An abnormal business environment
FAnews Online recently listened to a radio debate in which callers were invited to share their nightmare 'fronting' stories. 'Fronting' involves creating a false facade to enable a company to circumvent the spirit of various laws which were put in place t
The practice of 'fronting' includes "presenting a false representation of the business' true equity status in terms of employment equity, ownership, the degree of management participation by blacks and women and the degree of preferential procurement." Companies committing 'fronting' abuses often make token appointments, placing blacks in positions of leadership with no intention of affording them the authority that these positions command.
Regulation and capitalism at odds
South African businesses must comply with various restrictive Black Economic Empowerment (BEE) and employment equity (EE) laws. The BEE Code of Good Practice warns against fronting, which is described as a "practice or initiative which is in contravention of or against the spirit of any law, provision, rule, procedure, process, system, policy, practice, directive, order or any other term or condition pertaining to black economic empowerment under the codes."
When government steps in to regulate the operations of a business, things start to go wrong. While businesses usually tow the line where general issues of law and taxation are concerned, they tend to resist regulation which stifles their ability to accomplish their primary objectives. In large publicly listed companies, the objective is usually to create value for shareholders while in smaller companies it is often to provide enough income to make it through another month.
Regulations that impact on the smooth delivery of the primary objective make businesses extremely unhappy. And unfortunately, many of the actions required to reach an acceptable level of BEE compliance have such an effect. This is particularly true for small family businesses and sole traders who wish to implement black ownership structures in their businesses.
Entrepreneurs who built their business empires over a number of years have been wary of a process which requires them to relinquish ownership and control to comply with legislation. While many small businesses commendably went about the development of sustainable black business and the transfer of skills and economic benefits to black business in line with regulations, just as many employed subterfuge to maintain the status quo.
A natural defence mechanism
The business practices proposed in various black economic empowerment and employment equity proposals make it extremely difficult for small white-owned businesses to prosper. The process of 'fronting' can thus be viewed as a natural evolution of small businesses to accommodate pressures in the regulatory environment. 'Fronting' was also inevitable in light of the shortage of adequately skilled black individuals and adequately capitalised black firms when empowerment proposals were first introduced.
Government's inflexible empowerment policies are in part responsible for forcing small businesses to blatantly flout empowerment regulations. Small businesses and entrepreneurs are good at making money and will find ways to do so regardless of legislation.
'Fronting' created the smokescreen to ensure that these businesses 'met' legislative requirements and enabled them to continue their operations without giving up the control and equity they had built up over many years.
Why criminalising fronting is a weak solution
Today, business has had more than ten year to come to terms with South Africa's new trading environment. They have had sufficient time to restructure their operations in accordance with the intentions of the law. The fact that so many companies continue their 'fronting' activities to secure lucrative contracts indicate it might be time for government to take tougher action. The question is what action the government should take?
Should they criminalise 'fronting' as deputy director of the BEE unit at the Department of Trade and Industry (DTI) Janeez Hafizulla, recently suggested? Or should they investigate other methods, such as closer scrutiny of tender processes and state procurement?
We are concerned that some BEE requirements contradict economic reality. There are still not enough black owned companies to tender for the hundreds of capital intensive projects put on offer. The country cannot afford to let the economy grind to a halt while government waits for suitable companies to answer their various infrastructure tenders.
Significant economic redistribution has already occurred and will continue to occur at a sensible pace without further intervention. To implement this economic re-engineering process at a faster pace could have dire consequences... One of these being that the newly empowered black executive might soon be lord of an economy which is a mere shadow of its true potential.
Editor's thoughts:
The debates around black economic empowerment, employment equity and affirmative action have been heating up in recent weeks. Many suggest these practices are out of place in the new South Africa and that they exacerbate racial tensions. Apart from various ownership requirements, businesses in South Africa have to comply with numerous employment equity and BEE requirements. Do you think South Africa will ever be able to remove race classifications from the business environment? Send your comments to [email protected].
