Black economic empowerment in South Africa: Is transformation of the management structures of enterprises as essential as it should be?

Black Economic Empowerment (BEE) was launched as an integrated policy initiative to empower black people and redistribute wealth across the spectrum of South Africa’s population. The Broad Based Black Economic Empowerment Act 53 of 2003, as amended in 2013, was enacted to correct the imbalances of apartheid and promote transformation of the economy. The Codes of Good Practice adopted in terms of the Act were promulgated to provide a standard by which the BEE rating of enterprises can be calculated. BEE ratings are important to enterprises since enterprises use them to attract and retain clients: the higher an enterprise’s BEE r ating, the more it is likely to benefit financially. It is for this reason that it is in most enterprises’ interests to have a good BEE rating. The BEE rating of an enterprise is calculated by using the rules and formulae in the Codes of Good Practice. However, despite the objectives of the Act, enterprises are able to obtain good BEE ratings even where a low percentage of black people form part of their management structures. It is important to determine how this is possible. This article exposes shortcomings in the existing BEE legal framework that make it possible for enterprises to obtain good BEE ratings under such circumstances.

who are excluded from the scope of the EEA. 9 The B-BBEEA, as amended, governs black economic empowerment (BEE). BEE was initiated to rectify the inequalities caused by apartheid and to enhance the economic participation of black people. 10 The beneficiaries of the B-BBEEA are black people. "Black people" is a generic term that refers to: "Africans, Coloureds, Indians and Chinese -(a) who are citizens of the Republic of South Africa by birth or descent; or (b) who became citizens of the Republic of South Africa by naturalisation (i) before 27 April 1994; or (ii) on or after 27 April 1994 and who have been entitled to acquire citizenship by n naturalisation prior to that date". 11 The B-BBEEA was enacted, inter alia, to "achieve a substantial change in the racial composition of ownership and management structures and in the skilled occupations of existing and new enterprises" 12 and to "promote economic transformation in order to enable meaningful participation of black people in the economy". 13 The Codes of Good Practice promulgated in terms of the B-BBEEA provide the rules and formulae that enterprises have to use to determine their BEE ratings.
The purpose of this article is to determine what shortcomings in the legal framework make it possible for some enterprises to obtain good BEE ratings despite the low percentage of black people in their management structures. Accordingly, the article examines the manner in which BEE ratings are determined, the ratings of enterprises, the extent of representation of the racial groups in management positions within enterprises, and the provisions in the B-BBEEA and Codes of Good Practice (B-BBEE Codes) enacted in terms of it. This will be followed by a discussion of fronting practices and provisions in the B-BBEEA that are designed to prevent them. The article concludes by presenting the author's views on shortcomings in the legal framework that enable enterprises to obtain good BEE ratings in the circumstances mentioned above. every participant in the South African economy in one way or another. 14 BEE is important to enterprises not only in obtaining but retaining business. 15 It is vital for an enterprise to have a good BEE rating, since some customers choose service providers based on their BEE rating. 16 The level of the BEE rating can thus provide competitive advantage when entities are competing for the same business. 17 This is particularly so when it comes to tenders for government work, where it is imperative for an enterprise to have a good BEE rating. 18 In terms of the Codes of Good Practice, organs of state, public entities 19 and all measured entities which undertake any business activities with public entities and organs of state are required to be BEEcompliant. 20 An entity is also required to be BEE-compliant where such an entity undertakes a business activity with any other entity that is required to comply with the Codes of Good Practice and who seeks to be  Even in circumstances where private enterprises do not enter into transactions with organs of state or public entities or with other entities that are required to comply with the Codes of Good Practice, there is pressure towards compliance, "given the supply chain effect of supplier compliance in order to secure business". 22 Such circumstances arise where private companies seek to obtain business from other private companies that require their service providers to be BEE-compliant. This is similarly the case in various transactions with financial institutions that are reluctant to lend funds or provide business to non-compliant enterprises. 23 The objective which is most relevant to this discussion is found in section 2(b) of the B-BBEEA. It states that one of the objectives of the B-BBEEA is "to achieve a substantial change in the racial composition of ownership and management structures of enterprises". In view of this, it is essential to determine how some enterprises are able to obtain good BEE ratings even when they have not changed the racial composition of their management structures. The B-BBEE Codes refer to enterprises that use the Codes to calculate their BEE status as "measured entities". 24 The rules and formulae contained in the B-BBEE Codes prescribe the methodology to be followed in determining the BEE rating of enterprises.
The B-BBEE Codes contain five elements. Code series 100 and 600 are the Codes governing the ownership element; 25 Code series 200 and 602 govern the management control element; 26 Code series 300 and 603 govern the skills development element; 27 Code series 400 and 604 govern the enterprise and supplier development element; 28 and Code series 500 and 605 govern the socio-economic development element. 29 The table below sets out the manner in which the BEE rating of a measured entity is determined. The table above present eight contribution levels and their respective recognition levels. 30 The measured entity receives points based on its overall performance, 31 which will determine its corresponding BEE recognition level and contribution level. 32 An entity that scores less than 40 points is deemed to be non-compliant.
Measured entities are divided into four categories: an exempted micro-enterprise (EME); 33 a start-up enterprise; 34 a qualifying small enterprise (QSE); 35 and a large enterprise (LE). 36 Enterprises are able to obtain good BEE ratings despite the low percentage of black people who form part of the racial composition of their management structures. The achievement of these good BEE ratings is evident from the BEE certificates of enterprises that are displayed online and from the reports compiled by the B-BBEE Commission 37 on national trends in broad-based black economic empowerment. The table below combines the overall contribution levels of LEs, QSEs and EMEs as reflected in the B-BBEE Commission's report. The figures reflected in the table above indicate that a higher percentage of enterprises have BEE ratings from level 1 to level 5 than at levels 6-8 . As a result of the BEE ratings being in this range (level 1 to level 5) as opposed to the lower range (level 6 to non-compliant), this shows that enterprises have good BEE ratings. The representation of black people in management structures is outlined below in Tables 3  and 4.

THE EXTENT OF REPRESENTATION OF RACIAL GROUPS IN MANAGEMENT POSITIONS
Management is defined as "a set of activities (including planning, decision-making, organising, leading and controlling) directed at an organisation's resources (human, financial, physical and information) with the aim of achieving organisational goals in an effective and efficient manner". 39 Black people face hurdles in the workplace that impede their growth by making it difficult for them to enter the management structures of the enterprises that employ them. 40 Tables 3 and 4 show that change in the racial composition of the management structures of enterprises has occurred, but at a slow pace. The tables confirm that there has been a decline in white people occupying positions at the levels of both top management (with the exception of 2011 and 2015) and senior management (with the exception of 2015). In addition, it shows that the percentage of African people at both the levels of top management and senior management has increased (with the exception of 2011 and 2015 in top management and 2015 and 2016 in respect of senior management); however, they remain under-represented. 44 The figures reflected in the tables confirm that there is a low percentage of black people who form part of the management structures of enterprises.
The B-BBEEA and B-BBEE Codes were enacted, inter alia, to transform the managerial structures of enterprises and to assist black people in gaining employment at management level. 45 It is important to determine how it is possible for enterprises to obtain good BEE ratings in circumstances where there is a low percentage of black people who form part of their management structures when the B-BBEEA was enacted with the objective of ensuring transformation in South Africa. The BEE rating of an enterprise is measured by making use of the rules and formulas contained in the B-BBEE Codes. 46 The B-BBEE Codes contain scorecards which are discussed below.

BEE SCORECARDS AND THE PRIORITY ELEMENTS
The B-BBEE Codes contain two scorecards: the Generic scorecard and the Qualifying Small Enterprise (QSE) scorecard. The score obtained by a measured entity is determined by making use of either the Generic or the QSE scorecards. A start-up enterprises is regarded as an EME, unless such an enterprise is tendering 'for a contract that is in excess of the threshold for EMEs in which case the corresponding scorecard will apply'. 47 'An EME is deemed to have a BEE status of level four contributor having a recognition level of 100%', 48 however in circumstances where an EME is 51% black owned, such an EME qualifies for elevation to a BEE recognition level of 125%. 49 Despite the aforementioned, where an EME is 100% black owned, such an enterprise qualifies for elevation to a BEE level one contributor with a BEE recognition level of 135%. 50 Despite the aforementioned an EME is allowed to be measured by making use of the QSE scorecard. 51 A QSE is required to comply with all the elements. 52 A QSE which is at least 51% black owned 'qualifies for elevation to a level two contributor having a 44 See Horwitz & Jain (2011) at 304. 45 In terms of the B-BBEE Codes, an enterprise is able to obtain points in respect of management control. Points for management control serve as an incentive to employers to place black people in management positions. 46    Similar to the Generic scorecard, the QSE scorecard allocates the highest points to ownership, enterprise and supplier development, and skills development. Again, the fact that the highest points have been allocated to these elements is an incentive to enterprises to which the QSE scorecard applies to comply more with them. However, in both scorecards the points allocated to the management control element should have been higher than those allocated to skills development and enterprise and supplier development. One would assume that the high points allocated to the ownership element in both the Generic and QSE scorecards would have had some effect on the transformation of management structures, but, as acknowledged by the BEE Commission when commenting on the fact that LEs scored the lowest in the management control element, "notwithstanding high ownership percentages, shareholders appear to have limited influence in driving transformation at management levels". 57 The fact that high points have been allocated to skills development, as well as to enterprise and supplier development, in comparison to management control, is a shortcoming in the legal framework that makes it possible for enterprises to obtain good BEE ratings despite the low percentage of black people in their management structures.
There are three priority elements: ownership, skills development and enterprise and supplier development. A LE should comply with all the priority elements 58 while a QSE 'is required to comply with ownership as a compulsory element and either skills development or enterprise and supplier development with the exclusion of black owned QSEs'. 59 The fact that management control does not form part of one of the priority elements is one of the shortcomings of the legal framework that make it possible for enterprises to obtain a good BEE rating, despite the low percentage of black people who form part of their management structures.
One of the possible reasons that the legislature allocated less points to management control and did not make management control a priority element could be related to the Broad-Based Black Economic Empowerment Commission's 60 decision to adopt the maximalist 61 as opposed to the minimalist approach to BEE. 62 If the minimalist approach were adopted, the management control element would have been prioritised. While adopting the maximalist approach at the time BEE was initiated was the appropriate decision -given that the maximalist approach aims to close the gap between the rich and the poor -with nearly two decades having passed since BEE's initiation and noting the limited extent to which black people are represented in management structures, continuing on this basis may make it difficult to achieve the objective contained in section 2(b) of the B-BBEEA.
Opportunity hoarding is also relevant in determining the reason why enterprises choose to obtain a good BEE rating by complying with elements other than management control. Opportunity hoarding is discussed below.

OPPORTUNITY HOARDING
Research has shown that the advancement of black professional employees is hindered by a phenomenon known as opportunity hoarding. 63  enterprise is unable to comply fully with the priority elements, such an enterprise would be forced to obtain points by complying with management control and socioeconomic development. The enterprise then would be more likely to choose to comply more with socio-economic development, rather than management control, to ensure that positions are preserved for persons from their own racial group. The involvement in opportunity hoarding practices may thus discourage enterprises from obtaining a good BEE rating by complying fully with management control.
Opportunity hoarding is possible because white dominant enterprises are able to obtain good BEE ratings by means other than advancing black employees, such as by means of complying more with the elements of enterprise and supplier development and socio-economic development. Good BEE ratings are also obtained by enterprises in circumstances where fronting practices are committed by such enterprises. These practices are discussed below.

FRONTING PRACTICES
The commission of fronting practices affects the BEE rating of an enterprise. Fronting practices are defined by the B-BBEA as "a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of the B-BBEEA or the implementation of any of the provisions of the B-BBEEA". 65 Section 1 of the B-BBEEA contains a number of practices that fall within the scope of fronting practices. 66 In circumstances where fronting practices are committed, enterprises deliberately contravene the provisions in the B-BBEEA by misrepresenting facts about the extent of their compliance. 67 In essence, fronting is seen as "tokenism for the superficial inclusion of historically disadvantaged individuals with no actual transfer of wealth or control". 68 What this implies is that the provisions in the B-BBEEA and the B-BBEE Codes are manipulated to such an extent that it amounts to fraud. 69 The objective of an enterprise committing a fronting practice is to prove that the enterprise is BEE-compliant when this is not the case, or to prove that an enterprise has a BEE recognition level higher than what that enterprise is entitled to. The wording used by the legislature in the definition of fronting comprises the three most commonly known forms of fronting, namely, window-dressing, benefit diversion, and the use of opportunistic intermediaries. 70 65 Section 1 B-BBEEA. 66 Section 1 B-BBEEA. 67 Sibanda A "Weighing the cost of BEE fronting on best practices of corporate governance in South Africa"  71 In this judgment, the Supreme Court of Appeal held that the arrangement between Vossloh and Swifambo constituted a fronting practice for a number of reasons. The first is that Vossloh was not BEEcompliant, while Swifambo had a BEE rating of level four. 72 Swifambo was thus merely a "token participant" who received funds in exchange for Vossloh's use of Swifambo's BEE rating. Secondly, Swifambo was a front for Vossloh, because in the bid in question Vossloh was described as the subcontractor; however, all the services that were rendered under the PRASA contract were rendered by Vossloh, while Swifambo played a minimal role. 73 Finally, Swifambo's personnel played no role when it came to PRASA and there was no skills transfer, while Vossloh had complete control over the contract concluded between PRASA and Swifambo. 74 An example of a fronting practice in the form of window-dressing is found in Peel and others v Hamon J&C Engineering (Pty) Ltd and Others 75 . Here, Hamon & Cie (International SA) sold its shares in Hamon SA (Pty) Ltd to two black women. This was done for the purpose of improving the BEE rating of Hamon SA (Pty) Ltd. 76 In terms of the agreement for the sale of shares concluded between the parties, 13% of the shares were sold to each woman; however, the two black women shareholders did not participate in any of the company's decision-making processes. 77 These cases illustrate that fronting practices have the effect of showing that an enterprise is BEE-compliant when this is not in fact the case. Additionally, while improving the BEE rating of an enterprise, such a change in the BEE rating does not necessarily arise as a result of black people being placed in management positions. Enterprises' involvement in fronting practices can result in enterprises obtaining good BEE ratings even in circumstances where there is a low percentage of black people who form part of the management structures of these enterprises. Procurement officers, verification agencies and other corporate decision-makers are encouraged to report any fronting behaviour to the Department of Trade and Industry. 78  commission of fronting practices. As mentioned, the B-BBEEA establishes a Broad-Based Black Economic Empowerment Commission (the Commission) 79 which has jurisdiction throughout South Africa. 80 The functions of the Commission are, inter alia: "to oversee, supervise and promote adherence with this Act in the interest of the public"; 81 "to receive complaints relating to broad-based black economic empowerment in accordance with the provisions of this Act"; 82 "to investigate, either on its own initiative or in response to complaints received, any matter concerning broad-based black economic empowerment"; 83 [and] "to receive and analyse such reports as may be prescribed concerning broad-based black economic empowerment compliance from organs of state, public entities and private sector enterprises". 84 While these functions provided to the Commission are valuable in ensuring compliance with the B-BBEEA, they are not useful in all circumstances. One of the functions of the Commission is to oversee and supervise adherence with the B-BBEEA, but compliance with the B-BBEEA is voluntary when it comes to private enterprises that do not undertake business activities with organs of state or public entities or any other measured entity that is required to comply with the Codes of Good Practice. As such, there is no obligation on such private enterprises to comply with the provisions of the B-BBEEA and thus no reason for the Commission to exercise any supervisory functions in respect of the aforementioned enterprises who do not comply.
The Commission is also tasked with the function of analysing reports received from organs of state and public and private enterprises as far as BEE compliance is concerned; however, the B-BBEEA requires only public entities, spheres of government, organs of state, 85 public companies listed on the JSE, 86 and Sectoral Education and Training Authorities 87 to report on compliance. Given that private enterprises are not required to submit such reports, the Commission would not be able to exercise this function over those of them that choose not to submit a report. However, where private enterprises comply with the B-BBEEA and submit their reports, the Commission is able to exercise the aforementioned functions in respect of such entities.
In circumstances where the provisions contained in the B-BBEEA are contravened, or in the event of there being any complaints regarding BEE, the B-BBEEA has included provisions relating to the relief that may be obtained by aggrieved parties and the procedure to be followed to obtain it. The Commission has the power to investigate any matter that relates to the application of the B-BBEEA 88 and is empowered to make a finding as to whether an initiative amounts to a fronting practice. 89 The Commission may also institute legal proceedings in a court to restrain any breach of the B-BBEEA, "including any fronting practice, or to obtain appropriate remedial relief". 90 In addition, the B-BBEEA allows the Commission to publish any finding or recommendation it made as far as the outcome of an investigation is concerned. 91 In the event of the B-BBEE Commission being of the opinion that the investigated matter involves the commission of a criminal offence, the Commission is required to refer the matter to an appropriate division of the South African Police Service, or the National Prosecuting Authority. 92 One of the most important features of the B-BBEEA is its criminalisation of fronting in terms of section 13(0)(1). A person commits an offence if that person knowingly: "misrepresents or attempts to misrepresent the broad-based black economic empowerment status of an enterprise; provides false information or misrepresents information to a B-BBEE verification professional in order to secure a particular broad-based black economic empowerment status or any benefit associated with the compliance of this Act; provides false information or misrepresents information relevant to assessing the broad-based black economic empowerment status of an enterprise to any organ of state or public entity; or engages in a fronting practice." 93 The number of offences that have been created by the B-BBEEA is a step in the right direction in the legislature's effort to combat fronting. The B-BBEEA's provision for the criminal liability of additional parties where they fail to report to the appropriate law enforcement agency in the event of their knowledge of the commission or 88 Section 13(J)(1) B-BBEEA. 89 Section 13(J)(3) B-BBEEA. 90 Section 13(J)(4) B-BBEEA. 91 Section 13(J)(7)A B-BBEEA. 92 Section 13(J)(5) B-BBEEA. 93 Section 13(O)(1)(a)-(d) B-BBEEA. attempted commission of an offence 94 has been described as an effective deterrent. 95 This is because these parties 96 are positioned to detect contraventions of the B-BBEEA. 97 However, this may not be an effective deterrent in all circumstances. Fronting has become so sophisticated that some black people are unaware they are being used for fronting. 98 The additional parties to whom criminal liability has been extended will also seldomly be aware of the extent of the fronting that takes place.
As far as sanctions are concerned, a person who knowingly commits a fronting practice will be liable to pay a fine and/or be imprisoned for a period not exceeding ten years or both a fine and imprisonment and companies can face an administrative penalty of up to 10% of their annual turnover. 99 The B-BBEEA also prohibits any individual who has been found guilty of an offence from doing business with public entities or organs of state for up to ten years. 100 The B-BBEEA provides a number of punitive measures against enterprises and other parties who choose to circumvent its objectives; however, these measures are not always effective. Despite the fact that a legislative framework has been provided to combat fronting, fronting practices are still being committed. 101 The fact that enterprises commit fronting practices while the aforementioned measures are in place shows that these measures are not as effective as they should be, and it further illustrates that as far as some enterprises are concerned, the main objective is to obtain or improve their BEE rating, no matter how they go about doing it. This shows that for some enterprises, obtaining a good BEE rating is merely a "tick-box" exercise. The fact that the punitive measures are not always effective is thus an additional shortcoming of the legal framework that allows enterprises to obtain good BEE ratings despite the low percentage of black people in their management structures.

CONCLUSION
In order to dismantle apartheid, legislation was enacted to promote transformation, with the B-BBEEA being one such statute and its aim being to facilitate BEE. The objective of BEE is to redress the inequalities caused by apartheid by providing black people with economic benefits which previously were not available to them. Only a low percentage of black people form part of the management structures of enterprises, since shortcomings in the legal framework make it possible for enterprises to obtain good BEE ratings without having transformed their management structures.
The first shortcoming of the legal framework is that in terms of the B-BBEEA Codes there are three priority elements. A LE is required to comply with all three priority elements, while a QSE is required to comply with ownership as a compulsory element and either skills development or enterprise and supplier development. Management control is not a compulsory element in respect of either a LE or a QSE. Management control also does not form part of either one of the two priority elements with which a QSE is required to comply. This would enable a LE and QSE to obtain more points in respect of the priority elements without having much regard for management control.
The second shortcoming is that the points weighting allocated to ownership, skills development and enterprise and supplier development, is higher than what has been allocated to management control. Enterprises will thus be encouraged to comply more with the priority elements and may even obtain points under the socio-economic development element with less consideration for the management control element.
A third shortcoming contributing to the slow pace of transformation within the management structures of enterprises relates to opportunity hoarding, where dominant positions are reserved for persons of a particular racial group. In circumstances where white people in dominant positions reserve these positions for persons of their own racial group and enterprises are unable to comply fully with the priority elements, such an enterprise may choose to comply more with the socio-economic development element than with management control to assist in preserving dominant positions for persons from their own racial group. One of the reasons that opportunity hoarding is possible is due to the fact that enterprises can obtain good BEE ratings by complying more with the priority elements and with socio-economic development than with management control.
A fourth shortcoming of the legal framework that makes it possible for enterprises to obtain good BEE ratings despite the low percentage of black people in management is due to enterprises' involvement in fronting practices. The legislature has included a number of sanctions in the event of fronting practices being committed; however, research shows that these practices continue despite the sanctions.
The shortcomings of the legal framework identified above show that it is possible for enterprises to obtain good BEE ratings despite the low percentage of black people who form part of their management structures. This may change in the event of higher points being awarded for compliance with the management control element, or in the event of management control becoming one of the priority elements for a LE and a QSE. It is essential that the aforementioned changes be made urgently, given the likely impacts on the efforts aimed at eliminating inequalities in South Africa.