Why is Zuma wrong about black ownership of the JSE?

no scope for compromise

It is pointless for the JSE to be running around with two sets of “research” on the number of black South Africans invested in the local stock market – only one of which is worthy of the title. There is independent research, headed by Trevor Chandler of Alternative Prosperity (AP), which bears the hallmarks of credible inquiry, and another by the National Empowerment Fund (NEF), which does not.

Both cannot be correct in their conclusions because the difference between them is very large. Either black South Africans own at least 23% of the JSE's top 100 listed companies; Perhaps closer to 30% once the analysis is complete on some outstanding share registers, and perhaps even more than 40% of the available shares after excluding foreign investors (according to AP). Or they have 3% (according to NEF).

This debate challenges an academic nit-pick through an equally robust diverse methodology. The risks of supporting one side or the other are great and immediate. This failure of the government and what it wants black economic empowerment to mean gets to the heart of the future shape of BEE, which has profound implications for corporate governance. For mandatory investments, particularly pension funds with millions of members, the outcome could also determine whether their shareholdings are at risk of further dilution.

According to the AP, for the first time, the number of black South Africans owning shares on the JSE has overtaken the number of white ones. This was higher due to their share in mandatory investments in the public sector, including pension funds, compared to BEE structures. Shareholders were determined by their economic interest, i.e. the right to receive dividends, whatever they may be.

AP Research was commissioned by the JSE. It set out to measure the extent of changes in shareholding conclusively and reliably. Proudly announcing the findings, JSE chief executive Nicky Newton King was hardly expecting the government's response. Within days, President Jacob Zuma himself returned to refute the NEF findings by presenting and endorsing them.

The guardians of political correctness should not be fooled. Whether a person is a shareholder or not. The determinant of fact, and not interpretation, is whether the person is directly or indirectly entitled to vote at shareholder meetings of the investee company and to receive dividends from it. Irrelevant is the medium through which the shares are held. The only difference between direct and indirect shareholders is procedural.

So either the economic interests of black people should be included through mandatory investment (according to AP), or they should not be (according to NEF). Only one of them can be right. There is no half way.

The AP approach is consistent with the realities of modern-day share ownership, emphasized in King III which urges attendant exercise of voting rights. It is also in line with the Black Economic Empowerment Code and ANC Gauteng's superannuation-fund activation policies.

In contrast, NEF is actually saying that shares must be held directly by Black individuals or a vehicle owned by those individuals. Otherwise they would not be recognized. Such an approach ignores the manner in which the overwhelming majority of shares are held and even violates the principles of the Companies Act. Zuma's denial of shareholder realities is as appalling as Mbeki's on HIV/AIDS.

The contradiction between AP and NEF extends far beyond mandatory investment. For starters, there is no way the NEP can be considered independent. It is a creature of the government, ultimately answerable to Zuma. As it happens, the NEF chief executive is married to a minister in Zuma's cabinet. And whatever other areas of NEF distinction there may be, research of this nature is not among them.

It smacks of amateurism. Apparently using the publication as your base document 'Who owns whom?'Which only records large shareholders with influence in listed companies, the NEF does not attempt to incorporate legislated black economic-empowerment criteria. This does not take into account the global share registers of major JSE-listed corporates such as SABMiller and Richemont, another glaring omission.

Furthermore, it has selectively explained various forms of BEE. It also ignored JSE-listed companies, which are the most valuable by market capitalization, operate in a variety of sectors around the world and are additionally listed on other exchanges. Overall, the NEF highlights the privileged few rather than all black South Africans who are the beneficiaries of transformation policies.

On the other hand, AP is known to use a variety of information sources. They contained share registers of JSE-listed companies; BEE certificates of these companies or their unlisted SA subsidiaries; Annual reports and financial statements, and data are obtained directly from mandated investors. The various outcomes can be illustrated within metrics relating to the JSE's shareholder-weighted index (SWIX).

AP research may have flaws. However, given the firm's reputation, they are unlikely to be as obvious or serious. The best way to find out would be for the AP and NEF, as proxies for JSE and Zuma respectively, to engage in a head-to-head open debate.

Let's see if they're up for it. If one is there and the other is not, this will be proven to be the case.

AP/JSE vs NEF/ZUMA

*BEE legislation specifically allows either the inclusion of mandatory investment in the BEE calculation or its exclusion from both the numerator and denominator of the calculation.

Alan Greenblow is the editorial director of today's trustees (www.totrust.co.za), a quarterly magazine primarily for trustees of superannuation funds.

This article first appeared in Business Times.