companies don’t understand this. But that is a story for another day.