The pitfalls of BEE fronting

EmpowerLogic in the last year has rated many companies where, on face value their BEE status looks fine, but when assessed, the detail is different and reality emerges. "In many cases this is not always done deliberately but because of a lack of understanding on how the charters and the scorecard work," says Business Development Manager, Prince Booi.

EmpowerLogic has been engaged by many of the major companies to help them assess their suppliers in terms of their BEE status. When these suppliers are rated and fronting is found, a report is presented to the client showing exactly where and how the fronting is happening.

"Companies don't understand that BBBEE is a process and not an event. Not every company, especially family owned companies can transform overnight but in the haste to do something about their empowerment status they try the quick fix and go the fronting route. This creates a false sense of empowerment and it is not in the true spirit of the Government Broad Based Black Economic empowerment strategy."

Booi adds that one of the most common fronting examples is where companies start a new BEE company which does exactly the same as the existing company and then channel all the work through the BEE company. The BEE company will have a big turnover but the work will still be done by the existing "non BEE company" and its where most of the profits will go as well.

Another common fronting example is where the company is black owned (more than 50.1% shareholding), but the shares are allocated on an earn-out basis, or deferred ordinary shares. This means that when dividends are paid, the black owned company which is the shareholder, only gets a small percentage of the profit.

It remains to be seen what government's approach will be on the issue of fronting, and what guidelines will be put in place to effectively govern the way in which fronting will be judged and eradicted. It is the role of the rating agencies to make sure when a company is rated, BEE is meaningful and tangible and in accordance with the Broad Based Black Economic Empowerment Act.

Booi believes that in the future, all companies that are rated should make their status public, which will have positive impact in reducing fronting.