In October 2006 Kumba Iron Ore sold 3% of its shares to the Envision employee share ownership plan (Esop). This was part of a R9.4bn BEE transaction that resulted in black-owned Exxaro acquiring 20% of Kumba, and the Sishen Iron Ore Community Development Trust receiving an allocation of 3% in the company.
Five years later, Kumba’s 6,200 employees received a cash payment of R2.7bn, which was equivalent to R576,045 per beneficiary. Envision was probably the country’s most successful Esop yet.
At the end of December 2024 there were 14 Esops worth R40.7bn in the top 60 companies on the JSE, according to a report I did for the Transformation Lens.
The largest was Shoprite Checkers’ evergreen Esop for the group’s 126,000 employees, which was worth R11.2bn at end-2024. Absa’s eKhaya scheme for its 26,000 employees in South Africa was worth R5.1bn.
After Workers Day last week it is time to look at the good, the bad and the ugly of these schemes. The triggers for the proliferation of Esops were the country’s transformation policies and the policy shift from narrow to broad-based BEE.
Do the people who want to scrap BEE also want companies such as Shoprite Checkers and Absa to cancel their Esops? Must Kumba close its community trust, which is now worth more than R10bn? In what universe is providing shares to employees and investing in impoverished communities a bad thing for the economy and the cause of rising unemployment rates? The truth is that these are investments in our country’s future.
The BEE codes of good practice were not prescriptive about how Esops should be implemented. Initially, most schemes had vesting periods. Recently, there has been an increase in evergreen schemes, in which companies earn BEE points in perpetuity and do not have to go through the pain of designing a new scheme after the end of a vesting period.
The department of trade, industry & competition’s current review of BEE policies provides an opportunity to improve the quality of Esops and influence the development of a new generation of Esops.
Employees must have the rights that all owners of shares have. These are the rights to capital appreciation, dividends and voice — the ability to exercise their vote at an AGM and hold management to account. Many Esops are a passive form of BEE, in which employees lack a voice.
With evergreen schemes, the benefits are loaded in favour of companies, which get BEE points forever while employees cannot benefit from capital appreciation. If Envision had been an evergreen scheme, there would have been no R2.7bn payout for employees.
In the next chapter of Esops we must also reduce the asymmetry in the design and funding of executive and senior management schemes and those for other employees. If companies are prepared to endure the pain of designing new schemes for executives after the end of vesting periods, why should they not be prepared to do the same for Esops?
If executives get multiple instruments, including share options, performance shares and share appreciation rights, why can’t the same principles be used to reward employees?
Employees must have agency — the power to make choices on which instruments they prefer and what they want to do with them after the end of vesting periods.
There could be a guideline for the distribution of benefits in BEE transactions along the lines of Standard Bank’s 2004 BEE transaction, with allocations of 40% for Esops, 40% for communities and/or public retail offers, and 20% for traditional BEE companies.
• Gqubule is an adviser on economic development and transformation.
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