Black Economic Empowerment (BEE) all started with the Black Management Forum meeting in 1997 which resolved that government should be pressured to come up with a BEE policy (Nattrass, Seekings 2010, Chabano, Goldstein et al. 2006, Tangri, Southall 2008). Eventually this led to a BEE Commission being set up by government in 1998 which ultimately led to the BEE Act being promulgated in 2003 (Nattrass, Seekings 2010, Chabano, Goldstein et al. 2006, Tangri, Southall 2008). Although the BEE Act is not detailed, in that it only provides a framework for regulation, it provides the minister of Trade and Industry with authority to issue Codes of Good Practice on BEE through the Government Gazette. The purpose of these Codes of Good of Good Practice is to outline components and elements of BEE and provide guidelines for application of the BEE Scorecard (Institute of Directors in Southern Africa 2009). The main aim of the BEE Act was to ensure that organs of the state and public entities comply with Codes of Good Practice when: issuing licences, concessions or other authorisations; developing and implementing a preferential procurement policy; selling state-owned enterprises; and entering into partnerships with the private sector. Although the BEE Act is binding on the public entities, there is no legal requirement for private companies to comply with BEE (South Africa. Department of Trade and Industry 2003a) and the question that remains is how far this has assisted in empowering black people. The other question that remains which is more relevant to this study is if the private companies that do not necessarily have to comply to the BEE legislation could possibly benefit from complying. This is an important question in that, it would provide a great advantage for those companies to comply if there is any real advantage. This study seeks to assist in answering that question. 1.2 Status Quo in JSE Before the study attempts to answer any question, a status quo of BEE status needs to be outlined. According to Statistics South Africa (2012:20), in the 2011 census black people represented 90.6% while white people represented 8.9% of the population. This has not changed significantly since the 1996 census, which had black people representing 89.1% of the population and white people representing 10.9% (South Africa 2005, South Africa 2012). However, according to research done by Empowerdex, a leading company in the B-BBEE industry which together with Financial times publish information on BEE every year, indicates that black people own only 1.6% of the JSE value in market capitalisation. Empowerdex arrived at the 1.6% because they only considered a debt free portion of the ownership. A debt free portion of the ownership is ownership of shares without taking into account any portion of share that are financed through financial institutions. If debt is ignored, their figure would jump to 5.75% (Ntingi, Hlatshwayo 2010). According to Ntingi and Hlatshwayo (2010), Trade Union Solidarity argues that, according to its own research, black people owned 23% of the JSE share value in 2008. This is an increase from only 5% in 1995 (Ntingi, Hlatshwayo 2010). JSE conducted its own research which revealed that black people owned 17% of the top 100 companies in 2011 (Chandler 2011). Considering that the top 100 companies on the JSE represents 85% of the market capital (Chandler 2011), this figure would not change significantly if all the companies listed on the JSE were included. The black ownership percentage is thus contrary to research done by Empowerdex and Trade Union Solidarity. According to Sartorius and Botha (2008:442), 60% of the JSE listed companies had transferred at least 10% of their equity to BEE partners by 2008. If this was the case, and the companies maintained the same momentum, this would have indicated that the ownership by black people in the JSE listed companies would been significantly higher in 2012. Whichever research is correct, the ownership of the companies listed on the JSE by black people is very low considering that black people represent more than 90% of the population in South Africa. 1.3 Progress made since democratic South Africa, 1994 Despite the slow pace of transformation of companies in terms of black ownership of companies, in 1993, New Africa Investments Limited became the first black owned company on the JSE (Jack, Harris 2007). This was the birth of transformation in business and economy of South Africa. Although some of the experts and authors disagree on a method of measuring black ownership and this being caused mainly by the fact that they cannot agree on what constitutes ownership (Southall 2004), the consensus from all of them is that, the percentage of black ownership was below 5% prior to 1994 through to 2001. (Kantor 1998) believes the value of black-controlled companies listed on the JSE to be 10% of the market value of the JSE at the end of 1997. Southall (2004:315) found black capitalism in the post-apartheid South Africa to be growing very slowly. This view was supported by the then president Thabo Mbeki who admitted that black empowerment was moving at a snails pace (Southall 2004). Chabano et al (2006:557) seem to agree with this view explaining the process has been slow. By 2004, only five out of the top 100 companies were in black control (Chabano, Goldstein et al. 2006) . The journey on transforming the JSE in terms of participation of black people has not been an easy one in that ownership by black people varied over the years. As Southall (2004:318) explains, between 1994 and 1997, black ownership grew to about 10% of the shares on the JSE, but when the stock market crushed in 1997 all those gains were lost and black ownership dropped to between 1% and 3.8% (Southall 2004). Chabano et al (2006:564) also agree as they point out that after the Asian stock market crash, the JSE market capitalisation controlled by black people fell from 9.6% in 1998 to 4.3% in 1999. Tangri and Southall (2008:703) figures are slightly different as they explain the share ownership by blacks fell from 8% to 4% after the 1998 stock crisis. In 1999, Southall (2004:318) explains that value of the BEE ventures went down by R17.6 billion from 1998. This was caused by the share price of most of the black companies falling by more than 50% resulting in BEE deals significantly dropping at the time (Southall 2004). Black people participation began to shape up again around 2001 and 2002. According to Empowerdex, 10% of the top 115 JSE listed companies total share value was in black hands (Southall 2004). According to Nattrass and Seekings (2010:33), black ownership kept on improving but it surged significantly from 2003 onwards. JSE black ownership transferred was between 6% and 10% by the end of 2006. Sartorius and Botha also found that only 38 of the JSE listed companies had 25% black ownership which suggests progress has been very slow (Sartorius, Botha 2008). Tangri and Southall (2008:703) are less optimistic about the progress made in black empowerment. They point out that the government has done very little to deracialise white companies and this is because the government is not decisive in implementing BEE. They continue to argue that black people have in fact become poorer since 1994, despite the small elite of BEE beneficiaries, which include a small number of prominent, politically connected black figures, who got empowered (Tangri, Southall 2008). In a more optimistic finding, Patel and Graham (2012:200) found that 2007 was a peak year for BEE deals, which amounted R96 billion. This was 71% higher than 2006, and 2005. However, these gains slowed down in 2008 and 2009 because of difficulty in raising finance because of strict credit markets (Patel, Graham 2012). 1.3 BEE legislation and policy kicks in When apartheid ended and a new democracy started in 1994, black people for the first time had the political power but lacked the economic power as more wealth and resources were sitting in the hands of white people. It is against this backdrop that the policy and regulation of the BEE were formulated, especially the Preferential Procurement Policy Framework Act of 2000. In essence according to this Act, government has to favour companies which are BEE compliant when procuring goods and services (South Africa 2000). Jack and Harris (2007) view is that Government had no intentions of intervening in BEE through legislation. Government was forced to intervene because the market and private sectors failed to address black participation in the economy (Jack, Harris 2007). The government intervention amongst other things started with the Liquid Fuels Charter, Mining Charter, the DTI Strategy document which led to BEE Act and Codes of Good Practice being promulgated. The BEE Act as part of this government intervention, was supported by the constitution in that Section 217 of the constitution of South Africa which deals with procurement states that ?(1) When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. (2) Subsection (1) does not prevent the organs of state or institutions referred to in that subsection from implementing a procurement policy providing for-(a) categories of preference in the allocation of contracts; and(b) the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination. (3) National legislation must prescribe a framework within which the policy referred to in subsection(2) may be implemented. Furthermore, Section 9 states that ?(5) Discrimination on one or more of the grounds listed in subsection (3) is unfair unless it is established that the discrimination is fair. (South Africa 1996). According to the BEE strategy document, the South African economy is performing below its potential because of the inequalities in the distribution and access to wealth and income in the country. This is despite the fact that government has come up with policies, strategies and programmes to address these inequalities (South Africa. Department of Trade and Industry 2003c). Even after Government introduced the BEE Act in 2003 and the Codes of Good Practice in 2007 to address the economic inequalities that are mentioned above, the problems still persist. Some companies still resist transformation because they do not see a real benefit in it. The other problem can also be because the law does not enforce the BEE legislation on any company. Therefore BEE transformation remains an option to all the companies. Since 1994, there has been a very slow transformation in the JSE listed companies. As Jack and Harries (2007) explain, the reason for the slow transformation could be firstly, that some companies believe that the concept is not applicable to them as they do not supply any goods and services to government. Secondly, some companies believe BEE is reverse discrimination and it is unfairly forced upon them, they therefore resist the change. And lastly, companies see the need to transform but do so in bad faith, as they attempt to score BEE points without changing the status quo by engineering BEE deals that in substance do not change anything (Jack, Harris 2007). On the other side, for some companies transformation has been on the forefront of their agenda. Since Codes of Good Practice were introduced in 2007, broad-based BEE score has been the key to many Companies success as companies strive to achieve a high score. As Jack and Harris (2008) explain companies will lose recognition as a preferred supplier if they do not achieve a favourable BEE score and this in turn affects their cash flow negatively. Companies have been on the journey, although difficult, to position themselves as transformed companies not only to earn competitive advantage but also to build a good company reputation. According to (Wolmarans, Sartorius 2009), Companies can satisfy their corporate social responsibilities using BEE(Wolmarans, Sartorius 2009). They also explain that market participants care about corporate social responsibilities. They concluded of their study, which investigated the financial impact of BEE transactions that to some extent, BEE transactions have some effect on shareholder value creation (Wolmarans, Sartorius 2009). This finding is supported by Ward and Muller (2010) who explain there are both short-term and long-term positive responses to BEE deals on JSE listed companies. Veloso (2008) also argues that BEE policy deters foreign direct investment inflows into the country. Jack and Harris (2007) explain the objective of BEE is mainly to introduce poor people into the mainstream capitalist economy and getting them to share in the benefits. They also point out that BEE will also assist with economic growth, skills development and employment of the unemployed (Jack, Harris 2007). However, there remains a risk in that some companies may not invest money and effort in BEE at all if they do not see the benefits in it. Limited research has been done in the field of BEE and available research on BEE is relatively limited in depth and has many gaps. This includes limited literature on BEE challenges and factors necessary for BEE to succeed (Kruger 2011). The purpose of this study is to investigate the relationship between BEE scores and revenue generation and profitability of the JSE listed companies. Companies have spent a significant amount of money in an attempt to be BEE compliant Jack & Harris (2008). Jack and Harris (2008) explain that companies will lose competitive advantage which will affect cash flow negatively in future. This study seeks to investigate whether the predictions that the BEE compliant companies will have competitive advantage are positive by measuring revenue growth and profitability for the years 2007 to 2013 of these companies. Ellis and Kelly (1992) define the outcomes of competitive advantage to be sales, gross profit margins, and net profit margins. For this reason, this study will focus on revenue and profitability to measure whether or not high BEE scores result in high revenue and high profitability. As previously explained, the objective of this study is to investigate the relationship between BEE scores and revenue generation and profitability of the JSE listed companies. First part of the study, the top 100 black empowered companies will be ranked according for their BEE scores and analysed to test if there is any relationship between the BEE scores and revenue growth and profitability. The second part of the study will compare two groups, which are companies in the top 100 black empowered companies and the companies that are not in the top 100 black empowered companies to test if the performed differently in terms of profitability and revenue growth. Strydom, Christison and Matias (2009:68) explain how BEE is still one of the most important drivers in corporate restructuring. They continue to argue that BEE transactions are strategically significant and are still a big challenge to corporate South Africa (Strydom, Christison et al. 2009). Strydom, et al. (2009:69) further argue that companies who are BEE compliant have certain benefits like, revenue enhancements, preferential procurement, concessions, licenses and financial support from state owned enterprises and can assist companies to obtain lucrative government contracts. Some of these benefits extend to companies not doing business with government as they too have to be BEE compliant if they want to do business with businesses which are doing business with government (Strydom, Christison et al. 2009). By investors and other stakeholders understanding the companies challenges, dynamics and benefits of transforming the companies in South Africa, they will be able to influence the management of these companies to create an effective broad-based BEE strategy. Quoting from the strategy for broad-based BEE document ?Our country needs an economy that can meet the needs of all our economic citizens our people and their enterprises in a sustainable manner. This will only be possible if our economy builds on the full potential of all persons and communities across the length and breadth of this country. Governments objective is to achieve this vision of an adaptive economy characterised by growth, employment and equity by 2014. (South Africa, 2003b) Companies transforming using BEE is beneficial to the whole country through economic growth, reducing the gap between the ?haves and ?have-nots and allowing for skills development. BEE compliance by companies will also assist black people to be able to participate in the economy meaningfully. The impact of BEE compliance on revenue generation can assist the country in general in terms of tracking whether the BEE policy is effective. This information can also assist investors and other stakeholders to make informed decisions about their investments in those companies. If there is competitive advantage of being BEE compliant, companies may become more transparent about BEE compliance and that can influence those that are not compliant to follow suit. Managers of companies generally only pursue higher BEE scores if there a future benefit to it (Ferreira, de Villiers 2011). Big companies in market capitalisation and influence in the economy are listed in the JSE as such, listed companies in the JSE are probably the best indicator of where business is going economically. Hence the study focuses on the companies listed on the JSE. The study also seeks to attempt to address the knowledge gap existing in terms of the BEE compliance by companies between investors and other stakeholders and companies listed on the JSE. Finally, according to Fauconnier and Mathur-Helm (2008:1), the literature on the transformation in South Africa is limited and does not cover a lot of factors as there are many gaps in the literature. This study seeks to cover one of the gaps in literature which is relationship between BEE scores and revenue(Fauconnier, Mathur-Helm 2008)(Fauconnier, Mathur-Helm 2008)(Fauconnier, Mathur-Helm 2008). Sartorius and Botha (2008:439) identify a number of reasons why companies implement BEE initiatives. One of the main reasons was that, companies seek to grow market share and their business in general (Sartorius and Botha, 2008:439). This study seeks to measure if this reason is realised by the JSE listed companies by investigating if revenue growth relates to the BEE scores. If reasons for investing in BEE are not realised by these companies, this has a potential of discouraging companies to invest in BEE. This will be detrimental to the country as whole to reach its BEE objectives. This section explains the research methodology applied to construct a model to meet the research objective of the study. The research methodology is a quantitative in nature. All data used will be secondary. Data on BEE scores of the Top 100 BEE companies will be obtained from Empowerdex website from their annual Financial Mail/Empowerdex top empowerment companies survey. Empowerdex annually compiles the Top Empowerment Companies. This study ranks the top 100 JSE companies in terms of broad-based BEE. This information is published by Financial Mail annually. Data relating to revenue of all JSE listed companies will be obtained from McGregor BFA database. Other data collected will be obtained from literature review, legislation on BEE, prior research conducted broad based BEE and BEE in general, and existing empirical surveys and statistical data, all of which will be used to conclude on the study and make recommendations. Literature review will be undertaken to establish definitions of the theoretical constructs to be used in the research. The literature review will be done from existing studies from academic journals, existing government documented speeches and documents, and documents from South African unions and legislation. Existing empirical data will be used to establish the current statistics including level of BEE compliance in JSE listed companies and other comparative data. This data will be extracted from the latest statistics available from various documents and prior similar studies. Sources of data includes, Journal articles, Books, Publications, Websites, Legislation, Government publications, charters and Codes of Good Practice. The chapter layout is as follows: CHAPTER 2: LITERATURE REVIEW The chapter interrogates the literature on BEE, BEE compliance and how it influences financial performance of companies with specific focus being on revenue. CHAPTER 3: RESEARCH METHODOLOGY This chapter describes the research methodology that will be used in this study. CHAPTER 4: AN ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS This chapter interprets and analysis the research data collected and compares it with current theory and literature. CHAPTER 5: SUMMARY CONCLUSIONS AND RECOMMENDATIONS This chapter summarises an overview of the research findings. It also summarises conclusions of the study. This chapter also includes recommendations of further study in black economic empowerment and disclosure in the integrated reports. Prior to 1994, South Africa had laws that prevented black people to participate fully in the economy of the country. Black people were prevented from owning land and doing business outside of their designated areas. This prevented black people from trading on the outskirts of white towns and cities. Although some of the prohibitions and restrictions were not legislated, black people were not allowed to own property even within their designated areas. In business, black people were restricted to owning single operation within the designated areas. (Jack and Harris, 2007:6; South Africa, 2003a). Although in the mid-80s, the majority of these laws were relaxed, some restrictions still stayed which implied that the economic growth amongst black people were still limited. This chapter interrogates the literature on BEE, BEE compliance and how it influences financial performance of companies with specific focus being on revenue. Specifically, this chapter covered the literature on history of BEE and how it evolved over the years. Literature review on objectives of BEE, its challenges and how changes to legislation have evolved have also been dealt with. Finally previous contributions by other researches will conclude the literature review. The history of black empowerment starts with unrest in South Africa in the 1970s and the world began to debate the correctness of the apartheid system. These resulted in economic and political sanctions against South Africa by various countries. At that stage, it was becoming clear to the apartheid government that the apartheid had failed and they needed to end it (Jack and Harris, 2007). Elliott, Hufbauer and Oegg (2008), also explained that following the Sharpville massacre in the 1980s, other countries started putting pressure on the then president, FW De Klerk to release Nelson Mandela. That subsequently led to beginning of the new democracy in South Africa in 1994 when the African national Congress (ANC) won the national elections (Elliott, et al, 2008). The ANC assumed the office with a few challenges on its table after winning the national elections, one of them being a racialised inequality in the country despite economic growth both before and after 1994 (Nattrass and Seekings, 2010:5). It was clear that the end of apartheid did not immediately translate into improved material conditions for the majority of South Africans (Aliber, et al, 2006:47). This was mainly caused by the fact that, in apartheid times, the then government ensured that only white South Africans had skills, opportunities and high incomes, whilst many black South Africans lacked skills, faced few opportunities, and remained in poverty (Nattrass and Seekings, 2010:5). The ANC then decided to prioritise de-racialisation of business ownership completely through black economic empowerment policies to deal with continuing white economic control and racial income inequalities. This was declared as one of the central objectives in the Reconstruction and Development Programme in 1994 (Tangri and Southall, 2008:699). The governments black economic empowerment vision was mainly based on the Freedom Charter of 1995 which had as one of its objectives, meeting the economic needs of the South Africans equitably (South Africa, 2003a). According to the Freedom Charter the countrys wealth and resources should be shared amongst people in South Africa. It further has an objective of creating a democratic, non-racial, non-sexist, and prosperous society in South Africa (Congress of the People, 1955). In addition to this according to Chabano, et al (2006:562) this fact is further promoted by the countrys constitution which promotes equality and advancing people who were disadvantaged by unfair discrimination. The government at the time then decided to introduce few policies to address the inherent inequalities. These policies were around issues of affirmative action, employment equity, land reform, establishment of sector education and training authorities and introduction of BEE policies (Patel & Graham, 2012:194). The specific laws introduced were: Promotion of Equality and Prevention of Unfair Discrimination Act, Extension of Security of Tenure Act, Restitution of Land Rights Act, Employment Equity Act, National Empowerment Fund Act, Competition Act, Telecommunications Act, Preferential Procurement Policy Framework Act, and the Minerals and Petroleum Development Act (South Africa, 2003a). In another effort by government to empower black people was the introduction of the Preferential Procurement Act in 2000. Government was taking advantage of being the largest buyer of goods and service to support of economic policy objectives of black economic empowerment. This Act was meant to make government tendering accessible to black people and introduce a black empowerment point system in awarding these tenders for targeted groups (South Africa, 2003a). According to Chabano, et al (2006:563) Black Management Forum resolved in its 1997 conference that a BEE Commission should be set up and address black economic empowerment issues. The commission was successfully established in 1998, chaired by Cyril Ramaphosa. They presented a BEE commission report to the then President, Thabo Mbeki in 2001 which recommended that the state create black empowering guidelines and regulations which will compel the state and private sector to adopt black empowerment policies (Southall, 2004:323). BEE started off by being mainly self-regulatory. These early stages of self-regulatory environment of the BEE resulted in the government not being able to oblige the white companies to deracialise the businesses completely (Tangri and Southall, 2008:700). The result of this was a slow pace of transfer of corporate sector to black South Africans. This view was supported by Tangri and Southall (2008:700) that the slow pace in transfer of corporate sector to black South Africans was because of governments lack of focus in policies. Instead, government pursued several economic policies simultaneously including governments persuasion of white business to focus on generating higher rates of economic growth while pursuing policies to get white businesses to transfer equity into black South Africans. Balancing these two policies proved to be difficult for the government which led to slow implementation of black economic empowerment (Tangri and Southall, 2008:700). Nattrass and Seekings (2010:8) also supported this view explaining how the government made only modest efforts to promote black business in the mid- 1990s, and only acted aggressively in the early 2000s. The biggest challenge that BEE faced when it started was the lack of capital amongst black people. To deal with this problem, companies started setting up special purpose vehicles to house financing structures for the BEE deals (South Africa, 2003). Black entrepreneurs were financed by financial institutions using equity acquired in the companies as collateral. The idea was that, in time, the increase in value of the shares would eventually outweigh the finance cost incurred in acquiring the equity. According to Chabano, et al, (2006:563), more than half of the black ownership in the late 1990s was financed through the Special Purpose Vehicles. This created complex structures that left black people who participated in these deals highly indebted (South Africa, 2003a). The high indebtedness was exposed considerably when the market crushed in 1998 as it left a lot of black people with high debts and less value of their shares (South Africa, 2003a). Black owned companies control in the JSE fell from 10% to 4.3% between 1998 and 1999 as a result (Chabano, et al, 2006:564). Effectively, this implied that black people had very little benefit from these BEE deals other than a few. It became a clear signal at that point that BEE based solely on ownership was not sustainable (Jack & Harris, 2007). According to Sartorius and Botha (2004:437), the stock market crash led to a lot of critics to question the success of BEE. As Arya and Bassi (2011:689) explains, at that point, government had to consider the fact that transformation of the corporate world was a monumental task since it involved decades of social and racial imbalances in the economy, as a result it could not leave it to be purely voluntary and had to include government regulations to motivate and enforce BEE initiatives (Arya & Bassi, 2011:689). Black Management Forum was in consensus with this view at their 1997 conference. They proposed that the government set up a BEE commission that would look into the issues of BEE regarding definitions, benchmarks and standards of BEE (Jack & Harris, 2007). The BEE Commission reported to the government as mandated in 2001. BEE Commission reported that since 1994, there has been no significant change in the overall inequality and wealth as a result, black people remained poor and marginalised from ownership, control and management of economic activities (Black Economic Empowerment Commission, 2001:1). The report further blamed the lack of growth prospects and competitiveness in South Africa on that lack of significant change in transformation of the economic activities in the country (Black Economic Empowerment Commission, 2001:1). At this stage, government needed to come up with broad-based initiatives that address the lower and middle income groups of the country, so that they too can take part in the economy of the country (Jack & Harris, 2007). Following the report of the BEE Commission report government contended that the rate which the economic success had been shared by all South African was not satisfactory. What made this worse was also the fact that, even if there was some progress, it was very difficult to quantify it (Southall, 2004:318). It was for this reason that the department of trade and industry was of a view that the government needs to introduce a comprehensive and focused strategy for broad-based black economic empowerment (South Africa, 2003a). This BEE strategy document was drawn up in a form of South Africas Economic Transformation: A Strategy for Broad-Based Black Economic Empowerment. This document outlined theB-BBEE strategy and steps that government needs to take to effectively deal with BEE. Following the B-BBEE strategy document was the promulgation of Broad-Based Black Economic Empowerment Act of 2003. According to Broad-Based BEE strategy, the government set to form partnerships and collaboration with the private sector to ensure that BEE is sustainable. One way government intended to collaborate with private sector was encouraging setting up of sector and enterprise based charters. Different sectors would be allowed to determine ways and targets which will contribute to BEE with parameters of existing legislation (South Africa, 2003a). The strategy on sector charters was supported by Minerals and Petroleum Development Resources Act of 2002 which had similar regulations. Section 100 of this act requires the development of broad-based socio-econom
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