The Brenthurst Initiative sets out to link empowerment and growth, in line with President Thabo Mbeki’s conviction that “economic growth, development and black economic empowerment are complementary and related processes”. It seeks to reward present owners with tax breaks, to make companies’ improved empowerment “scorecards” profitable.
But it remains the discredited deal-making mode of recent years. Worse, it can point to no case where empowerment of this kind generates growth. Seeking to build the confidence of white business and international capital, it remains too close to the current elite orthodoxy to be taken seriously.
South Africa has grown to dislike black economic empowerment as a cynical form of elite deal-making. A recent newspaper editorial declared: “The time for black economic empowerment icons is up … It’s time to spread the joy.”
Deal-making for the privileged few negates South Africa’s overriding objective — to create “social capital” for all, especially the poor. No wonder the trade unions fear that “efforts to empower black people by supporting black business can only prove self-defeating”.
The government hopes to find a broad-based empowerment formula that accelerates the deracialisation of the economy and brings marginal communities into the economic mainstream. Hence the “scorecard” approach, where companies can notch up points for different kinds of redress.
The approach is state-driven, yet the government’s macroeconomic growth, employment and redistribution strategy, enshrines a largely hands-off approach to the market.
The government is clearly nervous about this tension. This year’s empowerment policy statement voices justified concern that a “sellers” market could emerge, allowing capital and management skills an easy exit from firms and the country, and leaving companies with newly indebted owners who cannot cope.
Brenthurst lists employee share options as a part of its strategy. But inviting employees to buy shares has a poor record.
Many working South Africans cannot afford shares. Real take-home pay per workers’ dependants is still falling — like it has for 10 years or more — as the employed carry more unemployed and sick people.
Share option schemes remain under management control and “atomise” employees, who do not “vote” their shares together and cannot influence the company or assume ownership responsibilities.
The only sure way of linking empowerment to growth is through democratic employee ownership, which does away with deal-making, scorecard cheating, artificial procurement qualifications and inadequate policing.
The evidence from the United States and the United Kingdom is that democratic employee-owned firms, with all employees owning between 20% and 100%, outperform conventional firms by large margins. FTSE shares in employee-owned firms have grown upwards of 280% compared to the average over the past eight years.
Moreover, their shares that are still traded sell for large premiums. On average they grow capital, market share and employment by between 3% and 7% faster a year.
Because they pay dividends inside the “family” of the firm, their benefit plans are up to three times better — and little money goes abroad.
Employee-owned firms are 40% more stable. They now follow the Mondragon (Spanish) example by spinning off companies that pursue new uses of technology or new products and services, expanding employee ownership and progression toward entrepreneurship.
In democratic employee-owned firms, all employees vote their common ownership through an employee ownership trust. Benefit flows match each employee’s contribution, best measured by salary.
The model sets up a powerful participation forum and exposes employees to the information rights and practices of ownership.
It suits private firms, as the trust adds only one more owner, sparing them the need to go public. Public companies become increasingly self-owned, and beyond the reach of outside buyers whose takeover bids often threaten jobs.
By building employee ownership, and thus national ownership of the economy, the model would rescue South Africa from the scourge of reliance on foreign investors and the floods and droughts of global hot money.
The state’s role is to encourage current owners to use their capital to guarantee loans to employee trusts so that they can buy shares. The value of company equity in South Africa is about R2 200-billion. That “sleeping” ownership can be mobilised to cover loans of, say, R50-billion a year — about R60 000 per family per year.
This starts as a liability in the trust until the loans are unwound, mostly by dividend payments and private contributions. After 30 years, most employees should own equity of R400 000 or more, driven by improved company performance.
This would require current owners to put at risk just 2,2% of their equity annually, until trusts can finance further ownership. The risk is slight, and performance gains and share price increases likely.
Initially, small tax breaks, like those on offer in the US and UK, would help make financing feasible. A tax break on inheritance would encourage private owners to sell to their employees.
The democratic employee ownership model is the only tried and tested way of linking equity ownership to empowerment, and empowerment to company and economic growth.
It removes the need to rob Peter to pay Paul, who is then hobbled by inexperience and new debt.
Norman Reynolds is a development economist who advises central and provincial government.