Employee Ownership – A Missed Opportunity to Drive Transformation

Research indicates that when employees feel a sense of ownership in the organisation they work for, they have increased job satisfaction and show more commitment and loyalty which then leads to improved productivity, innovation and profitability. It’s for this reason that organisations globally use Employee Share Ownership Plans (ESOPs) as a form of employee ownership, to increase employee engagement, align employee and shareholder goals, reward employees and as a tool for business succession planning.

In South Africa, however, employee ownership is primarily driven by Black Economic Empowerment (BEE). Black ownership via an ESOP helps to improve a company’s overall BEE status and competitive positioning.

Although ESOPs have not been widely utilised, there is no question that they could be more effectively used by the private sector to drive transformation.

BEE and Employee Ownership

At its core, South Africa’s BEE strategy is not only intended as a moral initiative to redress the wrongs of the past, but also as a growth strategy to fully exploit the country’s economic potential by bringing the black majority into the economic mainstream.

Has it worked as a growth strategy? Critics will argue that it has failed by nearly all metrics. Almost 30 years after the end of apartheid, South Africa has the highest income inequality in the world with high rates of poverty and household debt and poor income mobility. Low economic growth and high levels of unemployment, particularly amongst the youth, don’t auger well for our future growth prospects. Corruption and maladministration have added to our woes. The country’s energy crisis has hamstrung productivity and eroded business confidence. The pandemic and the war in Ukraine disrupted trade and pushed up energy prices, resulting in global inflation. These trends are exacerbated in South Africa, characterised as it is by a stagnant economy, elevated levels of sovereign debt, a skills shortage, a weak education system and a government unable – or unwilling – to implement the necessary structural reforms required to drive growth and attract investment.

South Africa’s economy is a complex and interconnected ecosystem. The situation in which it finds itself currently can by no stretch be attributed solely to the limited success of its BEE strategy, although this has certainly played a role. Technological advancement and the concentrated ownership of productive assets has resulted in income becoming increasingly concentrated with capital owners, leaving the majority of the population economically insecure. This is not ideal for any country with ambitions of economic prosperity.

Potential for Employee Ownership to Drive Transformation

Despite having worked in the BEE industry for almost two decades, I don’t pretend to have all the answers. However, what has become clear is that there is no silver BEE bullet that will achieve all the objectives of black economic empowerment. Having said that, employee ownership does have the potential to enable transformation while at the same time providing positive impact at an individual, organisational and societal level.

Employee ownership offers a more balanced economy with a somewhat more evenly distributed capital ownership, particularly relevant in South Africa given our numerous socio-economic challenges. Before the wrath of business owners descends on me, I don’t mean giving employees control of organisations – although this has been successfully implemented in developed countries like the USA and UK – but rather giving employees a slice of the pie and a vested interest, the latter which leads to more engagement and stronger business performance which ultimately results in better outcomes for all stakeholders.

Allowing employees to have a share in the ownership of businesses will drive vastly improved broad-based economic transformation outcomes compared to narrow-based approaches where only one or a small number of individuals participate in ownership. In the South African context, the broader economic benefit of an ESOP participant receiving R10 000 arguably significantly outweighs the benefit of a single investor receiving R10 million. I’m not suggesting that there is no place for narrow-based BEE ownership, but rather that ESOPs should play a more prominent role in BEE ownership.

Promoting Employee Ownership

Despite their benefits, ESOPs remain relatively uncommon in South Africa, with the exception of the mining industry where they are a little more prevalent. Under the current BEE scoring framework there are no points awarded exclusively for implementing an ESOP. To drive uptake of ESOPs will require that government provides the necessary incentives, clear policy direction and implementation guidance.

BEE measurement rules can at times be unclear. Generally, under a trust structure, you need to consider the race and gender profile of trust beneficiaries to determine the related BEE ownership outcomes.  One of the obstacles to employee ownership has been concern around not achieving the maximum possible BEE outcomes if all staff are included, or implementing schemes for the benefit of black employees only with a possible negative impact on broader employee morale. In my experience of advising organisations, enabling an employee benefit along racial lines is a real concern for top management, who tend to be wary of taking any action could weaken the employee-employer relationship.

Various BEE measurement rules enable boosted recognition. In my view, enabling a scheme with a strong majority of black participation to be fully recognised as black for BEE ownership purposes would do well to promote ESOPs. This could be done via a change in BEE Codes, clarification from the Department of Trade, Industry and Competition (DTIC) on related measurement principles, or clarification in the updated verification guidelines.

While the BEE Codes allow BEE ownership and potential healthy points scoring to be achieved via a correctly structured ESOP, there are no points awarded exclusively for implementing an ESOP. A stronger BEE incentive in the form of ESOP-specific points would, I believe, increase the drive for ESOPs

Another potential incentive tool is tax. Currently, most feasible ESOPs result in no tax deductibility for the employer, but then full taxation as income for scheme participants. Tax liabilities can, in some cases, be incurred for participating employees even before any value is actually realised.

As an employee ownership catalyst, SARS needs to enable some form of tax benefit for the employer or more tax friendly outcomes for ESOP participants such as making employer tax deductions available, reducing employee tax liability by removing or reducing tax on ESOP receipts, or aligning payment of the tax liability to when the ESOP value is realised by employees.

Policy direction uncertainty around ESOPs has meant that many businesses have either decided against them or postponed any BEE ownership efforts.  This uncertainty has largely been caused by the BEE Commission, which has rejected a number of schemes despite the fact that they appear to align with the BEE Codes’ ESOP requirements and are in line with market norms.  In an effort to address this uncertainty and provide clarity, the DTIC issued a Practice Note in 2021.  Although more organisations are now pursuing broad-based ownership vehicles, the BEE Commission’s position does not seem to have shifted. Better alignment between government entities would help top management make easier decisions regarding ESOP implementation.

While employee ownership may seem complex and daunting, many businesses have successfully navigated this space and realised the benefits that come with ESOP implementation.

Employee ownership offers advantages at an individual, organisational and societal level that cannot be ignored. Through ESOPs, government has an opportunity to drive transformation by broadening ownership and reducing wealth inequality. This will, however, require a catalyst in the form of BEE or tax incentives and a clear and consistent ESOP policy.