The Financial Sector Charter is a start — and it is a positive start. Not only will adherence to the charter transform the huge institutions within the sector, but its implementation will also boost the outlook for sustainable and higher economic growth.
The charter has been well received. Shareholders have not taken flight as they did when its equivalent in the mining industry became public.
The Financial Sector Campaign Coalition, which has been vocal in its criticism of the financial sector, has also expressed guarded approval for the charter.
Last Friday, when the charter was presented to government in Pretoria, Minister of Finance Trevor Manuel congratulated the sector on the document, describing it as “the benchmark for future empowerment charters”.
Producing a charter that is acceptable to all stakeholders can be viewed as phase one, now it is on to phase two.
The charter’s year-long development process bypassed some of the normal consensus-seeking routes. Phase two will see that change. The charter is to be gazetted, together with calls for comment.
While this could result in quibbling over weightings of the allocation of points, given the positive response to the document, it is unlikely to change dramatically.
But the charter is not without flaws. The first challenge facing the financial sector is to complete the charter itself. Nedbank Corporate CEO Derek Muller brushed off questions about why the charter was published before it was complete. “We felt that we had made sufficient progress to put the charter on the table,” he said. “The final details can be worked out from here on.”
The South African Insurance Association’s Barry Scott concurs. He points out that when it was published last Friday, only 30 or 40 individuals had seen the charter.
The second task facing the development team is to appoint a charter council to vigorously drive its implementation. That done, the council’s role is to assess and review the charter’s progress.
For financial sector companies the race is already on — the quicker they clarify their internal charter strategies, the sooner they will be able to compete for scarce resources.
Focused training
Speaking this week at the Gordon Institute of Business Science (Gibs) forum on the charter, Ajay Lalu, director of Ernst & Young black economic empowerment (BEE) strategic services, criticised the low level of current corporate spending on training. He cited Malaysia’s average 9% of payroll spending on training as an example of a target for South African companies. The 1,5% of payroll charter target is on top of the existing skills levy.
Association of Black Securities and Investment Professionals president Modise Motloba stresses that the new training expenditure is for skilling black people only and will be focused specifically on charter-driven requirements. Charter-specific training programmes will be developed to address the training requirements of individuals in line for inclusion in the charter’s four categories: executive, senior, middle and junior management. He stresses that the focus will be tight.
Two of the four speakers at the forum believe that human resource development will prove to be the toughest charter compliance issue.
But there is one fundamental change that works in favour of more successful training.
Andile Mazwai, CEO of stockbroker Barnard Jacobs Mellet Securities, argued that, in general, skills transfer has been a flop. “The reality,” he said, “is that the financial sector now has two choices — either it must recruit the black people needed to meet charter targets, or they must be trained.”
Given the shortage of black skills in the sector, the institutions will have to pay a premium for new recruits. The charter’s existence will only serve to intensify competition for those existing skills.
“But the charter has fundamentally changed the training scene — everyone in the industry will be doing it,” Mazwai continued.
“In the past, the trend was that trained black staff moved on, and this served as a disincentive to companies to invest in intellectual capital. The charter has removed that disincentive. As the entire industry is now compelled to invest in black training, large-scale poaching of skilled black employees will be in nobody’s interests.”
Engaging the government
The government’s role in the changes that will surround the charter’s introduction remains unclear. Speaking at the Gibs forum, Banking Council South Africa transformation manager Cas Coovadia stressed the importance of the government’s role, and that it was time for it to “come to the party”.
Mazwai cautioned the government not to “crowd out” private sector players. He said the government should get involved only when the benefits of financial institutions’ charter-driven activities did not accrue directly to them. He added that, for instance, where bank loans for low-cost housing result in greater demand for that housing, the government should take on a significant portion of the risk, because a direct spin-off of the increased demand for housing was more jobs in the building industry.
This is a macroeconomic benefit, the cost of which should not be borne entirely by financial institutions. The government must, therefore, be prepared, at least in part, to absorb some of the risk.
The forum speakers agreed that the government should underwrite the non-commercial risks involved in implementing the charter. That way, it would avoid reinforcing dodgy trading decisions.
The government will be indirectly involved through the yet-to-be-decided role of the development finance institutions (DFIs).
Lewis Musasike, executive manager of treasury at the Development Bank of South Africa — which, among others, is listed in the charter — said: “Our role will be formulated within the framework of our mandate, which is to finance development infrastructure. In the case of the financial charter, housing development financing springs to mind. But ultimately we will take our cue from the government.”
DFIs listed in the charter include the provincial development corporations, the youth-focused Umsobomvu Fund, the Industrial Development Corporation of South Africa, the Land Bank, Khula and others.
Motloba is adamant that the estimated R75-billion of empowerment financing promised in the charter will be used for “transformational infrastructure” and “definitely not for toll roads”. Land reform, too, will be enabled through infrastructure development and capacity-building.
Ratings
The charter has been accepted by all stakeholders. But the financial institutions are not compelled to take on 100% of each target.
With a score of just 40 points on the charter scorecard, a financial institution will get a 25% weighting when tendering for government business. If an institution has fully complied with the charter, that is, it scores more than 80 points, it will enjoy a weighting of 100% in a government tender.
Those financial sector players that do not take the charter too seriously and come in with less than 40 points will be dead in the water in government tendering, with zero weighting. But speakers at the Gibs charter forum seemed to agree that the government was not likely to switch its business around for a few points on the charter.
Mazwai’s last word was that the toughest aspect of the charter’s implementation would be auditing the annual scorecards, on which the ratings are based.
Blade Nzimande, chairperson of the Financial Sector Campaign coalition, sees the annual charter reports from each financial institution as a “weapon” that will influence where coalition organisations make their deposits.
The poor public relations impact of a tepid scorecard rating could turn out to be more of a factor propelling banks into charter compliance than fear of losing government business. But, as one bank procurement director put it, “Government orders are big.”