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VAST IMPROVEMENTS DESPITE LITTLE POLICING

04 Apr General

With the charter and DTI codes to adhere to, keeping the scorecard may be a bit tricky, but it can be done

Amid a simmering row between the finance ministry and the department of trade & industry (DTI) over just how empowerment should take place in the financial sector, the results of this year’s Top Empowerment Companies survey are enlightening indeed.

Though critics claim the financial sector has been particularly slack in transforming, it is notable that eight of the Top 15 most empowered companies in SA fall squarely under the auspices of the financial sector charter.

Notably, that includes three of the top four banks (Standard Bank, FirstRand and Nedbank, with Absa lagging at number 27 in the tables), which shows some rather radical transformation from last year. The highest-ranked bank last year was Nedbank at 23rd overall, while Standard Bank and FirstRand were the weakest. Now, Investec is 6th and Standard Bank is 8th.

Says Empowerdex’s Steven Hawes: “The financial sector has improved vastly as companies have got in touch with what they’ve got to do under the financial sector charter as well as the broad-based codes.”

Though the charter was only signed in 2003, this suggests the provisions are only now starting to gain traction. Perhaps this isn’t too surprising when considering that the Charter Council hasn’t exactly flexed its muscles in policing compliance. But while the results of this survey suggest a tangible improvement in actual transformation when compared with JSE-listed peers, banks and other financial companies will be anything but encouraged given the charter chaos.

The root of this disquiet lies in an unfortunate dispute that has been hyped as pitting the financial sector (and treasury officials) against labour and community groups (who in this case, are aligned with the department of trade & industry) over which empowerment principles hold sway.

Though the financial sector believes the charter is the pre-eminent document, the labour-aligned group is arguing that transformation in the sector should follow the guidelines stipulated in the DTI’s broad-based Codes of Good Practice.

Both sets of rules are closely aligned, but there are important differences. The most obvious is that the broad-based scorecard advocates 25% black control with at least 15% direct control. The charter agrees on the 25% target, but says only 10% need be direct ownership, with the rest coming through “indirect ownership”, such as pension funds.

It’s become quite an unpleasant spat. Though the labour group says the companies are being intransigent in refusing to renegotiate the charter’s ownership targets, the bankers suggest this is a case of government “shifting the goalposts”.

Banking Association MD Cas Coovadia says there are “a whole range of processes” aimed at breaking the deadlock. But he is adamant that the banks aren’t being intransigent.

“We’ve agreed to align everything but the ownership element to the codes. On top of that, we’ve got aspects in the charter that aren’t even in the codes, such as empowerment financing,” he says.

He says there are a range of technical and legal reasons why the banks can’t meet the requirement in the codes that black ownership should equate to 15% of a company.

For a start, the Banks Act says if investors buy a large-enough chunk of a bank, they would need to fund it themselves. Given the sheer value of cash needed to buy 15% of a bank, this remains prohibitive.

Considering the Industrial & Commercial Bank of China (ICBC) made the largest foreign investment in SA by paying R36bn to get 20% of Standard Bank, it puts the scale of such a requirement in perspective.

Equally, investors who take large chunks in banks also need to have cash reserves on hand to retain the confidence in the bank’s ability to meet its obligations, should there be a run on the bank.

“To change the rules now when the charter calls for a review of the rules in 2010 anyway would be inappropriate,” says Coovadia.

Thankfully, there has been a stay of execution. The new empowerment codes were due to take effect from February, but at the last minute trade & industry minister Mandisi Mpahlwa extended the deadline to August.

Coovadia and others will be racing against time to reach a compromise before then.

But amid this apparent political stalemate, many companies have taken to reporting on their scores under both the charter and the DTI’s black empowerment codes.

Says Hawes: “This squabble has woken the sector up to the fact that they’re probably going to have to continue to report under both the charter and the broad-based scorecard in future.”

Many senior bankers are keen to align the codes with the charter, if only to avoid the uncertainty of having to comply at some later date with rules they didn’t write.

One of the charges that critics level at the charter is that its targets are far too lenient, and that it would ratchet up transformation in the sector were government to require banks and financial firms to meet the targets in the codes.

“Generally, the charter is much more accommodating than the codes. The sort of companies that would score between 80% and 90% on the charter will be scoring about 60%-70% under the broad-based targets,” says Hawes.

Either way, the financial sector doesn’t look too tardy compared with other sectors. So how exactly have the banks improved in this year’s ratings?

From the figures, it looks very much like the racial composition of the banks’ staff is one of the key changes. For example, Standard Bank’s employment equity score is 9,8 out of 15, while FirstRand’s employment equity score has more than doubled.

Whereas last year there were only six financial companies with overall scores above 60 (compared to overall winner Adcorp with 81), this time there are 12 that surpass that mark.

Among the life assurers, Metropolitan’s rock-solid credentials saw it remain second only to union-investment company, Hosken Consolidated Investments (HCI). But the likes of Coronation Fund Managers have improved markedly from 15th in the financial sector last year (with a score of 43) to sixth with a score of 69,5.

Last year, Discovery was at the bottom of the table. But even though it has undergone a torrid year by locking horns with doctors, Adrian Gore’s company will be especially heartened that it was able to move to 11th position this year, nearly doubling its overall score from 33 to 63.

Some companies won’t be pleased to have slipped off the top of the list. The dual-listed life assurer Old Mutual, for one, last year came in fifth in the financial sector with a rating of 62. But this year, due to falling back in its employment equity and enterprise development numbers, Old Mutual falls to 15th in the table.

Tellingly, it becomes evident that financial companies tend to do particularly well in areas where they would have earned points under the charter, such as enterprise development.

Where the financial sector remains weaker than the rest – on average – is when it comes to management control and skills development. Looking at the top tiers of many of the financial companies suggests that the boardrooms of these companies are still largely the domain of men – even if there are more black men than in the past. Though not captured in this data, the recent appointments at Standard Bank take the group to another level. It appointed Simphiwe (Sim) Tshabalala as the designate CEO of SA operations, while Kennedy Bungane was made deputy chief executive of corporate and investment banking.

Hawes says skills development is also one of the areas where the financial sector generally falls short.

“It’s really quite difficult for them to spend enough on skills to get maximum points, if they’re a huge organisation. If your payroll is R400m, for example, then you have to spend about R12m on skills over and above the skills levy, and it’s difficult for them to achieve that level of expenditure because training, generally, isn’t that expensive,” he says.

Overall, however, the considerable progress made in the past year will remain a mitigating factor against shifting the goalposts just yet.

Source: Financial Mail – Top Empowerment Companies 2008 – Rob Rose