KPMG BEE Survey reveals widespread industry regression in progress on the BEE Scorecard
The 2008 BEE Survey highlights an urgent call for faster economic transformation at all industry levels
The results of the 3rd annual KPMG BEE survey have revealed an overall industry-wide regression in progress on the BEE scorecard measurement. This result is largely based on the impact of the adjusted gender recognition principle, which penalises organisations that have not addressed gender transformation in their management control, employment equity and skills development elements of the BEE scorecard.
The poor scorecard performance has also been impacted by gender and broad-based BEE schemes targets in the ownership element scorecard measurement. Just as alarming is the fact that respondents demonstrated ongoing poor performance in preferential procurement. Data collated for the 2008 survey revealed that this poor performance is largely underpinned by the requirement for suppliers to have independently verified BEE certificates for them to be recognised as empowered suppliers; whereas in 2007, supplier self assessments and narrow-based assessments that only focused on ownership and management control were still considered acceptable.
According to Sandile Hlophe, Director BEE Services at KPMG, the BEE honeymoon period is over and organisations need to urgently realise that a meaningful scorecard rating is set to become one of the main factors that will impact the growth and survival of businesses going forward. “Organisations focused much of their time and energy on the ‘BEE wedding’ – which ensured the codes and scorecard measurement set out by the dti were fair and amenable. However, these companies have forgotten to make the marriage work! 18 months on, many organisations have been left behind; with a lot of catching up to do.”
Hlophe maintains that this lack of focus and delivery on economic transformation has led to increased social agitation by the majority lower and middle income black population for faster delivery as evidenced by the policies adopted by the ruling party at their national conference in Polokwane; the xenophobic attacks that swept through informal settlements this year and the recent trade union marches to demand government intervention with respect to spiralling food, transport and energy prices. “BB-BEE is no longer a nice to have to comply with political correctness; nor is it only important for economic growth and acceleration; it is now a necessity for economic stability!”
Worrying declines
Comparing results with 2007, there are three significant areas of decline on the BEE scorecard which include the ownership, preferential procurement and skills development elements, which have all shown a decrease of more than 20%.
Whilst responses year-on-year have remained fairly similar, the key difference that has been revealed in this year’s survey is that ownership is now viewed as the most prevalent challenge with a 22% response rate given. This was followed by management control at 20% and employment equity at 18.5%.
According to Hlophe; “A potential explanation for this decline could be that companies began to remove their focus from ownership following the release of the final Codes of Good Practice in February 2007, preparing to focus on the other elements of the scorecard. However, one year later, companies may have realised that their contributions to the other six elements of the scorecard would be insufficient to achieve a particular Level Contributor Status (such as Level Four Contributor status, which ensures 100% procurement recognition for customers) and thus forfeiting the 20 points reserved for ownership would not be viable. This would have therefore shifted the focus back to the challenge of ownership.”
An average of 8.6 out of a possible 20 points has been scored for the ownership element, which is a decrease from the 2007 average of 10.8. This decrease can be attributed to the more stringent ownership element requirements introduced in the gazetted Codes which include gender, new entrants and broad-based schemes point scoring. A similar decrease has been observed for the preferential procurement element; which can be ascribed to the end of supplier self assessments and the introduction of independently verified BEE scorecards from suppliers. This trend underpins the importance of BEE verification agencies in ensuring accurate BEE reporting and measurement.
An average of 5.1 was scored for employment equity across all industries. This is a slight drop from the average score of 5.4 points that was achieved for this element in the 2007 survey. This result can be qualified against the introduction of the Adjusted Recognition for Gender (ARG) principle, which has minimum scoring thresholds for black female employees, for the gazetted measurement of employment equity and skills development as defined in the Codes.
Finally there was a significant decline in the average score for skills development from 7.8 in the previous year, to 5.7 in 2008. Once again this drop can be attributed to the adjusted gender recognition principle which penalises companies that do not have sufficient black female representation in their workforce.
Understanding the rules
While the KPMG survey found a positive trend in demonstrating that BEE is being viewed as part of executive management responsibilities together with other operational and executive ones, the real intent of BEE is still undervalued and therefore is still not being viewed as a means to truly achieve broad-based empowerment. Says Hlophe; “The survey evidence points strongly to the fact that certain sectors still view the ownership and management control elements as cornerstone to BEE. While an important consideration, a shift in mind-set from narrow-based (which focuses only on the ownership and management control elements) to broad-based BEE (which focuses on all seven elements of the broad-based BEE scorecard) must take place before we start seeing the fruits of meaningful empowerment. As of February 2007, measurements have become stricter and therefore it is no longer acceptable to merely establish employee share trusts or provide board member status to comply. Today, companies must pay more attention to the new codes and understand the rules to show their commitment to empowerment.”
Changing of the guard
Hlophe adds that companies are certainly starting to feel the consequence of non-compliance. “As we move into a new era – we are witnessing a changing of the guard. BEE monitoring is no longer the domain of the public sector but the private sector as well. Compared to the 2007 KPMG survey there is a significant number of private sector respondents, of all company types, who have started linking BEE compliance incentives and non-compliance penalties in the form of preferential tendering criteria for their suppliers.” A significant portion of respondents had implemented set deadlines for their suppliers to achieve a specific BEE status level, to the effect that 42% would like to see their suppliers achieve at most a Level Four Contributor status. Comments Hlophe; “This is an indication that B-BBEE monitoring is shifting from legislative compliance to pressure from the actual customer base who seem to wield more power and influence and would like to improve their own scores and gain further competitive advantage on their peers.”
Respondents also made it clear that punitive measures will be used against those suppliers who fail to meet their minimum BEE requirements.
Independent accreditation becoming a major image factor
Says Hlophe; “The survey clearly showed that companies with a good independently verified broad-based BEE scorecard will possess a real competitive advantage in the market place.” With the effective date of the broad-based BEE scorecard being August 2008; the survey showed that more and more private sector companies will be requesting an independently verified BEE scorecard from all their suppliers as they are encouraged by the dti Codes of Good Practice. “This change from self assessments, together with the view that BEE scorecards are only required for public sector tenders, which today is not the case at all, is set to have significant implications for all businesses operating in South Africa. In addition, this trend is likely to be amplified as most companies are actively looking for ways to improve their own preferential procurement scores as compared to previous years.”
Interesting to note is that while 28% of companies chose to measure their B-BBEE status by means of a self-assessment (owing to the fact that there are no accredited BEE verification agencies), 17% of companies did so because their clients/customers accept self-assessments. In the Finance and Business Services industry however, there were two primary reasons for obtaining an independent BEE verification certificate. These were to obtain a ‘competitive advantage’ (cited by 33% of all respondents in this industry) and ‘public image and perception’ (cited by a further 33% of respondents). Amongst respondents in the Transport Storage and Communication (including ICT) industry, 43% of all respondents stated that they had elected to obtain an independent BEE verification certificate to obtain a competitive advantage.
Says Hlophe; “These findings show interesting dynamics and reasoning behind being independently accredited – the two most prominent being competitive advantage and public image. Pressure from clients or customers was a relatively less important motivation at 11% and only 5.5% of companies respectively obtained ratings to respond to government tenders. This will drive accreditation acceleration through reputation based needs with companies starting to feel the pressure of self assessment models.”
In conclusion
There was a huge improvement on the average score for enterprise development in this year’s KPMG survey which was up to 7.9, from a pervious 6.1. “This is a positive trend, as the development of small and medium enterprises is the key to achieve economic growth and improving employment levels in the SMME sector,” says Hlophe.
“The findings of this survey go deeper than just a scorecard. The social and economic implications of non-compliance are forcing government and corporate South Africa to place more emphasis on programmes that will create real economic opportunities for the majority black lower and middle income classes. These programmes need to address employment equity, preferential procurement, the development of small and medium size enterprises, as well as meaningful socio-economic development programmes that enable previously disadvantaged communities or groups to create tangible income generating programmes, in both urban and rural areas. A broad-based BEE initiative addressing all seven elements of the BEE scorecard is the only way to achieve this goal effectively,” concludes Hlophe.
While the results of the 2008 KPMG BEE survey findings reveal a more sombre outlook on the progress made by industry towards addressing broad based empowerment; it does lend support to the call for speedier economic transformation that are supported by the correct programmes to deliver more meaningful equitable economic opportunities to all citizens of the country.
