BEE Employee Share Schemes: Handle with care The use of employee share scheme as a tool of effecting BEE

ownership has been growing in recent months in most of the big BEE deals. This increased use is due to the sentiment expressed by companies of wanting to empower their employees rather than having someone they do not know into their business or use the same prominent dealmakers as BEE partners. There are merits and pitfalls to transformation when one uses these share schemes. It is understandable and laudable to want to empower the companies employees through ownership over and above their normal bonuses and promotions. In theory this helps to align the interest of the employees and other shareholders. This alignment occurs because the employees would be more productive and would want to see an increase in the value of the company from which they would gain as shareholders. Furthermore through the shareholding the employees could contribute to the decision-making processes of the company due to the influence they exercise in the company through their shareholding and representation to the board of directors. Overall the morale of employees should be high because of their ownership in the company. The common structure used to effect these schemes is a trust. The company sets up the trust and the management appoints the initial trustees, who usually represent management and the employees. In most cases the representation of management and employees is equal, with a few exceptional cases where the trustees representing the employees are in the majority. One of the trustees would then represent the trust on the companys board and most of the time it may be an existing board member, which means that there is no board reshuffle which can take time and resources. The beneficiaries of the trust would be the employees who meet certain qualification criteria such as number of years in the company, the race of the employees, etc. Usually shares are sold to the trust by the company with a corresponding loan to the trust and the trust would allocate the shares to the qualifying employees with a loan attached to it. In rare cases shares are given as a bonus for the employees which may result in more tax being paid by the employees. How would these schemes qualify in term of the draft codes of good practice on BEE? Looking at the voting rights, what are the unrestricted voting rights that are exercised by black people and black women in these structures? The employees cannot directly exercise any voting rights. It is the trustees who exercise those voting rights on their behalf. However trustees are usually appointed by management and where the employees have had a say in the trustees appointment, those trustees still would not have majority vote in the trust. The codes say that voting rights exercised by a natural person who is not black but acts in a fiduciary capacity or in a representative capacity in terms of a specific mandate, those votes would be considered to be as if they are exercised by the beneficiary. So can the votes of trustees who are appointed by management be considered to be from the beneficiaries, especially if the beneficiaries did not have a say in the appointment of those trustees?

When assessing the economic interest due to the employees, one has to apply the flowthrough principle to determine the economic benefit that accrues to black people as defined in the codes. The key is to look at the value that accrues to black people and not the number of black beneficiaries in the scheme. For example the scheme may have 80% of the employees being black people, and 20% of the economic benefits may accrue to them. Therefore the 20% of economic benefits accruing to black people will be the real test of economic interest. In order to maximize points on the scorecard there must be clear allocation of economic interest to black people and black women. If the determination of the beneficiaries or the economic interest accruing to black people and black women is fuzzy or left to the discretion of the trustees, then no points will accrue until the accrual of the actual economic interest to them. The biggest concern around these schemes is that they may be used to circumvent true transformation from taking place, especially when management has the sole power to appoint trustees and also determines which trustees get representation on the companys board. The effect of the employee scheme as an incentive for black employees may be limited because the broader the beneficiaries the lower the value that accrues to individual employees. Therefore black people would still leave the company if the actual economic benefit from the scheme is not meaningful and if the accrual period is too long before the economic interest can be realized. Some of the schemes have loans that would take more than 40 years to be paid off which means that by the time they are paid off the employee would be retired or not alive and the value may just be few thousand rands which makes the present value of those share insignificant.