By Bruce Hunt
Moneywebmidday interview with Jeremy Maggs (JM)- Employee share ownership plans have been underused as a galvanising factor for economic growth in South Africa
Bruce Hunt – 4 September 2024
JM: Employee share ownership plans have been underused as a galvanizing factor for economic growth in South Africa, according to Bruce Hunt (BH), the Managing Director of Transcend Capital. Now, employee share ownership, or ESOPs for short, have become something of a compliance and empowerment tick box, but according to Hunt, could play a bigger role, a greater role, in creating lasting shared value across various sectors.
JM: Bruce, first then, how can ESOPs be leveraged as a strategy for economic growth?
BH: It’s quite interesting. If you look around the world, employee ownership is quite prolific.
BH: And you see a number of different states actually use tax incentives to encourage employee ownership. We don’t really have that in South Africa. And what’s interesting is when you look to go and see why they choose to do it, and they’re not looking at transformation like we are, which has driven ESOPs in South Africa to date.
BH: They’ve looked at how it actually increases the competitiveness and the productivity of businesses. It also makes quite a huge difference in terms of building cohesiveness in the various communities. And I suppose to a very large degree in South Africa, we’ve built ESOPs just on black economic empowerment.
BH: And what is the quickest way we can look to kind of do things? And I suppose when I think about this, and I look at some of our clients, you get like industrial clients, I’m afraid I can’t quite name them, who’s in a turnaround phase. And they go, we’ve had a really rough time. We haven’t gotten the business right.
BH: We haven’t been aligned. A new CEO comes in and says, I believe that we can build this company together. We can be aligned to it.
BH: We can do this as one team. And how can we use employee ownership to do that so everyone can share in those gains and feel like they’re part owners? And if we can get that kind of thinking into our businesses, where everybody’s playing the same game, going in the same direction, we can certainly see increases in growth. And in that company, I’d say there’s a 50% or 60% increase in share price over the last, let’s say, four or five years.
JM: Why do you believe that cohesiveness is so important in creating, as you suggest, a more inclusive and competitive business approach?
BH: So I think if we look at South Africa, we certainly have inequality to a very large degree. And there’s also quite a large pay gap. So often when you see companies turn around and you look at what CEOs earn in the gap between the highest and lowest kind of worker, and the company does well and the CEOs and all the execs and shareholders do well, and the workers don’t, that certainly doesn’t seem to make sense for long-term sustainability.
BH: So if you can actually get more of that cohesiveness together, where people feel they’re playing the same game, we really are starting to move into the shared growth type mentality and the shared value type mentality. You’re also asking, or you would be asking, employees to share in the risk of the company as well as the downside. And not everyone’s got an appetite for that.
BH: So I think when it comes to employee share ownership when we talk about sharing in the growth and shared growth and shared value, we can’t expect employees to write checks out and be in a negative position. There are already a huge amount of challenges just on a day-to-day basis for many employees, even more senior people in the business. So when we’re talking about the shared value and the shared growth, people may get nothing if the company doesn’t do well, but if the company does do well, they participate in it.
BH: And that’s how senior execs are also remunerated as well. You don’t often see the senior exec write checks out for the options if they don’t work, but they may end up being out the money. So the share, the downside is not participating very well if the company doesn’t do well, but it doesn’t mean actually having to write a check out.
JM: How do you sell the notion to people within a company to make sure that ESOPs are simple and easily understood across all levels of the organization? Because you’ll concede there could be a degree of either concern or confusion.
BH: I think it’s even worse than that. I think there’s a large amount of distrust as well. So we’ve been doing ESOPs for the last 20 years or so in South Africa, and we often work with companies and they’ll go and say, great, we’ve had an employee share scheme and the employees have gotten nothing. And now we want to do a new scheme. The people don’t trust it.
BH: So when we look from in terms of how you’re looking to design it, you need to take into account where the company has been, has value actually been delivered over the period, and how do you actually communicate it in the simplest way possible? And there’s been quite a huge growth or move towards what’s called evergreen type schemes. So in other words, a move away from one day, if you’re lucky and the company does well, you’ll get your money in 10 years, to participating closer to the actual annual profitability of the company, but not a profit scheme. So it’s how do you make it more real and tangible where people can see those benefits as they accrue or get paid as opposed to being very, very long term.
JM: Is there a specific way in which ESOPs are structured to maximize impact both on business and the broader community? And obviously mining springs to mind. Is there a different design in that respect to make sure that everybody beyond just the company benefits?
BH: I think when it comes to ESOPs, there are two things. There’s partly what the structural corporate finance type design is, which we’ll deal with in a second, but it’s also the philosophy of the managers and the owners of the business who put it in place.
BH: So if the owners are, let me just do the bare minimum I can do so I can be compliant, it’s never going to make a difference, no matter what the structure is. But let’s assume people have a shared value approach. We really want the employees to benefit. We want them to understand. I think there’s been a huge move to understand that historic ESOPs were, when were you lucky? You take Kumba, people made a fortune. They made 500,000 rand in the first scheme. You’d get other commodities where they’d make nothing. And that was all around the structure, right time, right place, leveraged investment. There’s a huge move towards what’s called evergreen type structures, where people get a larger dividend and potentially less capital gain at the end of the period. And that builds the trust and makes it more sustainable. And I think it’s that kind of structuring and design where things have moved to very aggressively. And you’re seeing that in some of the large structures. You’re seeing it in the Anglo structures. You’re seeing in the Shoprite structures. I think that’s where that’s definitely where things are going.
JM: Bruce Hunt, I appreciate you shining the spotlight on this. Managing Director at Transcend Capital. Appreciate your time today.
About Bruce Hunt BCom, CFA, MBA(Manchester) – Director at Transcend Capital
Bruce is the Managing Director at Transcend Capital. He has 12 years of experience in structuring multinational BEE transactions which include Black operational partners, employees, Broad-based Ownership Schemes, and the sale of assets to Black investors. Before joining Transcend Capital, Bruce was a trader and structured finance professional at Investec Bank.