The black economic empowerment (BEE) scorecard should evolve to include a more detailed definition of ownership and require verification agencies to report on "fronting", a study by KPMG and IQuad BEE Verification found.

(Original article published in The Times, 31 Oct 2010)

"A lot of black businessmen make a career of winning tenders. Government says it wants to buy from black people, but it needs to improve the rules. It should buy from black companies, not black individuals. They need to verify the entire supply chain," says Sandile Hlophe, managing director of restructuring at KPMG.

More than half of the 2000 small, medium and large companies surveyed indicated their willingness to have their fronting status published on their accreditation certificates.

Hlophe says fronting is driven by the absence of a clear set of rules and no sufficient system of checks and balances. While fronting is supposed to be addressed by other corruption legis-lation, this is not really happening in practice, he says.

"Fronting is the enemy of transformation. The business is not transformed, skills development is not taking place, and it drives up the cost of doing business."

The draft version of the BEE codes of good practice placed a duty on verification agencies to disclose information if fronting is found. However, when the codes were gazetted, that requirement disappeared.

Risk factors indicating fronting include the number of employees compared with the turnover of the business and whether any value-add is done by the company itself. Many fronting companies, which are often one-man bands or other "tenderpreneurs" who simply subcontract to other suppliers and take a cut for themselves, import products cheaply, "killing our local producers", says Hlophe.

In order to clamp down on fronting, government should also address the ownership measure on the scorecard to ensure ownership equates to control and the right to receive dividends.

"Any black person should not just qualify. That allows people to put shares in the name of their gardener or housekeeper, without any benefit ever flowing to that person."

According to the survey, skills development, employment equity and preferential procurement were top empowerment priorities for companies this year.

The economic climate, however, had a negative effect on the attention given to ownership, management control and socio-economic development.

"Because of the economic conditions over the past 12 to 18 months, companies fared better when it came to employment equity, as people did not move around much and their employment equity base could be maintained. Preferential procurement became more important because companies can shift the responsibility to their suppliers by putting pressure on them to transform," says Hlophe.

"Other issues took a back seat due to the recession. There was no money available for ownership transactions, directors and executive management remained stagnant, and a lot of socio-economic development budgets got cut."

Employment equity and skills availability remain a huge challenge for businesses, the study found. Increased skills development will reduce the problem of poaching, particularly of talented black professionals, and will increase retention, as employees feel more valued, says Hlophe.

"It is high time corporate wake up and grow their own timber. They need a lot more focus on skills development, otherwise employment equity will remain a big challenge."

Significant penalties can be incurred by companies who do not comply with employment equity legislation.

"As a country, we're not doing enough when it comes to skills development. It is clear the Setas are not working; we've killed the technikons, the nursing colleges. The type of skills we require are not necessarily university graduates. People think universities will deliver ready-made employees. As companies we need to do work training - universities can't cater for all the companies and industries. We need to pull the responsibility for skills development back into companies."

Making Enterprise Development (ED) and Socio Economic Development (SED) contributions can be the easiest way to boost your scorecard points in a short period. Thus, if year-end is coming up, an ideal opportunity is presenting itself to your company to fill your point's gap with an appropriate contribution.