The dream of immense wealth was a reflection of the times. When apartheid ended, the Johannesburg Stock Exchange took off, rising nearly 20 percent in 1994 and continuing to climb in 1995 and 1996. It seemed only fair for blacks to jump on for the ride. Anxious to curry favor with the new majority-black government, investment firms offered well-connected blacks an irresistible deal, the opportunity to buy huge blocks of stocks with no money of their own. Instead of money, the blacks would provide political access and credibility. On the basis of that perceived access, the merchant bankers would raise money to buy the stock, which would then become collateral for the loan. The shares, often sold to the so-called black-empowerment firms at a discount (by companies eager to appear politically progressive), allowed blacks, Indians and coloreds to become players on the Stock Exchange–and to take over some previously white-run companies. Under the terms of the agreements, the stock generally couldn’t be sold for at least three years; the black buyers reaped riches only if the stock appreciated enough to generate profits well above those needed to cover the loans. But, if everything worked out, all involved would prosper.
Later the huge potential for disappointment became obvious. Since many of the black-empowerment deals never saw a profit, the trickle-down prosperity didn’t materialize. And because the emphasis was on stock value and not managerial input, empowerment didn’t necessarily mean an improvement in the circumstance of low- and middle-level black employees. But in the exalted era of South Africa’s rebirth, no one focused on the downside. “Everyone went into this without a thought of how you exit it,” says Jenny Cargill, head of BusinessMap, a prominent South African consulting and research firm. And why not? Merchant bankers were collecting fees. Blacks were getting financing. And fate was smiling.
According to BusinessMap’s statistics, black control of boards of companies listed on the Johannesburg exchange shot up from less than 1 percent in 1995 to more than 7 percent three years later. Equally astounding was the amount of money made available for empowerment deals. In 1998, more than 100 black companies participated in deals worth more than $3 billion.
Inevitably the rose-colored lenses shattered. Shaken by the financial crises in Asia, Brazil and Russia, investors worldwide fled emerging markets, sending the Johannesburg Stock Exchange into a tailspin. In August 1998, the market lost roughly 30 percent of its value, and black-controlled companies’ stock tumbled. The market capitalization of the 28 black-controlled firms tracked by BusinessMap went from $11 billion to about $8 billion. Although the stock market later rallied, the damage to confidence was done. Empowerment transactions in the first three quarters of 1999 fell to less than $1 billion. Black control of firms on the Stock Exchange also fell. The sense of loss in the black business community was palpable. If the market had not collapsed, “black people would have leveraged themselves into the economy of this country,” says Dikgang Moseneke, chief executive of New Africa Investments Ltd. (NAIL), an empowerment firm heavily invested in media and financial assets.
It was not merely a bearish market that accounted for the empowerment backlash. Some of the blame goes to the black firms themselves. New Africa Investments Ltd., for instance, enraged many of its shareholders earlier this year when its four top executives decided to award themselves stock options worth millions of dollars apiece. (“The timing was awful,” acknowledges Moseneke.) The spectacle of executives of the premier empowerment firm apparently feasting at the trough opened NAIL to harsh criticism from all quarters. NAIL’s founding chairman (Nelson Mandela’s personal physician) resigned, as did its executive director. NAIL was also forced into a reorganization that will result in blacks’ holding only a minority of the voting shares.
This not exactly empowering experience has left South Africans wrestling with some difficult questions. How do you create a new financial order (and new financial opportunities) without disturbing the old? How do you construct equality–economic and otherwise–on a foundation of blatant inequality? To what extent can you rely on the noblesse oblige of the newly rich to uplift the poor? Do black business people and professionals who benefit from government favoritism have social responsibilities their white compatriots don’t?
These issues are relatively new for South Africa. In the old days, when wealth was a whites-only privilege, black South Africans saw themselves as “part of a common struggle with common goals. There was a culture of unity, of togetherness,” recalls Moseneke. The new South Africa has created a class of black economic elites. “For me, that’s not the worrisome point,” says Tokyo Sexwale, former premier of Gauteng, South Africa’s most important province. “What is important is what they will do with that wealth… They must further continue to empower others,” adds Sexwale, who is now a businessman in the process of acquiring a diamond-and-mineral-resources empire.
Some critics challenge the very idea of get-rich-quick schemes as empowerment tools. Vhonani Mufamadi, a 30-year-old lawyer, suggests a more back-to-basics approach. In 1996, Mufamadi and nine partners were offered a chance to buy into Johnnic, a mega-black-empowerment holding company chaired by Cyril Ramaphosa, former general secretary of the ANC. “Financial houses came running,” Mufamadi recalls. His team quickly put together a deal valued at more than $25 million and then began computing their future wealth. The windfall never materialized: “We didn’t even have the benefits of dividends,” Mufamadi says. In the sobering light of that experience, Mufamadi shifted focus. Tswelopele Consortium Ltd., of which he is managing director, is now in the sugar-repackaging business. “This is not glamorous. It does not offer you [a $50 million] deal overnight,” says Mufamadi. But while the Johnnic structure, in his view, didn’t create a single new job, his sugar business had an immediate impact. “From the first day we opened the door, we empowered people,” he says. The firm started with eight employees several months ago, and now has 17, including a man who was unemployed for 22 years. And though Mufamadi’s new venture is relatively small, the experience has been priceless. “In the last year I’ve learned more about running a business than in the two years we were shareholders in Johnnic,” he says.
Despite disillusionment and some high-profile flops, black empowerment has not been a total failure. It allowed people (including women and representatives of labor unions) who had been systematically excluded to gain some valuable experience. It also made a few people rich, and gave others some capital with which they could construct a future. And it has fueled a resolve to ensure that the next phase is better–with players more focused on business and more attentive to the needs of the broader community.
“Every time an empowerment deal fails, I feel as if it’s emotionally scarring me,” says Hawa Bibi Khan, the 28-year-old managing director of the newly formed Merit Asset Managers. Merit, she vows, will not only do better deals, but will help build a better society. It will employ only nonwhite professionals (with the notable exception of Willi Jonker, Khan’s mentor and Merit’s senior portfolio manager). And Merit will focus not just on huge companies, but on smaller businesses where there is the possibility of more control and more opportunity for social impact and job creation. How successful the firm will be in this less-heady environment is unclear, but as Allen Tshabangu, Merit’s 27-year-old head of investments, points out, the principals are in no hurry to get rich. “I can afford to wait 10 to 15 years to make money.”
South Africans’ efforts to reconstruct their economy are as exhilarating for Sexwale as “when we started the political struggle.” Unlike the fight against apartheid, however, the empowerment movement has identified neither a clear villain nor an obvious solution. But thanks to the excesses and miscalculations of the first phase, it has generated a consensus about some things that were done wrong. Such as focusing too much on stock ownership and control rather than on socially meaningful results and, second, giving entrepreneurs a compelling financial incentive to buy stock but (with none of their own capital at risk) no incentive to take an active role in the companies whose stock they were buying.
Some of the disappointment in black empowerment has less to do with mishaps and mistakes than with unrealistic expectations. Empowerment firms, after all, control only a fraction of the national economy; and their creation was never conceived of as a cure-all for generations of deprivation. The movement became the focus of such outsized hopes because it promised so much for so little. It required no extraordinary government expenditures, nor charity from the financial community. It merely required faith in the market and in the power of personal wealth. That faith, though damaged, lives on. And money remains available for the politically connected looking to do deals. Still, in a country with a deep legacy of discrimination where roughly a third of blacks are unemployed, black empowerment should mean much more than wealth for a new elite. At this point, however, it is not clear that it will.
