How fronting, by form, defeats the substance of B-BBEE

By Sibusiso Mtsetfwa, Manager of Member Services at the South African Supplier Diversity Council

I recently came across a “transformed” 51% Black-owned company who flashed their Level-2 Broad-Based Black Economic Empowerment (B-BBEE) credentials to all and sundry as they continued to stand in the front of the line successfully winning tenders and retaining contracts with large corporations that they did business with prior to their “B-BBEE transformation”.

 

I say “transformed”, because upon closer investigation, their status comes from the 51% shareholding held by a “creatively” registered trust for black employees of the business.  The 49% white shareholders and directors are also the trustees of the trust while the black employees, as beneficiaries, do not have any veto rights or say in the running or decision-making of the trust.  In this case, the actual decision-makers and profit-takers remain white and could now find economic benefit that has flowed through to the trust, since inception more than five years ago.

The disheartening and disappointing part of the aforementioned is how a typical case of fronting has gone undetected for so long while our government has come up with so many programs, regulations and legal requirements to be enforced so as to ensure the freedom, inclusion and transformation that we fought for and still long for.  Yet 27 years later, we remain one of the most unequal countries in the world!

 

Fronting is a case of “Same script, different cast” … (thank you, Deborah Cox and Whitney Houston)

In 2016, the Department of Trade and Industry (DTI), found that a shocking 70 out of 109 companies surveyed that year were fronting and circumventing the B-BBEE Codes of Good Practice.  In my line of work, there are so many companies that are said to be “Black Owned”, yet the said black owners are not in control of those companies nor gaining the expected economic benefit equating to their shareholding. 

What’s more, in many other cases, black staff are given directorship titles that represent responsibility they don’t actually hold. They realise zero share in the profits being made while, unfortunately, in the event of loss or reputational damage, those very same ‘directors’ will still be held liable.

In fact, two out of ten companies seeking certification with our organisation, the South African Supplier Diversity Council (SASDC), are found to be fronting.  The sad part of these scenarios are that some of the black individuals knowingly get involved in such schemes, while others, unknowingly or through ignorance, fall victim to such practices.  Of course, it is a known fact that ignorance of the law is no excuse. The perpetrators on the other hand are quick to claim that they were advised by their lawyers or accountants to structure the companies the way they have and they believed all was above board.

 

Begs the question - is B-BBEE the yellow brick road to the much needed empowerment and transformation that we endeavour for as a country? 

The Oxford English Dictionary (OED – 3rd edition, 2018) defines the American-English phrase “yellow brick road” as denoting a course of action or series of events viewed as a path to a particular (especially positive or desired) outcome or goal. 

While the current B-BBEE policy environment aims to include the participation of Black South Africans in the mainstream economy through access to markets and exposure to economic opportunity as a whole, it is sometimes hard for me to see it really bearing any of its intended fruit.  There have been amendments to the B-BBEE Act and its associated Codes of Good Practice to ensure that the scales are tipping more in favour of Black citizens, but in so doing, other loopholes have been created.

I can therefore only conclude that the Yellow Brick Road to Empowerment is paved with good intentions, my adaptation of the common idiom and expression “The road to hell is paved with good intentions”.  Why chose to share my view through this statement you may ask – because this expresses my view that good intentions don’t necessarily guarantee good results, and that good intentions matter little—if at all—if they don’t end in good outcomes.

There are a few ways to interpret this phrase and its application to fronting in the context of B-BBEE:

  • People often intend to do good but then fail to do anything at all: Their procrastination and inaction doesn’t produce a good result and, in fact, could actually lead to a bad outcome. In this scenario, good intentions without good actions are at best meaningless and at worst harmful.

Many corporations publicly declare their support and commitment to transformation in the country, including their support of SMMEs and black businesses through their procurement.  Many of them have in the past, and still, continue to promote the ownership transformation of current white owned EMEs and QSEs, very often incentivising them to achieve 51% black ownership.   

Once this is done by these targeted suppliers, the corporates continue to do business with those same suppliers without interrogating the legitimacy of the new ownership structure.  By doing so, they don’t open up opportunities for new legitimate black owned businesses.  These corporates end up achieving better B-BBEE scorecards while failing to do nothing at all.

It is also common practice for procurement or supply chain departments to simply ask for the affidavits or BEE certificates from suppliers that they transact with.  This is the most important document to ensure their own compliance reporting.  Perhaps the biggest problem is that the whole process is driven from a compliance perspective and thus ends up being a tick box exercise by form instead of a transformation objective by substance.

In both cases, this complacency and inaction has created an environment that promotes instead of deters fronting.

  • People can often hide behind good intentions: they can commit an action that results in a bad outcome under the guise of doing good. A case in point are white businesses owners who transform their business to 51% Black owned by “gifting” 51% shareholding to loyal black employees either directly or in the form of employee trusts.

Once this has happened, nothing else changes in the business – there is no skills transfer and capacity building and economic benefit is minimized to comply with legislation.  In such situations (and I have my experience with those) no economic empowerment takes place but at the same time the white business owner paternalistically feels that they have given their chosen black staff an opportunity that nobody else would have given them.  The business continues to benefit from the fronting practice while such benefits do not accrue to the majority Black shareholders.

  • When acted upon, even the best of intentions can have negative unintended consequences: In 2010, the then Minister of Trade and Industry, Rob Davies, made the following statement in relation to fronting:

“It is not just the obvious one, where you take the factory-floor worker and call him the managing director…It’s now beginning to involve accountants, lawyers and verification agents that are giving people ideas of more sophisticated ways to front…Fronting is becoming analogous to tax avoidance and tax evasion”. 

This was largely part of the reason for amending the B-BBEE Act and revising the B-BBEE Codes of Good Practice.

In October 2013, Government implemented amendments to the B-BBEE Act to criminalize fronting practices while revising the B-BBEE Codes to provide Black owned EMEs and QSEs enhanced recognition (Level 1 and 2) and removing B-BBEE compliance cost barriers to small businesses, especially for small and medium sized Black owned businesses, through the introduction of sworn affidavits.  At the same time, these revisions included increased spend targets of measured entities for them to procure more from EMEs and QSEs, and especially Black owned entities. 

This is reasonable and much needed - you would think

But the unintended consequence was the removal of an independent third party to verify ownership and business size credentials while placing responsibility on business owners to self-verify through sworn affidavits.  Bearing in mind that with sworn affidavits the onus lies with the deposer for should he/she be found to have lied under oath, the individual concerned may be charged with fraud as a criminal offence.  

However, how many of these deposers really care or even consider the outcome in the event that they have lied under oath?  

The fact is the reliance on affidavits for confirmation of B-BBEE has made fronting rifer because there is no independent third party asking the hard questions and policing the whole process.  Coupled to this is the failure to appropriately act on the part of many corporates to ensure that they do not transact with fronting businesses – thus once again perpetuating this practice.

 

Here @SASDCOUNCIL, we aim to achieve the economic inclusion of black businesses by leveraging corporate procurement market access through sustainable supplier diversity.  Because to us real #BlackSuppliersMatter. 

As a supplier diversity advocacy organisation, led and governed by member corporations, the SASDC verifies the key credentials of Black Suppliers and certifies them as Black owned, managed and controlled through our proprietary due-diligence methodology developed in collaboration with our corporates and other strategic partners.  We exceed simply establishing and maintaining a database of certified bona fide black suppliers. Our value proposition is in our network of professionals committed to supplier diversity in South Africa, enabling our members to practice supplier diversity as a strategic business objective.

We encourage business owners, procurement and supply chain managers to partner with us

We encourage bona fide black businesses to certify and become part of the SASDC and for corporates to commit to doing business with them.  Through these linkages, we believe we can bring about the real economic inclusion of black business and economic transformation aligned to the goals of the National Development Plan (NDP).

Even though fronting is a criminal offence - in my view, it is right up there with corruption and therefore a gross violation of human rights – so many still find the loopholes and rob a system that is paved with good intentions. The sad reality, is that these collective acts of selfishness are keeping our country in the doldrums and on the verge of a real socio-economic crisis. One that will continue to affect our children and future generations to come. 

We have just celebrated Human Rights Day, and soon, on 27th April, we will be celebrating Freedom Day.  That said, I wonder if we even ponder the most obvious question anymore: Are we truly free as Black people when economic opportunity continues to evade most of us due to some of us?

But what can you do? Be aware of fronting.  Look beyond the piece of paper that is being presented and perform a thorough due diligence of the supplier concerned. If you are a procurement officer or supply chain specialist, ask yourself, is the company you are doing business with actually as black as they claims to be?

As we journey along our Yellow Brick Road, I am reminded by the words of President Nelson Mandela (MHDSRIP) in his autobiography, Long Walk to Freedom: “But I can only rest for a moment, for with freedom come responsibilities, and I dare not linger, for my long walk is not ended.”

Let us all become the headlights for lighting up the dark fronting tunnel that obscures the Yellow Brick Road to transformation.