Broad-Based Black Economic Empowerment and corporate financial health

Abstract

Background: Legislation was implemented in South Africa in 2003 and revised in 2013 to promote Broad-Based Black Economic Empowerment (B-BBEE).

Aim: To investigate the relationship between B-BBEE compliance and a range of financial health measures among publicly listed companies.

Setting: Altogether 379 companies listed on the Johannesburg Stock Exchange over the period 2004–2015.

Methods: Data on the sampled companies’ B-BBEE scores (in total and per element) were sourced from Empowerdex, whereas financial data were downloaded from Bloomberg. Panel regressions were computed to investigate hypothesised relationships.

Results: A significant increasing trend was noted in B-BBEE compliance over the research period. No significant relationships were found between the total B-BBEE score, individual B-BBEE elements and any of the considered accounting-based measures (annual percentage change in turnover, return on sales, return on assets and return on equity). A significant negative relationship was observed between the market-based price/earnings ratio and total B-BBEE score, while a significant positive relationship was noted with the cost of equity. The latter seems to indicate a negative perception among shareholders towards B-BBEE.

Conclusion: Although B-BBEE legislation has been partially successful, more can be done to achieve its goal of empowering black employees and small business owners. Management teams should be more diverse and greater emphasis should be placed on socio-economic development and skills development. Companies should caution against overemphasising the importance of black ownership, as shareholders seem to view this B-BBEE element in a somewhat negative light.