South Africa’s transformation drive under scrutiny as JSE black ownership remains low

A recent research report highlights persistent low levels of black ownership in several major JSE-listed financial institutions, notably Standard Bank and Nedbank, which reportedly maintain less than 1% black ownership despite South Africa's decades-long transformation drive. This situation, contrasted with other financial sector entities that have undertaken 'replacement transactions' to maintain black ownership, brings into sharp focus the efficacy and design flaws within the Broad-Based Black Economic Empowerment (B-BBEE) framework. The findings underscore the ongoing challenges in achieving meaningful and sustainable economic transformation, particularly concerning ownership targets in publicly traded companies, prompting scrutiny of current policy incentives and their practical implementation.

South Africa's ambitious journey towards economic transformation, enshrined in its Broad-Based Black Economic Empowerment (B-BBEE) policies, faces renewed scrutiny following a recent research report on black ownership on the Johannesburg Stock Exchange (JSE). The report, as highlighted by the Mail & Guardian, reveals a stark disparity in the financial sector: while some institutions like Old Mutual, Absa, FirstRand, Sanlam, and Capitec have engaged in or retained black ownership through various transactions, Standard Bank and Nedbank reportedly lag significantly, with less than 1% black ownership and no substantial B-BBEE transactions concluded in a decade.

This persistent low ownership in key economic sectors, particularly among large JSE-listed entities, raises critical questions about the effectiveness of the B-BBEE framework in driving genuine and sustainable economic inclusion. This article will delve into the legal and regulatory landscape governing B-BBEE ownership, examine the challenges hindering comprehensive transformation in the financial sector, and explore the implications for legal practitioners advising on compliance and corporate strategy within this evolving environment.

The legislative cornerstone for South Africa's transformation agenda is the Broad-Based Black Economic Empowerment Act 53 of 2003 (B-BBEE Act), which aims to promote economic transformation and enable meaningful participation of black people in the South African economy. The B-BBEE Act empowers the Minister of Trade, Industry and Competition to issue Codes of Good Practice, which provide a standardised framework for measuring an enterprise's contribution to B-BBEE across various elements, including ownership, management control, skills development, and enterprise and supplier development.

For the financial sector, the overarching B-BBEE framework is supplemented by the Amended Financial Sector Code (FSC), which came into effect on 1 December 2017. The FSC sets specific ownership targets, including a minimum of 25% black ownership at the holding company level, of which at least 10% must be direct ownership by black people. A crucial aspect of ownership measurement under both the generic Codes and the FSC is 'Net Value', which assesses the extent to which black ownership is unencumbered, with a sub-minimum requirement of 40% of the Net Value points to avoid a drop in B-BBEE rating. The JSE, as the primary stock exchange, also plays a role in promoting transparency and compliance, requiring listed companies to publish compliance reports on their B-BBEE status, including scores for various elements. Furthermore, the JSE has introduced an Empowerment Segment to facilitate the listing and trading of B-BBEE securities, aiming to boost participation and liquidity for black shareholders.

The persistent low black ownership in certain JSE-listed financial institutions, as highlighted by the recent report, points to significant policy design failures and weak incentives within the current B-BBEE framework. A key criticism is the 'continuing consequences principle', which allows companies to retain up to 40% of their B-BBEE ownership points for a decade after the exit of black shareholders, effectively reducing the impetus for new 'replacement transactions'. This mechanism, while intended to provide stability, can inadvertently perpetuate existing ownership structures without fostering new, broad-based participation. The report also criticises the recognition of 'indirect ownership', arguing that it can inflate B-BBEE scores without necessarily transferring meaningful, active ownership to black individuals who can influence company strategies.

While the financial sector, particularly asset managers and life offices, has shown progress in meeting or exceeding B-BBEE ownership targets, with black shareholders owning 38% of asset managers and 27% of life offices in 2023, the situation in major banks like Standard Bank and Nedbank remains a concern. This disparity suggests that while the FSC provides a framework, its application and the commitment to its spirit vary across sub-sectors and individual entities. The practical challenges of structuring and financing large-scale B-BBEE ownership transactions, especially in capital-intensive industries, are considerable. Historically, such deals have often relied on complex funding mechanisms, and the sustainability of these structures, particularly in volatile economic conditions, has been a recurring issue.

Judicial pronouncements have also shaped the landscape of B-BBEE implementation. The Supreme Court of Appeal's ruling in *Afribusiness v Minister of Finance* (2020) declared certain preferential procurement regulations invalid, clarifying that while the B-BBEE Act remains robust, the Preferential Procurement Policy Framework Act (PPPFA) regulations cannot be used to impose pre-qualification criteria like mandatory 51% black ownership for tenders. Although primarily impacting government procurement, this case underscores the need for careful alignment between B-BBEE objectives and other legislative frameworks. Furthermore, the 'once empowered, always empowered' principle, affirmed in cases like *Chamber of Mines v Minister of Mineral Resources* (2017) in the mining sector, has allowed companies to retain empowerment status even if black ownership levels subsequently drop. While this principle offers certainty, it can be seen as counter to the ongoing objective of increasing and maintaining black ownership. More recently, cases like *Dimension Data Facilities (Pty) Ltd and Others v Dimension Data Investments South Africa (Pty) Ltd and Others* (2024) have scrutinised ownership structures, particularly those involving *en commandite* partnerships and private equity funds, for potentially circumventing the objectives of the B-BBEE Act. These legal developments highlight the ongoing tension between the need for sustainable transformation and the practicalities of corporate structuring and market dynamics.

The persistent low black ownership in some of South Africa's largest financial institutions underscores the complex and often challenging path to achieving genuine economic transformation. While the B-BBEE Act and its sector-specific codes, such as the Financial Sector Code, provide a comprehensive framework, the implementation reveals significant gaps, particularly concerning the incentives for ongoing black ownership and the quality of such ownership. The reliance on indirect ownership and the 'continuing consequences principle' may inadvertently dilute the impact of B-BBEE, leading to a disconnect between reported compliance and tangible economic inclusion.

For legal practitioners, these findings necessitate a proactive and nuanced approach to advising clients. It is crucial to navigate the intricacies of B-BBEE legislation, the Codes of Good Practice, and sector-specific charters, while also understanding the practical and financial implications of ownership structures. Practitioners must anticipate potential policy adjustments aimed at strengthening incentives for direct, sustainable black ownership and addressing perceived loopholes. Advising on robust governance for B-BBEE entities, ensuring compliance with evolving JSE disclosure requirements, and structuring transactions that genuinely advance the spirit of empowerment will be paramount in guiding clients through South Africa's ongoing transformation journey.