The "Lessor Spotted" Value of Equity Ownership

November 23, 2016

The Amended Codes value ownership at a weight of 25 out of the overall 109 scorecard points. Using this measure, transformation is largely about ‘who owns what’. However, while the B-BBEE scorecard measures economic interest, voting rights and net value in the form of ownership points, there are some vital qualitative ownership measures, such as ownership values and shareholder attributes, which are not measured by the B-BBEE scorecard. Eric Ackroyd, Verification Director at EmpowerLogic, explains how certain measures pertain to an individual’s or group of shareholders’ ability to create, maintain and share value.

While different organisations, by nature, require different shareholders, there are common ‘ownership values’ which constitute a good business owner and shareholder. These include:

• Their appreciation and care of resources
• Their alignment to, and understanding of, their resources, customers and stakeholders
• Their patience to painstakingly build, nurture and guard their resources
• Their recognition of human capital and the human factor, which is the ability to determine the physical and psychological wellbeing of an individual, taking into account their ability and threshold within a particular environment
• Their readiness to take responsibility and accountability as custodians of value.

In addition to considering B-BBEE credentials and ownership values, ‘shareholder attributes’ play a major role when searching for and selecting a shareholder, particularly a strategic business partner.

What attribute does a business need in a shareholder? What attributes does the shareholder need to bring?

A business may be looking for one or more of the following:

• Access to funds
• Long-term or bridging finance
• Access to markets
• Access to networks
• Knowledge and skills expertise
• B-BBEE credentials

There is much more to the ‘true value of ownership’ than meets the eye. It is the unique diversity of each shareholder that ultimately determines an authentic and inclusive productive culture. This, essentially, increases productivity, unleashes engagement and brings about all types of intelligence and expression, which is often not seen in a homogenous shareholding structure.

The true value of ownership is about aligning the core values and work ethic of shareholders, employees, customers and stakeholders in order to generate growth and productive expression. A potential shareholder should have a shared vision, a defined role and identified deliverables.

From the outset, the long or short-term expectations of a potential shareholder should be mutually agreed upon. For example:

Short term:
A shareholding agreement could bring a short-term speculative shareholder, in the form of a financial institution, to provide funds to fuel expansion and subsequently increase profits. Their core role would be to provide resources without which shared value may not be unlocked.

Long term:
An individual shareholder could have scarce skills, networking capabilities, and/or market access. This may be the attributes required in order to unlock shared value and/or opportunity.

Alternatively, a long-term shareholder could be in the form of an employee share-ownership scheme. This could be very effective as a mechanism to motivate and direct employees towards a common goal through shared profit. In order to achieve these objectives, transparency, trust and “buy-in” are critical.

The ‘net value of ownership’ vs the ‘true value of ownership’

The Amended B-BBEE Codes prioritise ‘net value of ownership’. If an organisation does not achieve 40% of the net value points, then their B-BBEE Status Level is “discounted” by one level. Not achieving the true value of ownership (threshold) may result in the ‘total loss of ownership’.

Equity ownership is a privilege, not a right and comes with responsibility and accountability. B-BBEE Ownership scorecards should be patiently and painstakingly built by prioritising the true value of ownership through considering ownership values and shareholder attributes, and not solely on the B-BBEE scorecard ownership measures. These should take priority over the quantitative scorecard measures of economic interest, voting rights and net value.

The B-BBEE scorecard defines Ownership as follows:
 

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Other than measuring the value of the components of ownership, the B-BBEE scorecard measures the composition of owners as follows:

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