What about start-up companies, what level of compliance must they achieve?   Start-ups are treated as a QSE, at least for the first year following their formation, regardless of their expected revenue.  Given this status as a QSE, start-up companies must submit a QSE scorecard when tendering for any contract over R5 million.  However, for contracts valued at more than R35 million, start-ups must submit the M&L scorecard.

3. When Must Companies Comply?
The Government has introduced a transitional period of 12 months (commencing 9 February 2007) during which businesses can choose to comply with a limited number of elements of the BEE scheme, namely the ownership and management elements of the scorecard.

4. How Does a Company Comply?
A business complies with BEE by ensuring it has sufficient points in the BEE scorecards.   There are two BEE scorecards; one for QSEs and one for M&Ls.   The points allocated to the scorecards are as follows:

Element	What does it mean?	QSE Scorecard	M&L Scorecard
Ownership	% of shares held by black people	25 points	20 points
Management control	Directors and senior management positions held by black employees	25 points	10 points
Employment equity	Implementing an affirmative action plan	25 points	15 points
Skills Development	Money spent on up-skilling black people	25 points	15 points
Preferential Procurement	Purchases from BEE-compliant companies	25 points	20 points
Enterprise Development	Developing small, black-owned companies	25 points	15 points
Socio-economic development	Social investment initiatives	25 points	5 points

The table above highlights the different compliance obligations between QSEs and M&Ls.   As a general rule, it should be easier for QSEs to become BEE compliant than it is for larger businesses.

M&L companies invariably ask why their scorecards equate to 100 points, whereas the QSEs scorecard equals 175?   In an effort to ease the burden for smaller companies, they can be assessed on their four strongest elements of their scorecard (hence, 25 points for each of the four elements).  This is particularly important for small businesses that may have very few (if any) employees, who would naturally score poorly in the employment equity and skills development elements of the scorecard as a result.

5. Equity Ownership
To score maximum points in this element of the Codes, a business must:

• have a certain percentage of voting rights in the hands of black people (the Codes target is 1 more than 25%);

• have a certain percentage of voting rights in the hands of black women (the Codes target is 10%);

• have a certain percentage of black people with 'economic interests' (that is, shareholding) (the Codes target is 25%);

• have a certain percentage of black women with 'economic interests' (that is, shareholding) (the Codes target is 10%);

• have a certain percentage of shareholding owned by black people belonging to designated groups (the Codes target is 2.5%), such as black persons under 35 years of age, over 65 years of age or living in rural areas; and/or

• ensure that the value of the shares allocated to a black participant must exceed the 'black debt' on those shares by a certain percent (over a nine year period black shareholders must repay the debt on their shares).

The scorecard also allows for 'bonus points' that are available if 10% of the company is owned by black women or if 10% is owned by employee ownership schemes, broad-based ownership schemes or cooperatives.

You may notice that the scorecard refers to black "people" and the calculation guides refer to "black participants".   Many companies ask us whether this is a natural person or whether a company can be black?   For the purposes of the BEE Codes, a company (or closed corporation, partnership or similar entity) can be black, depending on the company's level of black ownership (it must have a black shareholding of more than 50%).

Another frequent question that arises out of this element of the Code is what happens when a black participant exits the business?    Is it a case of once empowered, always empowered?   The answer is yes, but only under certain circumstances.   The recognition of black ownership can be retained if:

• the black participant held the shares for at least three years;

• the black participant gained a financial advantage from the shares;

• there is a level of transformation within the company; and

• the company does not have more than 40% of black ownership arising out of the continued recognition of exited black participants. 

For HR Managers, the use of employee ownership share plans may increase given their BEE benefits and HR has an important role in implementing such schemes.

6. Management Control
To score maximum points in this element of the Codes, a business must reach the following targets:

• 50% of Board voting rights held by black board members;

• 50% of Executive Board members are black; and/or

• 40% of senior top management or top management are black.

Bonus points are available for companies who have black women on their Board (25% will give the company an extra point) or in top management (20% will give the company an extra point).    Companies who have black women as 40% of their senior or top management will score particularly well.

HR departments would be wise to commence a search for potential black directors, particularly if the candidate is female.   It is not inconceivable that some companies will assess the worth of their HR Department on its ability to source (and attract) suitable black directors.

7. Employment Equity
The employment equity scorecard is influenced heavily by the provisions of the Employment Equity Act 1998 (EEA).    Like the EEA, one of the aims of the scorecard is to increase the number of black persons (women and the disabled, in particular) in management positions.

M&Ls should aim to reach the following targets to obtain maximum points:

• 43% of black senior management within 5 years and 60% within 10 years;

• 63% of black middle management within 5 years and 75% within 10 years;

•  68% of black junior management within 5 years and 80% within 10 years; and/or

• 2% of black employees with disabilities within 5 years and 3% within 10 years.

HR Managers should note that, in terms of BEE, employment equity for larger companies is all about black employees occupying management positions.    Companies with a majority of black employees will not score well for BEE purposes unless some of those employees are managers.  Black drivers or cleaners will not help a company's BEE rating.

QSEs should aim to reach the following targets to obtain maximum points:

• 40% of black representation at management level within 5 years and 60% within 10 years; and/or

• 60% of black employees (of any level) within 5 years and 60% within 10 years.

For HR Managers of QSEs, the EE Scorecard represents an extension of their employment equity obligations, as QSEs (with less than 150 employees) have been excused of the obligations of reporting racial compositions of each occupational level under the EEA.  Some HR professionals will need to quickly up-skill on EE requirements.   For others, the BEE scorecard may well represent the future of EE obligations and replace the current obligations contained in the EEA.

8. Skills Development
It is in the area of skills development that HR can potentially have the greatest impact on a company's BEE compliance. 

QSE's can achieve maximum points for skills development if they spend 2% of the company's total salary bill (per annum) on "learning programmes" for black employees.   Though the new Codes don't define what "learning programmes" are, we are advised that it must be a programme in the learning programmes matrix, which is as follows:

Cat	Narrative Description	Delivery Mode	Learning Sites	Learning Achievement
A	Institution-based theoretical instructions alone - formally assessed by the institution	Institutional instruction	Institutions such as universities and colleges, schools, ABET providers	Recognised theoretical knowledge resulting in the achievement of a degree, diploma or certificate or registered formal institution of learning
B	Institution-based theoretical instruction as well as some practical learning with an employer or in a simulated work Back environment - formally assessed through the institution	Mixed mode delivery with institutional instruction as well as supervised learning in an appropriate workplace or simulated work environment	Institutions such as universities and colleges, schools, ABET providers and workplace	Theoretical knowledge and workplace experience with set requirements resulting in the achievement of a degree, diploma or certificate issues by an accredited or registered formal institution of learning
C	Recognised or registered structure experiential learning in the workplace that is required after the achievement of a qualification - formally assessed by a statutory occupational or professional body	Structured learning in the workplace with mentoring or coaching	Workplace	Occupational or professional knowledge and experience formally registered through registration or licensing
D	Occupationally-directed instructional and work-based learning programme that requires a formal contract - form ally assessed by an accredited body	Institutional instruction together with structured, supervised experiential learning in the workplace	Institution and workplace	Theoretical knowledge and workplace learning resulting in the achievement of a South African Qualifications Authority registered qualification, a certificate or other similar occupational or professional qualification issued by an accredited or registered formal institution of learning
E	Occupationally-directed instructional and work-based learning programme that does not require a formal contract - formally assessed by an accredited body	Structured, supervised experiential learning in the workplace which may include some institutional instruction	Workplace and some institutional as well as ABET providers	Credits awarded for registered unit standards
F	Occupationally-directed informal instructional programmes	Structured information sharing or direct instruction involving workshops, seminars and conferences and short courses	Institutions, conferences and meetings	Continuing professional development, attendance certificates and credits against registered unit standards (in some instances)
G	Work-based informal programmes	Informal training	Workplace	Increased understanding of job or work contact or improved performance or skills

An obvious question for HR departments is whether this BEE obligation is covered by the skills development levy?   Sadly for employers, the amount is over and above that levy. 

For larger companies, the skills development scorecard is similar to QSE obligations but with higher targets.  To achieve maximum points, M&Ls must spend 3% of the company's total salary bill on learning programmes for black employees.     Additional points can also be achieved if 5% of employees in the company are black employees participating in learning programmes or if the company spends 0.3% of company salary on learning programmes for disabled black employees.

HR Managers would be well advised to keep these targets in mind when assessing their organisation's skills development needs.

9. Preferential Procurement
Procurement may not appear to be a pivotal issue for managers of HR, but as purchasers of goods or services, HR has a role to play in procurement like any other part of a company.

The basic principle behind this element of BEE is that when a company buys from a supplier that is "more empowered", it will enjoy greater preferential procurement recognition than it would when buying from a supplier that is "less empowered".

To understand how the procurement scorecard works it is important to consider the following table:

BEE Contributor Status	Qualification (points on the generic scorecard)	BEE Spend Recognition
Level 1 Contributor	At least 100 points	135%
Level 2 Contributor	At least 85 points, and less than 100	125%
Level 3 Contributor	At least 75 points, and less than 85	110%
Level 4 Contributor	At least 65 points, and less than 75	100%
Level 5 Contributor	At least 55 points, and less than 65	80%
Level 6 Contributor	At least 45 points, and less than 55	60%
Level 7 Contributor	At least 40 points, and less than 45	50%
Level 8 Contributor	At least 30 points, and less than 40	10%
Non compliant	Less than 30 points	0

Assume Smith & Jones CC achieved 57 points in the generic scorecard.  It will be a Level 5 contributor.    If you were to purchase good or services from Smith & Jones CC, you would be able to count 80% of your purchase as preferential procurement.

There are three notable issues arising from the table above.   Firstly, one must ask, what exactly is procurement?   Essentially, any purchases of goods or services (other than salaries or taxes) amount to procurement.   Secondly, companies must realise that not all the money they spend with a BEE Contributor will count as BEE procurement (because of the spend recognition percentages).   Finally, no preferential procurement will be recognised (no matter what scale of black ownership) without that company having a valid BEE certificate certifying its contributor status. 

To gain maximum points for preferential procurement, a company should:

• spend 50% of its total expenditure (within 5 years) and 70% of its total expenditure (within 10 years) on preferential procurement spending;

• 10% of its procurement must emit from QSEs and EMEs (within 5 years; 15% within 10 years); and/or

• 10% of its procurement must emit from companies that have majority black ownership or from companies that have more than 30% black female ownership (20% within 10 years).

As mentioned above, EMEs (they can be 100% white owned) are deemed to have a preferential procurement rating of a Level 4 Contributor.   Start-up companies are also given this rating.

10. Enterprise Development
Like the name suggests, enterprise development, from a BEE perspective, is about developing enterprises; particularly smaller enterprises controlled by black owners.

To earn points for the enterprise development scorecard, you must contribute to a beneficiary company of your choice.  The contribution can be monetary (such as a recoverable loan or a discount) or it can be non-monetary (such as advice on management issues).   If it is the latter, the contribution will need to be measurable in monetary terms, in order to quantify the level of contribution.   In this respect, the contribution must be a 'qualifying contribution', in that it must be a contribution to a 'qualifying beneficiary', which the Codes defines as:

• EMEs;

• QSEs which are Level One to Three BEE contributors;

• QSEs which are in excess of 50% owned by black people and which are Level Four to Six contributors to BEE;

• non-QSEs which are Level One to Three BEE contributors; or

• non-QSEs which are in excess of 50% owned by black people and which are Level Four to Six contributors to BEE.

M&Ls can achieve top marks for the enterprise development scorecard if they spend 3% of earnings (before interest, tax & depreciation) on qualifying contributions.   QSE's need contribute 2% for maximum points. 

HR Managers are well positioned to assess their company's enterprise development opportunities. Contributing in some way to black-owned training companies, payroll companies or recruiters that HR may make use of, is one such example. As compliance experts, WISE has established successful projects on which full points can be acquired under this element (and others).

11. Socio Economic Development
Socio economic development works differently than enterprise development. The former is made up of two components:  industry specific contributions (that seek to address needs in a particular industry sector) and corporate social investment that covers a wider range of needs (from health programmes to conservation efforts).

To achieve maximum points, M&Ls and QSEs must both contribute 1% of their earnings (before interest, tax & depreciation).

Again, HR is well placed to assess industry or community projects that qualify for socio economic contributions.

Conclusion
The need to address the inequalities of the Apartheid area are well documented and BEE represents a commendable (if not ambitious) method to bring about transformation.

Like any new regulation, the implementation of BEE is certainly a challenge for business and those that do it better than their competitors will gain significant

Like any new regulation, the implementation of BEE is certainly a challenge for business and those that do it better than their competitors will gain significant advantages in the marketplace.    The HR profession has an important role to play to meet those challenges, particularly in relation to the employment equity and skills development elements of BEE.   

Information provided herein is used with the permission of Work in Solutions& Equity. Work In Solutions & Equity has been advising clients on their BEE obligations for some time and is well placed to assist with strategies to assist compliance.   For further information please call Dee Cranswick on (021) 465 3500.

 

>>  Broad-Based Black Economic Empowerment Act No 53 of 2003

>>  Codes of Good Practice on BEE 2004

>>  Strategy Document for BEE

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