CHALLENGES OF IMPLEMENTING EMPLOYEE OWNERSHIP

IN THE REPUBLIC OF SOUTH AFRICA

07th September 2015

ILERA CONGRESS: CAPE TOWN

Tendani Nelwamondo

Development Impact Support

IDC

2

Introduction

• IDC Background

• B-BBEE (Policy Perspectives) (Codes)

• Trust Funded and Sectors

• Composition of the Board of Trustees

• Challenges of Implementing Employee Ownership in South Africa

• Training and Education

• The Role of the Association

• Other Initiatives to Drive Change

• Supplier and Enterprise Development

• Way Forward

• Conclusion

3

IDC Background

• Established 1940 in terms of Industrial Development Corporation Act (Act No. 22

of 1940). IDC is fully owned by the South African government.

• National Development Finance Institution – set up to promote economic

growth and industrial development.

• VISION – to be the primary source of commercially sustainable industrial

development and innovation to benefit both South Africa and the rest of Africa.

• MISSION – to contribute to the creation of balanced, sustainable economic

growth in South Africa and on the rest of the continent. \Further promote

entrepreneurship through the building of competitive industries and enterprises

based on sound business principles.

4

B-BBEE Policy and Code of Good Practice

• Broad Based Black Economic Empowerment Act of 2003

• The objective is to promote participation of blacks / marginalized

groups in the economy by using various methods;

(Blacks meaning Africans, Coloureds and Indians).

Black Designated Groups meaning women, youth, employees, people with

disabilities and rural communities;

• Code of Good Practice (2007)

• 7 elements (Old);

• 5 Elements (New) 2013;

5

IDC Workers / Employee Trusts

• IDC Workers Trust Policy target to benefit low level workers / employees

• IDC has specialized Funds to finance employee ownership stake in companies

Development Fund capitalized at ca R350 million and capped at ca R20 million

per transaction (not specific on shareholding but is suppose to be meaningful);

Risk Capital Facility (RCF) – 25% + 1 shareholding;

• To date, IDC has funded and supported plus minus 70 Workers Trust in various

sectors since 1998 (some of these transactions has exited IDC or cancelled or

liquidated).

• IDC has spent ca R500 million to fund workers participation through

concessionary loans.

• The Workers Trust owns an average of 10% shareholding in the company.

6

Funders for Employee Ownership in SA

• IDC through Development Funds and Risk Capital Facility (RCF)

• National Empowerment Fund

• Development Bank of Southern Africa

• PIC

• Government departments

• Department of Rural Development and Land Reform Farm Equity Scheme

• National Department of Agriculture

7

IDC Trust Funded and Sectors

• Agro Processing ***

• Light Manufacturing and Tourism**

• Clothing and Textiles*

• Automotive and Transport **

• Basic and Speciality Metals*

• Chemical Products and Pharmaceutical **

• Heavy Manufacturing

• Industrial Infrastructure

• Machinery and Equipment

• Media and Motion Pictures

• Metals and Mining

• New Industries

8

Composition of Board of Trustees

• The recommended legal entity to hold shares for the benefit of Workers /

employees is a TRUST.

• The Trust is registered in terms of the Trust Property Control Act of 1988 as

amended.

• The recommended Board of Trustees composition:

At least 2 or 3 representative from the workers / employees / beneficiaries

At least 1 representative from Management;

At least 1 representative from the funder (IDC);

At least certain number (1 or 2) from the Independent Trustee

9

Training and Education

• Training and education is the key to the success of any Trust, example of

basic training that need to be provided:

Corporate Governance;

Directorship Training;

Basic Business Principle;

Financial Management;

Investment Planning;

Change Management;

Leadership Training;

Effective models to distribute the benefits

10

Challenges of Implementing Employee Ownership (EO) in SA

• Realization of benefits by target beneficiaries;

• Funding models utilized to fund employee participation;

• Repayment of loans using dividends;

• Wages / salary increase strikes / labour unrest;

• Training and education;

• Understanding of EO objectives;

• Information dissemination to beneficiaries and other relevant stakeholders.

• A lack of equity to pay for shares and lack of resources or assets needed to

secure traditional bank finance (At IDC have specialized funding)

• The role of the company on the Workers Trusts.

• Engagement approach / Strategy / plan.

11

Challenges of Implementing Employee Ownership in SA

• Economic development vs compliance with B-BBEE

• Plan / Strategy with stakeholders internally

• No documented research, lesson learnt and best practices in the country

(Employee Ownership is always sounds / looks new in South Africa);

• Appointment of Trustees;

• Independent Trustees related Trustee fees and their locality;

• Management of immediate expectations by identified beneficiaries;

• Suspected mismanagement of funds;

• Lack of commitment from management / shareholders to empower / mentor

trustees / beneficiaries;

• Day to day administration of the Trusts.

12

Key Principles of Making Community Trust Success

• Involvement / Engagement;

• Sharing of Information;

• Training and Education;

• Regular feedback to the Trustees / beneficiaries;

• The rights of the Owners / Shareholders / Management;

13

Key Roles of the Association

• The Voice of Employees on the ownership rights.

• Conduct research, best practice and documents lesson learnt.

• Advocacy for EO in the Country in various sectors.

• Influence and lobby for government funding to finance employee

ownership initiatives to drive job creation and fair distribution of wealth.

• Influence and lobby government on Policy Formulation that support

development of EO.

14

Other Initiatives to Drive Change

• Develop new Funding Models that can facilitate early realisation of benefits to target

beneficiaries:

Partner with Government Incentives / Grants to Employee Ownership

Shareholding;

Trickle Dividends;

Free Carry Shares / Discounted Shares

• SPECIAL FUNDING

Focusing on other sectors like Franchising;

Funding 100% Employee Owned Business;

• The initiatives have potential to accelerate implementation of EO, drive job creation &

distribute wealth to the poor;

• It will further reduce the high rate of wage or salary increase strikes (Minimum

Wages);

15

Supplier and Enterprise Development

• Encourage companies with EO to provide procurement opportunity/ies to

Trusts;

• Provide vendor finance for the Enterprise Development (ED);

• Establish a fund to finance the initiative;

• The initiative can be implemented even if employees doesn’t own equity

portion in the company;

• Claim points on ED

16

Way Forward

• Establishment of the Specialised Fund to fund and support Employee

Ownership shareholding (including 100% ownership by employees);

• Funding to the establishment of Employee Ownership Association of South

Africa (EOASA). IDC is willing to finance the portion of the fund to finance the

establishment of EOASA.

• Conduct a detailed Research on EO in South Africa funded by different funders

e.g. IDC, DBSA, NEF, Commercial Banks, vendor financing, government

departments, donation of shares by companies and Private sector.

17

Conclusion

• Team work or partnership is of critical significance to achieve the

set objectives on the Trust Deed and other related documents.

• Sustainable implementation of EO is a key priority for uplifting /

improving the socio-economic livelihoods of the targeted

beneficiaries.

• It will significantly impact to the debate / negotiations of minimum

wages by various sectors in the economy.

Industrial Development CorporationIndustrial Development Corporation19 Fredman Drive, Sandown19 Fredman Drive, SandownPO Box 784055, Sandton, 2146PO Box 784055, Sandton, 2146South AfricaSouth AfricaTelephone 011 269 3000Telephone 011 269 3000Facsimile 011 269 2116Facsimile 011 269 2116E-mail callcentre@idc.co.zaE-mail callcentre@idc.co.za

Thank you / Ndo livhuwa Thank you / Ndo livhuwa