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South Africa and the law of unintended consequences

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5th Apr 2017
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Kevin Phillips, CEO of South African forecasting tool IDU, examines the side-effects created by well-intentioned government legislation, and how companies react to it.

I often write about how accountants should be looking to technology, automation and the decentralisation of some of their operations to free up their time to think and act more strategically. Plus, it doesn’t hurt that doing these things anyway — devolving responsibility and accountability to those at the coalface makes the finance machine, and the organisation itself, run more smoothly and transparently, with greater accountability and ownership.

Then it struck me. South African accountants have an additional “to do” on their lists that their compatriots around the world don’t. They have to enable compliance with the government’s broad-based black economic empowerment (B-BBEE) programme, the purpose of which is to drive socio-economic growth by transforming the economy to enable meaningful participation of the majority of South African citizens. The fundamental principles of B-BBEE are noble – no one can contest that. Unfortunately the reality is the programme hasn’t had the intended impact, and one wonders whether the latest iteration will bring any improvement.

In the new B-BBEE iteration, the emphasis has shifted from the previous, narrow definition of economic empowerment, which focused only on improving ownership and management representation. The hope with this was that change at the top would ripple through the organisation via hiring and promotion policies, but in reality only the few at the top benefitted.

The latest B-BBEE iteration tries to drive change across the whole of society by including dimensions such as preferential procurement, training, enterprise development and socio-economic development in the FSC scorecard. These new dimensions clearly aim to empower those previously disadvantaged and so, on the face of it, the new approach looks like a step in the right direction towards achieving real change and greater equality.

Unfortunately, for most corporations B-BBEE has become a check box exercise – companies assume a compliance-based approach instead of embracing and embedding the principles in the organisation. Hence, the new iteration will most likely be viewed as yet another, more burdensome compliance exercise with the greatest impact usually on finance and HR. And, as a result, once again the intended recipients are not likely to experience the intended impact.

In some ways the legislation itself encourages a compliance-based approach, forcing companies to check specific boxes in an effort to avoid having to check many more. For instance, companies that have more than 51% black-ownership are automatically granted the highest B-BBEE status (level 1) which relieves them of the responsibility of complying with the other areas of the legislation, areas such as training which some might say are more far-reaching in their impact and fundamentally more empowering.

I fully agree that training is absolutely key to driving social and economic growth in South Africa, as well as to correcting the inequality we face in our nation. However, in the current socio-economic climate and in periods of economic downturn, companies find it difficult to place newly-trained, junior job seekers into permanent roles which leads to disappointment and frustration from both the companies and the job seekers themselves. After all, companies invest money in training but in this scenario they are unable to reap the intended rewards.

Smaller organisations often suffer the greatest impact, given they tend to invest a disproportionate amount of cost and effort into training with the aim of competing with the inflated salary packages offered by larger corporates. But often this is only to have their future new recruits poached just as they are about to begin getting a return on their investment. The unfortunate side effect of this is a reduced appetite to invest in training in the future.

In closing — bringing us back to my evergreen point that shifting finance’s role to be more strategic is key to growth and success — the compliance and red tape in administering and managing B-BBEE is both time consuming and not directly revenue-generating. So, the finance team is bogged down in tracking race and other demographic data, and complying with B-BBEE audits and requirements, none of which appears to have a material, long term beneficial impact to their organisation. Instead, they could be focusing on growth-orientated, strategic initiatives that might actually have the economic upliftment and empowerment impact that B-BBEE always intended to have.

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