Is BEE a farce?

Is BEE really a farce, or is that just ego speaking?

Dr. Iqbal Surve (chairman and shareholder of Sekunjalo which in turn owns Independent Media) has been appearing before the Mpati Commission of Inquiry which is looking to the affairs of the Public Investment Corporation or PIC.

In his testimony before the Commission Dr. Surve is quoted as saying “BEE is a Farce” – this was the front-page headline of The Star, a paper in his stable of (not-so) independent publications.

He was also quoted as stating that BEE is fundamentally flawed and needs to be reviewed.  In support of this he cites well known examples of BEE companies that imploded after their share prices failed to perform: Nail, REAL, Thebe, Mvelaphanda and his own Sekunjalo.

Really?

As believers in free markets and the power of stock markets, we do not believe that a failed share price can ever be used to argue that BEE has failed.

If this were the case, we could point to Steinhoff to argue that “WMC” is no more or to the likes of Anglo, Barloworld, Edcon and other giants of the markets during apartheid to show that white economic disempowerment has been reached.  Really?  What is the link between any share price and the race of its shareholders?

BEE can be useful to blame but it alone has little bearing on any share price.  It may be relevant, indirectly, in helping a company land business or secure funding, but analysts valuing companies only care that the business or finance has been won.  Analysts don’t care how these are won, let alone whether it was because of BEE, especially if they are foreign analysts and don’t really care about or understand BEE.

Stock markets reward relative investment performance:

As with any stock market, South African markets punish the share prices of badly run companies and inflate those that are well run, irrespective of who owns their shares.  Badly run could be from fraud (Steinhoff), excessive risk (Aspen) or poor execution (Group 5).  No ordinary share has traded at a discount or a premium because of the race of its shareholders.  Besides being irrelevant, nobody knows the race of the shareholders at any point –in good liquid companies these are changing every minute of the trading day.

In simple terms share prices go down because shareholders “dump” them.  Sellers choose to sell for a number of reasons.   Some have nothing to do with the company e.g. the seller needs the money to pay off a personal loan or income tax.  Most are directly related to the company, where the seller believes that the share price will drop and wants to cash out while he still can.  When there are lots of sellers, it’s more likely that shareholders are selling because they think the company will be worth less in future than it is now. Why sell if you think it will go up?

We all want the same thing: a better ROI:

Black and white investors (including the foreigners who own ±70% of the JSE ) all look to make good investments.  On this, at least, all races are fully united.

If shareholders are united in their assessment of the company and have no immediate need to sell shares to raise cash for other reasons, then it’s a share price cannot drop – everyone is holding, and no trades happen so the price doesn’t move. This applies in every company, including BEE companies.

Therefore, every black-owned listed company (including those cited by Dr. Surve), that has seen its’ share price fall has done so because its black shareholders have decided to sell – en masse.  There may have been some white sellers too, but a BEE Company had to be mostly black sellers by definition. While there are myriad reasons for selling, almost all are because there is a better use (risk/return basis) for the money.  Such a decision is not a BEE-related decision.  When a shareholder wants to get out, he is voting with his money – in effect saying that he can deploy the capital better elsewhere than the companys’ management can.

Therefore, we question whether a company with a declining share price is a sign of BEE being a farce, or whether its future prospects and investment value are simply looking worse than before.

Perhaps the “good” doctor has underestimated not only the power of the markets to price correctly, but also the intelligence of the investors themselves.

What’s the role of the PIC in this?

One of the biggest investors on the JSE is the PIC, which although only Level 2 represents millions of black peoples’ savings and (where investment principals were followed, was often a seller of shares in BEE businesses too).

The PIC was formed by Parliament in 2004 and, at over R2 trillion in size, is one of the world’s largest fund managers (and definitely the biggest in Africa).  Given the size of the PIC it cannot simply concern itself with its members’ needs.  The PIC has a key role to play in not only South Africa’s capital markets but also in the development of the country as a whole…it has a major transformation role and as it states in its latest report:

The objective of transformation within PIC investee companies is to give effect to the country’s transformation agenda and the PIC’s transformation objectives are to, among others:

  • Promote and incubate the growth of broad-based empowerment;
  • Achieve wide-reaching social transformation;
  • Stimulate economic growth and transformation in South African investee companies; and
  • Integrate all the B-BBEE elements into business processes.

However, the PIC is a licenced financial service provider (like all fund managers, including Tusker) and like them it looks to give its clients a superior investment return.  Even its BEE transformation objectives are secondary to a client mandate, and if it buys or sells shares it is not (or should not be) because of BEE…

Where’s the real farce?

As reported in the Daily Maverick: “At the end of September 2018, after interest was added, Sekunjalo owed R1.35-billion to the PIC for Independent Media. The company has not been servicing its debt and, with a penalty interest fee added, Sekunjalo may owe as much as R1.5-billion, said commissioner Gill Marcus.”

Amongst other deals, the PIC has funded the doctor too, and he’s in front of the commission because it looks like the deal was far from correctly priced. Did he get the money because of real investment potential or because he was BEE or for some other reason?

Time will tell.