Why Employee Ownership Must Be Considered as Part of Your BEE Strategy

ESOPs (Employee Share Ownership Plans) involve enabling employees to share in ownership of the company they work in. Employee ownership is gaining momentum in South Africa as more companies recognise the benefits it offers. These include improved business performance, better employee relations, socio-economic benefits, and positive BEE outcomes, among others. These are particularly relevant in context of South Africa right now, where the country is facing a cost of living crisis, skills shortages, and high unemployment. For every business, employee ownership should be considered as part of the BEE and business strategy.

Increased performance, stronger employee relations, and retention of skills

Employee ownership provides a range of benefits to businesses. Importantly, employee ownership aligns the interests of employees with those of the business owners. When employees have a stake in the business, they are more likely to have a sense of ownership and to make decisions that are in the best interests of the company.

An ESOP can be an effective way to improve productivity and performance within a business. By creating a culture of ownership, improvement, and collaboration, employee ownership can increase motivation and engagement and help businesses to achieve better outcomes and drive long-term success. Research in the USA has shown that companies with employee ownership tend to have higher levels of productivity and profitability than those without.

In addition, employee ownership can be a way to improve corporate governance and accountability. With an ownership stake in the company, employees are more likely to take an active interest in its affairs and hold management and co-workers accountable for their actions. This can help to prevent corruption and unethical practices, and promote transparency and good governance.

One of the most significant benefits of employee ownership is that it can improve employee relations. Employee participants in an ESOP are more likely to feel personally invested in business success and to take pride in their work. This can lead to increased motivation, higher productivity, and better job satisfaction. In addition, employee ownership can promote a culture of transparency and open communication.

Retaining skilled workers is particularly important in South Africa, where there is a shortage of skilled labor in many sectors. Through employee ownership, businesses can create a more attractive benefit package and differentiate themselves from competitors This can help to attract and retain talented employees and create a more stable and sustainable business over the long term.Top of FormBottom of Form.

Strong BEE outcomes for the business

South Africa’s Broad-Based Black Economic Empowerment (BEE) policy is designed to promote economic transformation and redress the imbalances of the Apartheid past. BEE is defined in the BEE Act as viable economic empowerment of Black people, and specifically highlights workers and mentions employee ownership.

In 2021 the Department of Trade Industry and Competition (DTIC) issued a Practice Note which confirmed the feasibility of ESOPs as a means to address BEE ownership. This echoes previous communication from the government in support of worker ownership.

The Competition Commission also strongly supports employee ownership and most often requires that an ESOP is implemented in order to approve certain deals.

Employee ownership can be an effective way to achieve positive BEE outcomes through recognition of BEE ownership through Black participants in an ESOP.

The BEE Codes of Good Practice explicitly cater for ESOPs, and additional BEE points are awarded for employee ownership and ownership by “Black new entrants”, which employees are typically recognised as.

Socio-Economic Benefits

The BEE Act highlights that South Africa’s economy excludes the vast majority of its people from ownership of productive assets and performs below its potential because of the low level of income earned by the majority of its people. The country is currently experiencing a cost of living crisis, with many people struggling to make ends meet.

Unless further steps are taken to increase the effective participation of the majority of South Africans in the economy, the stability and prosperity of the economy in the future may be undermined to the detriment of all South Africans.

Employee ownership can help to address income inequality. South Africa has one of the highest levels of income inequality in the world, and this has contributed to social and economic problems such as poverty, crime, and political instability. Employee ownership can help to distribute wealth more evenly, as employees share in the profits and growth of the company. This can also contribute to a more stable and equitable society.

Employee ownership creates opportunity for wider benefit and arguably a better socio-economic impact that more narrow-based ownership. In a country with high unemployment and economic inequality, one employed person is often supporting an extended family, thereby playing an important role in society. Providing additional financial support to these societal pillars through an ESOP can make a huge difference – reducing stress, anxiety and even illness, and increasing opportunity for happiness, well-being and fulfilment.

As mentioned above, employee ownership can support stronger and more sustainable businesses. This then contributes to economic growth and job creation – a major societal benefit, particularly given South Africa’s challenges of low growth and unemployment.

Getting employee ownership right

Employee ownership is a strong opportunity to drive true broad-based empowerment in South Africa, and to provide benefit to those people that are directly involved in achieving business success – the employees.

An ESOP makes sense for businesses in South Africa for several reasons. There are clear business benefits, but also intertwined societal benefits. While employee ownership is not a panacea for all of South Africa's economic and social problems, it is a powerful tool that can contribute to sustainable business success and a more equitable and prosperous society.

If you are considering implementing employee ownership, it is important to carefully consider the options and implement an ESOP that is suited to your particular business’s circumstances and which can best enable sustainable positive outcomes over the medium to long term. In addition, good scheme governance as well as strong employee training and communication is required. Management of employee expectations is imperative, as well as leadership buy-in and support.

Transcend has extensive experience in structuring and implementing ESOPs and BEE transactions for multinational companies and South African corporates. We have advised on more than 200 transactions since 2005.

We are unique among service providers in that we provide full turnkey ESOP solutions. We understand the employee ownership process from the perspective of the founder and the employee beneficiaries. This allows us to design workable and BEE compliant ESOP structures, and create optimal communication programmes that manage employee expectations.

With over 15 years of experience in turnkey ESOP implementation, Transcend can support you on your journey in finding an optimal and sustainable ESOP solution.

Contact us to speak to a consultant today.