In today’s economic environment, the ability to change corporate behaviours is dictated by finding the solution that maximises profits for the corporate.
It is phenomenal to see how quickly world class solutions can be created when the entrepreneur, or big business, sees an opportunity to make a living – or in some cases a billion – from the market gap. With the global natural environment on the cusp of disaster, regulators can learn from market corrections which have been successful elsewhere to address critical issues.
Following the fall of apartheid, the South African Government introduced legislation which aimed to promote economic opportunities to a broad spectrum of South Africans who were previously disadvantaged. The legislation has had a profound impact on the mindset of the (South African) corporate landscape. This behaviour shift has been driven through the implementation of a (legislated) scorecard which creates corporate-to-corporate monitoring of the extent to which each corporate has addressed the Black Economic Empowerment (BEE) imperatives.
The extent to which the scorecard should be used and the negative effects of manipulation of these scorecards can be debated at length, but the visible effect in corporate South Africa is that corporates are investing in Black people and Black companies and, regardless of political stance, businesses are incentivised to trade with Black-owned businesses.
Whether governments seek to address racial discrimination or climate change through economic incentives, the scorecard implemented in South Africa could provide valuable learnings for policymakers.
To transpose this thinking, the Kyoto Protocol and the Paris Agreement and their intention to reduce greenhouse gas (GHG) emissions on a country-by-country basis are widely spoken of, but the implementation at a corporate level within each country appears varied at best. Perhaps regulators could look to frameworks such as the BEE scorecard principles in South Africa to incentivise corporates to create a corporate review culture – corporate monitoring – and awareness towards GHG? The difficulty for policymakers (and politicians) will be that the first mover may be seen to act to the detriment of its local businesses if other countries do not impose similar frameworks…
More detail on the South African experience:
The effectiveness of the legislation – the Black Economic Empowerment Codes of Good Practice (the Codes) – will no doubt have as many critics as it has of those offering praise.
Under the Codes, a company’s contribution towards enhancing BEE is measured on an annual basis using a scorecard and results in a company being issued a contributor status which is made public. The pillars of the scorecard range from measuring the presence of Black people in the workplace (measured all the way through to the C-suite and board members) through to the percentage of one’s equity (stock) owned by companies or individuals who in turn show a level of Black empowerment. The definitions of what is Black (for natural persons and corporates) and how to measure Black ownership in companies are detailed and can be open to some manipulation, but the principles are clear.
The most pivotal element of the scorecard which, in my experience, has created a peer-monitoring of the level of transformation in the BEE landscape is that of Preferential Procurement (PP). The PP element is measured in a way that one corporate must ensure that purchases of input materials (goods and services) are procured from entities whom have a high BEE contributor status themselves. This becomes an iterative calculation, in that one entities’ BEE score relies on the score of multiple other entities which in turn rely on multiple other entities.
The power of the PP scorecard element is really felt when a large corporate with an annual procurement spend in the billions of Rands, reviews the way it acquires goods and services…not only do the industry goliaths now need top quality goods and services at good prices, but they need to ensure they acquire these products from firms with strong BEE scorecards or else they will be prejudiced by their own clients and customers by a lower BEE scorecard level. Large corporates then face the issue of ensuring that previously disadvantaged suppliers are given the necessary skills and training to deliver products and services which are demanded by the corporate itself.
Where corporates are selling goods to the end consumer, the ‘peer monitoring’ lacks teeth – where the end consumer is an individual it is difficult to find advocates to bargain collectively against large corporates – but in many cases these corporates require licenses from the South African Government which also rely on a certain BEE contributor status being achieved and the ‘teeth’ are felt in the application for a license.
The BEE scorecard model and the peer review element of this builds on itself. Currently, a huge amount of time is spent by corporates operating in South Africa to ensure that they are maximising their BEE scorecard because this will impact a company’s competitive advantage when selling its own products and services. Governments and institutions around the world seek to address complex matters like global warming and discrimination… is it not time to ensure there are economic incentives creating ‘corporate monitoring’ behaviours such as those used in South Africa to ensure that global imperatives are addressed?