Address to the Transformation Indaba 2012 by Peter Leon Head of Africa Mining & Energy Projects, Webber Wentzel The Innovation Hub, Pretoria 14 November 2012

THE IMPACT OF REGULATORY CHANGE ON TRANSFORMATION

Introduction

In a world in perpetual flux, there is no doubt that the only constant is change. As Robert Kennedy said, "[p]rogress is a nice word. But change is its motivator and change has its enemies."[1] 2012 has certainly been a tumultuous year. For many, particularly those in the South African mining industry, it has been characterised by the Marikana tragedy, related wildcat strikes, and the knock-on effect on other areas of the South Africa economy.

The unrest in the mining industry has been identified as the cause, either wholly or in part, of South Africa's credit ratings downgrades;[2] our slowing economic growth rate (now at just 2.5 per cent, compared to other developing countries which are expected to grow between 5 and 6 per cent);[3] and of an estimated loss of approximately R10.1 billion in the platinum- and gold-mining sectors alone.[4] 

The inescapable conclusion is that these events are a symptom of a more pervasive and rooted problem - South Africa's deeply inegalitarian society, which is in desperate need of change. To paraphrase Albert Einstein, we cannot change the world without changing our thinking. But the question is - where do we begin?

Today I would like to focus on one aspect of regulatory change which, in my view, has the potential to lead to significant social and economic transformation, and is in line with the overall theme of this conference: the remodelling of South Africa current (purportedly) broad-based black economic empowerment ("BEE") and mineral regulatory model to promote real and meaningful broad-based economic empowerment for historically disadvantaged South Africans ("HDSA").

As South Africa transitioned into the democratic era, BEE was identified as one of the key drivers to, inter alia, promote economic transformation; achieve a substantial change in the racial composition of ownership and management structures of existing and new enterprises; increase the extent to which communities and workers own and manage existing and new enterprises; and empower rural and local communities.[5]

Although much has been done in this area, the unrest in the mining industry over low wages and deplorable living conditions has highlighted the long path ahead to meeting the aims behind South Africa's BEE policies. This has been recognised, too, by key role-players in the African National Congress ("ANC"). For instance, the Minister of Mineral Resources ("the Minister"), Susan Shabangu, has commented that "[t]ransformation is not moving at the speed it should move",[6] and ANC Treasurer General Mathews Phosa has said:[7]

Marikana taught us that ... our [BEE] model is dysfunctional ... If the miners at Marikana, and elsewhere, [have] a meaningful stake in the assets that they create, my view is that we would have had different and more positive outcomes.

With this in mind, I now turn to look at the shortcomings of BEE and other empowerment measures in their current form. Following from this, I will talk about three mechanisms which I (globally) consider to be better suited to the promotion of a truly broad-based empowerment that South Africa so direly needs: first, the promotion of employee share ownerships schemes and community trusts; second, the introduction of community development agreements ("CDA") in place of wholly inadequate Social and Labour Plans ("SLP") provided for under the Mineral and Petroleum Resources Development Act, 2002 ("MPRDA"); and, lastly, the introduction of an amended system of corporate governance in line with a model used in Germany.

Whilst my emphasis today will be on miners and mine communities, I believe that a careful examination of the lessons learnt in this sector can yield important insight which is applicable to all sectors of industry.

Shortcomings of BEE in the mining industry

BEE in the mining industry is championed primarily through the Broad Based Socio-Economic Empowerment Charter for the Mining Industry ("original Mining Charter") promulgated under section 100 of the MPRDA, and its subsequent revision in 2010 ("revised Mining Charter").[8] BEE is promoted through the elements of ownership; procurement and enterprise development; beneficiation; employment equity; human resource development; mining community development; housing and living conditions; sustainable development and growth; and reporting (monitoring and evaluation).

A major problem with the application of BEE measures in the mining industry is an over-emphasis on the elements of ownership, despite the importance of the other elements.[9] The ownership target provided for in the original Mining Charter, and retained in the revised Mining Charter, required stakeholders to achieve 15 per cent ownership by HDSAs by 2009, and 26 per cent HDSA ownership by 2014.

This has led to the continued promotion of 'narrow' BEE, a form of crony capitalism that has enriched a well-connected few,[10] rather than empowering workers and marginalised mine communities who should have been the principal beneficiaries of BEE. In 2009, the Department of Mineral Resources ("DMR") commented that "[r]egrettably, the reported level of BEE ownership is concentrated in the hands of anchor partners and [special purpose vehicles], representing a handful of black beneficiaries, contrary to the spirit and aspiration of both the Freedom Charter and the Mining Charter."[11]

Another major concern with the BEE policies has been the lack of certainty that arises from the MPRDA, the original Mining Charter and the revised Mining Charter. As mentioned above, the original Mining Charter and the revised Mining Charter put in place targets for HDSA ownership to be achieved by mining companies within specified time periods.

However, because the DMR and the Chamber of Mines have thus far been unable to agree on what meets the requirement of HDSA ownership, mining companies do not know whether or not they have complied with the HDSA target. This is evinced in the disparity between the figures presented. Last year, the Chamber of Mines painted a glowing picture in Parliament, recording that all of its members achieved at least 15 per cent HDSA ownership levels, with some as high as 50 per cent.[12] 

However, the DMR disputed these figures, stating that only 9 per cent HDSA ownership had been achieved by 2009.[13] One reason for the discrepancy appears to relate to whether encumbered shares are to be counted when measuring HDSA ownership levels. Although Minister Susan Shabangu has recognised the urgent need to reach "a common understanding" on this issue,[14] it does not appear that any steps have been taken in this regard as yet.

Further uncertainty arises from the 'back-door discretion' afforded to the Minister. For instance, the MPRDA provides that a mining right must be granted if the granting of the right will further the objects in section 2(d) and (f) of the MPRDA, which are to substantially and meaningfully expand the opportunities of HDSAs in the mining industry, and promote employment and advance the social and economic welfare of all South Africans in accordance with the revised Mining Charter and the prescribed SLP.[15] This wide discretion afforded to the Minister makes it difficult for a mining company to know in advance whether or not it has complied with these requirements.

Social and labour plans

In the pursuit of socio-economic transformation, the MPRDA provides that a mining right may only be issued if the applicant submits a compliant SLP to the DMR and continuously complies with its requirements.[16] SLPs aim to give effect to sections 2(f) and (i) of the MPRDA: to promote employment and advance the social and economic welfare of all South Africans; as well as ensure that holders of mining rights contribute towards the socio-economic development of the areas in which they are operating.

The required content and form of such a plan[17] are, however, unworkably vague. In 2006, the DMR published a guideline on SLPs, but a 2009 study by the University of Stellenbosch's Unit for Corporate Governance in Africa found that that key parts of this guideline were "frustratingly vague",[18] provided "no guidance whatsoever on desired courses of progression or desired outcomes for development", and - most concerning of all - that the SLP process itself was formulaic and formalistic, being "treated as a paper exercise to get approval for the mining licence".[19] A report on Africa's mineral regimes, conducted under the joint auspices of the African Union Commission and the United Nations Economic Commission for Africa, reiterated this conclusion.[20]

The blame for the widespread failure of the current empowerment policies cannot be singularly attributed to any party. Rather, it is apparent that it has arisen from a confluence of factors, emanating in varying degrees from the mining companies, government, and the failure of the mine community leaders to properly implement the measures that have been put in place.[21] However, while it is important to clarify the problems, this should be done with a view to solving them. Thus, I now turn to consider ways in which I believe BEE policies can be implemented to achieve real and meaningful economic transformation. If properly implemented, empowerment and transformation policies should be seen by businesses as both a social imperative and a competitive advantage.

Employee share ownership schemes and community trusts

A potential solution to the present unsatisfactory state of affairs, and a possible means of achieving real broad-based empowerment, might be to make the creation of employee share ownership plans[22] and community trusts (collectively referred to as "share ownership schemes") mandatory for large South African companies, especially in the mining sector under the Mining Charter.

These share ownership schemes are generally implemented by creating a trust which holds shares of a company for the benefit of a company's workforce or a mining community.[23] Share ownership schemes allow employees and mine communities to enjoy the benefits of capital appreciation and dividend distribution associated with normal share ownership. While the precise benefit enjoyed by employees and communities is wholly dependent on the structuring of the scheme, the shares are usually kept in trust until its maturation. Beneficiaries typically benefit from some form of regular dividend payments before the scheme matures and, on maturity, may either elect to receive a pay-out of the value of the shares or hold onto the shares themselves.[24]

The potential benefits of share ownership schemes - for employer, employee and for mine communities - are manifest. Importantly, all qualifying persons are equal beneficiaries, and the trust collectively exercises the voting rights attaching to the shares on their behalf.[25] By giving employees and communities a stake in companies, share ownership schemes make it increasingly likely that companies will have a more committed and productive workforce, in addition to the company meeting BEE percentage-ownership requisites.

The potential benefit to employees and communities is also self-evident, providing the rewards of capital ownership to people who usually have no means of making the necessary acquisition. To my mind, this fosters precisely the objectives that BEE should: empowering workers and communities and decentralising ownership in the economy, rather than merely increasing the stake of a few well-connected black businessmen.

Share ownership schemes have already been implemented by some mining companies in South Africa, and have enjoyed a measure of success. One iconic, fairy tale-like success story is Kumba Iron Ore's ("Kumba's") Envision project. Initiated in 2006, the Envision Trust held a 3 per cent stake in Sishen Iron Ore Company for the benefit of 6 209 of its permanent employees, all of whom were below managerial level. Riding on the back of a global iron ore boom, the employees received up to R55 000 worth of dividends over the first five years, and a payment of R2 665 billion last year at the conclusion of the schemes first five-year maturation period. This amounted to a staggering payment of R576 045 per employee.[26] This was, by some measure, the largest collective social dividend ever paid out by any company to HDSAs.[27]

While share ownership schemes need to be carefully managed, implemented and structured to ensure that their beneficiaries benefit meaningfully from their creation,[28] they nevertheless offer a workable model for ensuring that workers and communities participate in and enjoy the benefits that accrue from mining. By investing employees and communities in the performance of mining companies, the development and further implementation of the model can potentially provide the sector with some much needed stability, and might decrease the likelihood of further debilitating strikes which have ravaged the industry this year.

Community Development Agreements

In place of failing SLPs under the MPRDA, I would like to propose a model which has been used, with some success, in West Africa. Under the Nigerian Minerals and Mining Act, 2007, an applicant for a mining right is required to conclude a community development agreement ("CDA") "that will ensure the transfer of social and economic benefits to the community".[29] 

Such an agreement must address any matters relevant to the community and must provide for community participation in the planning, implementation, management and monitoring of activities carried out under that agreement. Each agreement is reviewed every five years, which allows parties to address emerging challenges, while providing reasonable stability.[30] Sierra Leone has enacted a similar requirement in its Mines and Minerals Act, 2009. CDAs are also required under Papua New Guinea's Mining Act, 1992, and, more recently, under the Mongolian Minerals Law, 2006.[31]

By giving a voice to the community concerned, CDAs succeed where SLPs have fallen short. Communities become better acquainted with the financial and other constraints on the company, and this can foster a mutual understanding of expectations. Further, by defining mutual obligations, CDAs can help to build a "sense of shared responsibility".[32]

For me, this system is far more preferable than SLPs currently provided for under the MPRDA. CDAs include, rather than exclude, communities from regulatory decisions which affect their future. The model also crucially has the potential to enable and empower South African mine communities in a way consonant with broader transformative objectives of BEE and the mineral regulatory regime.

The German two-tier system of corporate governance

The German two-tier corporate governance system might also be a useful way to help develop a broader, more socially and politically cohesive approach to running businesses. Under the system, public companies have two boards - a management and a supervisory board. The management board, which is constituted by executive board members, is responsible for decisions relating to the day to day operations of the company,[33] while the supervisory board, which is non-executive in nature, exercises oversight over the management board.[34] The supervisory board's prior consent is required on certain matters deemed by the company's articles of incorporation to be of fundamental importance before the management board proceeds. [35] To pass a decision in the absence of the supervisory board's assent, a three quarter majority of shareholder votes is required.[36]

Crucially, and in contrast to the single-tier South African model, the supervisory boards of major German public companies are subject to the principle of employee codetermination.[37] This requires that, in addition to the involvement of shareholders, the supervisory board must include employee representatives. While the number of employee representatives on the board is contingent on the size of the company's workforce and the type of company, at maximum, employee representation can constitute half of the membership on the supervisory board.[38]

In my view, this system has the potential to be well suited to the environment in which corporate South Africa finds itself. It could give employees an important voice in directing the operations of companies, and might help in attuning businesses to their broader social responsibilities.

Conclusion

The transformation of South Africa's economy, in which ownership and control is centralised in the hands of a wealthy few, is an immediate and demanding imperative. However, while it does necessitate urgent attention, it must nevertheless be acknowledged that meaningful transformation cannot take place overnight through the divesture of ownership to strategic empowerment partners.

Today I have dealt with three possible ways in which a more broad-based form of empowerment might be given effect - through the promotion and development of share ownership schemes; the use of CDAs; and through an amended system of corporate governance. But these measures alone will not suffice.

The South African government, business community and civil society need to continue to search for and develop new and innovative ways in which the benefits of South Africa's economic wealth might be more broadly and evenly shared, and the disadvantaged sectors of society uplifted. Not only is the promotion of equality one of the foundational imperatives of our supreme Constitution,[39] it is also, as Marikana has so poignantly reminded us, essential to the attainment of a peaceful, stable and flourishing South Africa.

Footnotes:

[1] R.F. Kennedy, In the pursuit of justice, 1964, at p 13.

[2] Business Day, Spread of mine labour revolt casts shadow on SA's ratings, 27 August 2012; Moody's Investor Services, Moody's downgrades South Africa's government bond rating to Baa1; outlook remains negative, 27 September 2012; Financial Mail, S Africa downgraded by S&P, 12 October 2012.

[3] Department of Finance, Medium term budget policy statement 2012, 25 October 2012, at pp 5, 9 and 10.

[4] Mining Weekly, Mine strikes cost SA R10 bn in lost production - Treasury, 25 October 2012.

[5] Section 2 of the Broad-based Black Economic Empowerment Act 53 of 2002 ("BBBEE Act"). Section 1 of the BBBEE Act stipulated that black people refer to Africans, Coloureds and Indians. Section 1 of the BBBEE Act further provides that the use of the term 'broad-based' BEE refers to the economic empowerment of all black people, including women, workers, youth, people with disabilities, and people living in rural areas, through diverse but integrated socio-economic strategies.

[6] Mineweb, SA to review mines over black participation pace, 4 September 2012.

[7] Engineering News, BEE not working - Phosa, 26 October 2012. According to Empowerdex, between 2004 and 2008, of all the BEE transactions conducted in the mining sector, only 7 per cent involved employee share schemes directly, and only 10 per cent involved community schemes. See Empowerdex, A summary of BEE transactions in the mining sector: 2004 - 2008, 27 October 2009, at para 6. This illustrates the dysfunction in the current BEE system to which Mathews Phosa refers.

[8] In view of the fact that the MPRDA does not provide for the amendment of the original Mining Charter, it is possible that the revised Mining Charter is ultra vires. However, the legality of the revised Mining Charter has, to date, not been challenged, and it is therefore binding on the mining industry.

[9] Empowerdex, Ownership cannot be the only aspect of transformation, 2011, at p 1.

[10] According to London-based business information provider, WealthInsight, the number of South African super-rich previously disadvantaged individuals had risen to 75 by the end of 2011. Five years ago, this figure was less than 40. This has been attributed mainly to BEE deals. See Business Day, Empowerment 'boosts number of super-rich', 21 August 2012.

[11] DMR, Mining Charter impact assessment report, October 2009, at p 17.

[12] Business Day, Mines seek definition of 'black ownership', 7 June 2012. This gave a weighted average of 28 per cent, well above the 26 per cent level required under the original Mining Charter and the revised Mining Charter to be achieved by 2014.

[13] Mines seek definition of 'black ownership', ibid.

[14] Mines seek definition of 'black ownership', ibid.

[15] Section 23(1)(h) of the MPRDA.

[16] Regulation 42 of the Mineral and Petroleum Resources Development Regulations, 2004, published in Government Gazette 26275, 23 April 2004 ("MPRD Regulations"); section 25 of the MPRDA.

[17] Regulation 46 of the MPRD Regulations.

[18] Corporate governance: Social and Labour Plans in the mining sector, Unit for Corporate Governance in Africa (University of Stellenbosch Business School), May 2009 at 4.

[19] Ibid. at 6. The study goes on to state that SLPs were "also seen as rigid, and not allowing for changing local circumstances over the lifetime of the mine ... [D]espite the presence of a fair amount of approved SLPs, no cases were recorded where the conditions of an SLP relating to retrenchments were invoked in the aftermath of the 2008 world financial crisis."

[20] Minerals and Africa's Development: The International Study Group Report on Africa's Mineral Regimes, November 2011, at 85.

[21] Legalbrief, Leaders failing their communities on BEE deals?, 31 July 2012.

[22] Employee share ownership plans ("ESOPs") were initially pioneered in the United States in the 1950's as a way to encourage capital expansion and economic equality. The first plan was invented by Louis Kelso in 1956, and ESOPs were subsequently promoted by Senator Russell Long, a Democrat from Louisiana, who helped develop a tax policy for ESOPs.

[23] Usually, the trust is loaned shares in the company, which loan is paid off by a portion of the dividends which accrue to the shares. In recent years, such schemes have also tended to include a number of "free shares" in the trust structure in order to guarantee that there will be some form of minimum pay-out to beneficiaries, regardless of the market performance of the shares. See Miningmx, More equal than others, 30 July 2012.

[24] More equal than others, ibid.

[25] It is perhaps for this reason that most mining companies opt to divest shares to a BEE company rather than a community trust or employee share ownership programme, which might have a more immediate socio-economic impact. In 2010, for example, Lonmin saw the entire empowerment stake (18 per cent) in its two South African subsidiaries transferred from the Lonplats Employee Masakhane Trust to Incwala Resources, of which just over half is owned by Cyril Ramaphosa's Shanduka Resources, and almost a quarter each is owned by the Industrial Development Corporation and Lonmin itself. According to Lonmin's 2011 annual report, however, the company plans to include broad based community and employee share schemes in its empowerment holdings in future.

[26] Anglo American, BEE success for Kumba's Envision Scheme with milestone cash return for employees (Press Release), 29 November 2011. Under the plan, "Sishen Iron Ore Company ("SIOC") non-managerial employees were allocated units that were notionally linked to SIOC shares through which they benefitted in the value created in SIOC by way of dividend and capital growth through the Envision scheme. Envision was structured to be a ten year scheme with two 5 year maturities, at which point SIOC shares held by Envision would be swapped for Kumba Iron Ore ("Kumba") shares. The Kumba shares would then be distributed to the employee beneficiaries of Envision."

[27] Mining Weekly, Black economic empowerment gets R16bn Kumba boost, 23 July 2012.

[28] It is crucial that employers financially educate their employees. Otherwise, pay-outs quickly get dissipated in disposable income. This point is accentuated by the use of Kumba's employees of their proceeds from the Envision scheme, much of which was spent on new cars and other consumer items. See Miningmx, Kathu feats in Kumba's Envision windfalls, 8 January 2012. In addition, care also needs to be taken when deciding how the schemes are to be managed. In some instances, decisions on the allocation of money cannot be settled because of "infighting, failure in leadership and the poor management" of schemes. See Legalbrief, Leaders failing their communities on BEE deals?, 31 July 2012.

[29] Ibid., quoting section 116(1) of the Nigerian Minerals and Mining Act, 2007.

[30] Ibid.

[31] Good practice note on community development agreements, EI Source Book, 2011, at 4.

[32] Ibid.

[33] Section 76 of German Stock Corporation Act, 1965.

[34] Section 84 of the German Stock Corporation Act.

[35] Sections 59, 88, 111(4), 202, 204 and 205 of the German Stock Corporation Act.

[36] Section 111(4) of the German Stock Corporation Act; R. Bohinc "One or two-tier corporate governance systems in some EU and non-EU countries" Megatrend Review(2011), at 57-58

[37] Section 96 of the German Stock Corporation Act.

[38] German Codetermination Act, 1976. In such a company, the chairman of the board is elected from the ranks of the shareholders, and the deputy chairman (or one of the two deputy chairmen) is elected by the employees.

[39] Sections 1(a) and 9(2) of the Constitution of the Republic of South Africa, 1996.

Issued by Webber Wentzel, November 14 2012

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