When a company is subjected to BEE pressures that are out of the ordinary, what's it to do? Carol Paton re-examines the way that Gold Fields handled its South Deep predicament.
In the murky world of black economic empowerment, the Gold Fields transaction over its South Deep mine stands out for its contradictory distinctions. It is one of the sector's most broadly based and yet one the most contentious.
Although finalised over two years ago, late last year it became an object of public controversy. There were media allegations, replete with innuendos dutifully aired on Carte Blanche, into the processes followed to bring about the BEE transaction and who it benefited.
Gold Fields' management and some of its directors then spoke candidly to Business Day about the difficulties it had experienced. These particular difficulties arose when Gold Fields was faced by a government regulator with the power to delay or derail multi-billion rand mining investments.
They provide insights into pressures that might similarly afflict other companies.
Basically, the question is this: When a company must choose between ensuring the sustainability of its operations and upholding its code of ethics, by not being politically bludgeoned, what is it to do? That BEE is a statutory requirement, implicitly tempting cronyism or corruption for individuals politically favoured, can make it exceptionally difficult to draw fine lines and proclaim the success of compromises.
The case study presented by Gold Fields followed its acquisition of the South Deep mine in 2006. To secure a new-order mining right for the asset, an empowerment transaction specific to the mine had to be undertaken.
Although Gold Fields had previously concluded an empowerment transaction, beneficiary Mvelaphanda subsequently sold its stake.
Because the once-empowered-always-empowered principle was held not to apply, Gold Fields was left exposed on the BEE ownership requirement.
The Department of Mineral Resources, which regulates mining rights, also regarded South Deep as a standalone company needing its own empowerment credentials. The licence application and an empowerment transaction were thus joined.
Having already been hit by a BEE partner liquidating its investment, Gold Fields chief executive Nick Holland was concerned to ensure that this time a partnership would be lasting. Also wanting to ensure that the envisaged R2,1bn transaction would be broad-based, Gold Fields chose two vehicles. One was an employee share-ownership plan, the other an education trust for the South Deep community.
Gold Fields' first hurdle was getting into the Department. Holland says he couldn't secure a meeting with the then director-general (Sandile Nogxina) to discuss the licence or the company's BEE compliance. For about six months the licence application had languished.
Needing somebody who could open the door to Nogxina's office, Gold Fields hired a "facilitator". This person was an ex-convict, reformed and reinvented as a motivational speaker, who had who had performed a similar service for a lesser company in helping Central Rand Gold to secure a new-order licence in record quick time.
Thus did Gold Fields, one of the world's largest unhedged gold producers listed on five international stock exchanges, form a relationship with former bank robber Gayton McKenzie. There's nothing wrong with the principle of a company giving a chance to an ex-con. Exactly what service was is that McKenzie performed and how it was delivered?
To know is to enable an holistic view on the deal. Holland's version is that McKenzie was employed only to set up a meeting with Nogxina and to help identify possible beneficiaries for the BEE deal. For this he was paid R12m at R1,5m per month over eight months.
McKenzie's version is different. He insists that he was paid to secure the licence. This he did by painstakingly following due process.
All parties deny that any of the R12m that McKenzie received was deflected into means that helped illegally to facilitate the licence award. Of course they'd deny it.
But Holland wouldn't necessarily be aware of all that McKenzie does to achieve results. McKenzie did receive an extraordinarily generous payment if it was made exclusively for the limited services that Holland describes. He is adamant that it was not for McKenzie to negotiate the licence.
On the face of it, R12m sounds like a lot of money and eight months a lot of time. Specifically, on Holland's version, it hardly speaks well of the Department that an intermediary had to be engaged by a top-flight miner for gaining access to the director-general.
At his eventual meeting with the Department, Holland recalls, he was informed that the esop and trust arrangements would be insufficient for Gold Fields to satisfy the empowerment critieria. An equity deal with individuals had to be done too. How then were the individuals to be selected?
As part of his mandate, McKenzie was asked to advise. In compiling a list of possible beneficiaries, he says, his first port of call was the MK Military Veterans Association. Included on his list were numerous politically-connected individuals, amongst them then ANC chairperson Baleka Mbete.
The list was submitted to transformation experts on the Gold Fields board. This sub-committee - comprising Rick Menell, Cheryl Carolus and Don Ncube - then deleted several names and added others. It also altered the balance in the suggested dividend flows to favour the community trusts rather than the proposed consortium of private individuals.
Dividend flows to the latter were significantly reduced. Nobody could get more than R80,000 a year in dividends (partly for repayment of the vendor finance) and nobody could sell shares for at least 30 years.
In the end 70 or so individuals comprised the consortium, mainly political unknowns. The names were publicly available until a shareholders' meeting in October 2010, but Gold Fields has since kept the list under wraps.
The sub-committee served to give the list legitimacy; so much so that Mamphela Ramphele, who at the time was designate-chair of Gold Fields, paid it scant attention. While she wouldn't be interviewed on the transaction, saying it pre-dated her chairmanship, she was at the time a serving director.
Still, now that she's resigned from the board, she might be more easily positioned to discuss how it fits with the BEE concept she's vociferously criticised. The pressures put on Gold Fields, where she had an inside track, are fodder for political leaders in opposition to the ANC.
Under the circumstances imposed, Gold Fields did pull off a transaction worthwhile for the quantum of wealth being widely distributed. Without disclosure of the consortium members, other commendations would be for the inclusion (as Gold Fields put it with Ramphele in the chair) of "people who had contributed to the peaceful transition of the country" as well as "those who typically would not have been part of deals of this nature in the past".
Scepticism might continue to linger about whether all of the R12m payment went to McKenzie alone, why he was paid so much for ostensibly doing so little, and how his suggested BEE beneficiaries actually helped the final selection. Less speculatively, a sour taste is left by the reasons for a facilitator to intercede between Gold Fields and the Department at all.
As a matter of fact, nevertheless, the South Deep licence was awared before the BEE participants were finalised. And as a matter of record, Gold Fields is satisfied that it got the mineral rights strictly as prescribed by the relevant legislation.
From the Today's Trustee perspective, it's noted that once again black members of pension funds (existing shareholders in Gold Fields) were omitted from inclusion (even consideration) in yet another major BEE transaction. The fault lies as much with the company as with the funds' trustees and their institutional representatives, silent as ever.
Gold Fields points out:
- The employee share ownership plan (esop) enabled all 47 100 employees at its SA operations to become shareholders. No payments were required. Plan members had so far received R76m in dividends;
- An education trust and a community trust were established for South Deep. The two trusts receive 65% of all South Deep distributions (so far around R46m) and the BEE participants 35%.
- In recent years the group has additionally spent over R600m on housing, educational and medical benefits for its employees.
SHE SAID IT
"The tragedy of silent free-riding business people is the high opportunity cost of their acquiescence to bad governance practices to protect their business interests....The question facing our society, and business leaders in particular, is how we are going to extricate ourselves from the trap of unintended BEE consequences and focus on using all our considerable human and natural resources to grow our economy in an inclusive sustainable way.
"This is a question that citizens of our democracy must face and cannot simply defer to politicians. The voices of business leaders are missing in the debates that ought to inform the way forward beyond BEE which has been used by both politicians and captains of industry to enrich a few at the expense of many." -- Mamphela Ramphele, Conversations with My Sons and Daughters.