Providing insights that enable Foresight

The Flight Plan The facilitated Workers’ Trust establishment process in the IDC context in SA. Managerial challenges and responses The Systemic View – Social dynamics at play The Global Perspective - USA, UK and India Harmonisation of divergent interests Conclusions and recommendations

Background A number of USA literature sources make the statement that “The employee stock ownership plan (Esop) concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets.” Trade unions in rejected the concept when Anglo announced, in 1988, what was then a ground-breaking move in South Africa, this was after a strike in which tens of thousands of workers were dismissed. Unions charged that Anglo was trying to bring the flavour of “people’s capitalism”, championed by Iron Lady Margaret Thatcher, to South Africa.

The Contextual Environment Global Environment Contextual Local Environment Local Enterprise

Key Drivers of Change Global Environment The Flat World Global communications Sustainability Contextual Local Environment Societal Economic Transformation Imperatives Local Enterprise Organisational Transformation - Driven by legislative Imperatives

Complexity of the Environment Globalisation Geopolitics Changes in BoP Social Media Technological Innovations Demographics Global Environment The Flat World Global communications Sustainability Contextual Local Environment Political/Policy Economic Social Technological Environmental Legislative Societal Economic Transformation Imperatives Local Enterprise Restructuring - Driven by business imperatives Organisational Transformation - Driven by legislative imperatives

Broad Management Roles and Responsibilities Products & Services Operations Asset Base Costs Financial Structure Marketing Industry Research & Development

Broad Management Roles and Responsibilities Products & Services Operations Asset Base Costs Financial Structure Marketing Industry Research & Development Industry dynamics Market growth Customer Needs Competitor moves Suppliers Rules & Regulations

Broad Management Roles and Responsibilities Products & Services Operations Asset Base Costs Financial Structure Marketing Industry Research & Development Industry dynamics Market growth Customer Needs Competitor moves Suppliers Compliance to Rules & Regulations Social change Technology advances Economic shifts Environmental drift Political developments Legislative changes

Some concrete examples

Former Arch-Bishop Desmond Tutu lauds the Sharon Fruit Industry. Baffuljagsrevier, Swellendam, South Africa. ARISA Workers’ Trust and ARISA Community Trust 09 MAR 2012 09:35 -

Preferential treatment of workers Then Magwa’s management gave pay rises of 100% to some workers but not to others, the union claims. “This led to conflict among the workers. Management was selective in terms of compensation,” said Mbalisi Tonga, the union’s provincial secretary in the Eastern Cape. “The manager said he would reward, in his words, ‘deserving cases’.” Tonga said there was further resentment when, to comply with the law, lunch breaks were extended from 30 minutes to an hour—but with a deduction of R6. “At that point, they unified the workers. The workers said we must fight and the strike started.” 09 MAR 2012

Management Challenges The decision to introduce an ESOP Scheme Mapping the process of establishing an ESOP Scheme Establishment of the actual ESOP Scheme Administration of the ESOP Scheme Management of the ESOP entity Measurement of its performance ESOP Governance Issues Representation on the Board of Directors ESOP and related stakeholder communications Role of the ESOP in long-term planning

Let’s start from the beginning
In 2006, we assisted the IDC with a reviewof Workers’ Trust transactions thathad been completed by that time.

Background: There was a growing need to facilitate empowerment of workers in selectedindustries in SA. There was increased desire to use Workers’ Trusts as the ideal empowerment vehicle No consistency in approach even within the IDC’s own historic involvement with Workers’Trusts. The non-existence of a common body of knowledge and approach to the establishment of Workers’ Trusts.

The Brief To determine the key success factors (“best practices”) in the formation and functioning of workers’ trusts within the following focus area: Mainly in the Agriculture, Miningand Tourism sectors, with more emphasis on the Agriculture sector Trusts aimed at the empowerment of lower skilled workers Legal and developmentalperspectives

Focus on Enterprises Global Environment Contextual Local Environment Local Enterprise We looked at about 22 entities in the Western Cape, Gauteng and Mpumalanga. All being IDC clients at that time.

Focus on Enterprises The Global Environment Contextual Local Environment Local Enterprise We looked at Workers’ Trust Deeds in place at that time

A Holistic View of Knowledge Requirements Essential Requisite Knowledge and Skills The Transaction Financial/Business Policy/ Social Facilitation Activities/Results Due diligence Business planning Fund raising Shareholding structure Dividend policy Governance policy Trust Creation People/Business/Legal Policy/ Social Facilitation Activities/Results Project management Meetings Facilitation Communication Elections New structure New culture New relations Code of Conduct Legal Aspects Legal/Policy/ Social Facilitation Activities/Results Trust Deed Registration Shareholders‘ Agreement Management Agreement Loan Agreement Put Option

Rationale and Motivation As a result of; Inheritance of assets as a result of a successful Land Claim in terms of Restitution of Land Rights Act, 1994 (a farm, farm land or a tourism asset) The sale in execution of a business owned by a state entity (to save jobs) Debt reduction or raising of capital for expansion Privatisation of a state-owned business/asset A Local Economic Development initiative Act of benevolence by a Trust Donor (rare in SA) The need to manage succession (rare in SA) The need to improve productivity and shared growth

Legal Framework and the Trust Deed Trust Deed Formation, Objects, Security, Name Trustees Election / Resignation / Removal Duties / Powers Beneficiaries Initial & New / Resignation / Removal Duties / Rights & Benefits Shares (NB: Exit clauses) Meetings (AGM, SGM) Disputes Amendments, Termination Appendices

Legal Framework and the Trust Deed Trust Deed Formation, Objects, Security, Name Trustees Election / Resignations / Removals Duties / Powers Beneficiaries Initial & New / Resignations / Removals Duties / Rights & Benefits Shares (NB: Exit clauses) Meetings (AGM, SGM) Disputes Amendments, Termination Appendices What is the finite number of clauses in any Trust Deed ?

The Trust Formation Process Low levels of education amongst workers – ignorance regarding Trust Deed & the Transaction Lack of business knowledge amongst the workers – no formal training programs exist Confusing roles and responsibilities as … shareholder vs. worker, Trustee vs. Director, Beneficiary vs. employee Unrealistic expectations of immediate returns/benefits Inability to draw on local professional expertise to assist workers Power relations between owners/management and workers remain unchanged (even after the deal has been concluded) Lack of a workers’ communication forum separate from a Trade Union structure Issues and Concerns

The Trust Formation Process % equity to be acquired Finance costs of the transaction Current performance and future prospects & risks Any foreseeable drastic developments (e.g. job cuts, new job opportunities, new acquisitions, etc.) Basic Terms of the Deal

The Trust Formation Process Normal market related risks Climate risks on crops Currency risks for exports/imports Cash-flow and debt management Inflation and competitive pricing Associated Business Risks

The Trust Formation Process Trust Deed Shareholders’ agreement Management agreement Loan agreement Put-option Important Legal Documents

The Trust Formation Process Appointment, dismissal and remuneration of directors Dividend policy Protection of minorities interests Dilution of employees’ equity stake as a result of a new share issue or the re-capitalisation of the business Surety requirements Dealing in company shares Worker empowerment policy and practice Key clauses in these documents

Trust Formation ProcessPrinciples & Values Transparency Empowerment Being “enabled & accountable” Financial Knowledge & Skills Requisite Authority Inclusive Participation Fairness Justice Equity Mutual Respect

Financial liquidity of the Trust Exit and entry mechanism for new beneficiaries What criteria should used ? How will it be financed? (selling & buying of “trust units”) Ongoing mentorship/support Ongoing knowledge empowerment and change management Key Considerations & Priorities

Lessons learned and best practices Structure and content of the Trust Deed Simplicity of representative structures Simplicity of the management and operational processes Facilitation of the implementation process Relationship Management - Management of the Paradoxical dynamics - Management of emerging social and business complexities - Power relations within and amongst the Trust beneficiaries Monitoring mechanism to ensure integrity of leadership and statutory compliance Provision for mediation/arbitration of disputes Management of the exit and entry from the Trust Post-settlement support (when the sponsor has exited) The need for a spirit of true empowerment

A Systemic View The ESOP environment in context Based on Systems Thinking Systems thinking has been defined as an approach to problem solving by viewing “problems” as parts of an overall system, rather than reacting to specific parts, outcomes or events and potentially contributing to further development of unintended consequences.

A Systemic View of - the social dynamics at play Realities that should be acknowledged by all role players specifically sponsors, (be it government, the company or employees) funders and Facilitators the Various systems exist and are simultaneously at play: The Enterprise The Board Management (at all levels) Non-managerial staff Workers (in a factory or farm environment) The Trade Union (where applicable) The identity, roles, interests, functions and duties of each are neatly separated and well defined.

A Systemic View of - the social dynamics at play Existing systems prior to an ESOP Board of Directors Workers Management and Staff Trade Union Staff Representative body The identity, roles, interests, functions and duties of each are neatly separated and well defined.

A Systemic View of - the social dynamics at play Influential Stakeholders – local and international External investors & Regulators & influential suppliers The influence of powerful yet silent and invisible actors outside the enterprise should be recognised and considered.

A Systemic View of - the social dynamics at play Existing systems prior to an ESOP External investors & Regulators & influential suppliers The ESOP System - Effective but subtle influence on the overall performance of the enterprise A minimum of 4 paradoxes immediately confront the enterprise role players in different ways and in different degrees of magnitude.

A Systemic View of - the social dynamics at play The Paradox of Perception The Paradox of Disclosure The Paradox of Belonging The Paradox of Identity Oxford English Dictionary defines paradox as ‘a statement or tenet contrary to received opinion or belief, especially one that is difficult to believe’. Paradoxes represent instances where the present knowledge is lacking and expectations are inconsistent with actual events or findings. Paradoxes surprise us and should evoke a desire to gain deeper understanding. Therefore, realizing and highlighting paradoxes is important as unique opportunities to acquire new knowledge and question assumed truths. European Journal of Neuroscience, Vol. 32, pp. 1030–1031, 2010 Alvaro Pascual-Leone, at Harvard Medical School

A Systemic View – The Paradox of Perception It’s too good to be true !!!! Traditional employer/employee relations have always been characterized by the overriding paradigm of “putting the interests of the enterprise first” Where the ESOP idea originates from and external BEE promoting agent of government, can employees/workers be expected to trust the “new found goodwill” of management and directors? The perception that prevails amongst beneficiaries is often expressed in the scepticism of “…what’s the catch?, they have never been this good to us in all these years”. In many instances, the relationship never transcends these perceptions, especially where the inspiration came from an external agent. Where these have been overcome, trust needs to be built and nurtured over time

A Systemic View – The Paradox of Disclosure To tell or not to tell, is the question !! To what extent is the Workers’ Trust representative on the board, constrained or obliged to disclose the discussions and forward thinking of the board, outside of formal communication channels ? If new developments are likely affect negatively, the interests of the workers/staff members, is there not a duty to disclose to one’s constituency ? What are the consequences of failure to disclose ? And what are those of actual disclosure? For many Workers’ Trusts representatives, this is a major source of conflict !! It has the potential of destroying mutual trust in an enterprise

A Systemic View – The Paradox of Belonging To join or not to join the union !!! Unions are known be positioned in the workers’ camp in direct adversarial postures against the management of the enterprise promoting and protecting the interests of the workers. In a climate where a thriving and lucrative ESOP or Workers’ Trust is known to exist, new entrants to the enterprise are bound to be conflicted in exercising their right to join an existing union. Where a trade union exists, solidarity strikes in initiated at other companies place workers in ESOP enterprises in paradoxical situations. The workers desire and work hard to ensure maximum profits and dividends but feel constrained to join a solidarity strike that threatens their financial rewards. Trade unions in SA have long standing well established & thriving ESOP entities but still the paradox prevails.

A Systemic View – The Paradox of Identity Owner(employer) or employee ? While for many owner established and operated businesses, the dualidentities of owner and employee at the same time do not give rise to any paradox, the same is not true for newly empowered ESOP beneficiaries. The adversarial and subordinate relations of the employee towards employer, present a paradox of identity. Along with the paradox of belonging conflicting feelings of loyalty and trust begin to surface. How these manifest and how they are dealt with is at core of a more competent and enlightened new paradigm, that displaces the old. Recognising and dealing with these paradox dynamics requires insightful knowledge and understanding of emerging social complexities and knowing when to take proactive interventions.

The Global Perspective - A View from India - Empowerment An Indian ESOP company on the NASDAQ Stock Market

The Global Perspective - A View from India - Empowerment An Indian ESOP company on the NASDAQ Stock Market In 1994 the company put in place the Employees Stock Option Scheme, which along with the 1998 ADR scheme gave stocks to over 18,000 employees, creating hundreds of dollar millionaires and thousands of rupee millionaires. Drivers, office assistants, secretaries got stock along with others and became millionaires. It soon became the most successful scheme in India and set a benchmark for other companies. It gave us an unique positioning, democratized wealth and suddenly the professionals realized that they too could become wealthy by ethical means early in their careers. It revolutionized India. The Predictability, Profitability, Sustainability and Derisking (PSPD) model has been at the core of our business philosophy. In 1993, we had 25 projects, 750 employees, US$ 5 million in revenue and operated out of two offices in India and one international sales office in Boston. Today, we have over 620 clients, 6,500 projects, 1,30,820 employees, US$ 6.04 billion in revenue, and operate out of 64 sales offices and 63 global development centers spread across 75 cities in 32 countries. When I look back, I realize that quality at Infosys is not just about governance, prerequisites or metrics. Through quality, we have succeeded as an organization to set ourselves on the path of the continued pursuit of excellence with a constancy of purpose. In the process, we have earned the sustained trust of our stakeholders – employees, clients, alliance partners, the industry, government and the society at large. This trust is an intangible, yet an invaluable asset and reflects the success of our quality journey over the past three decades. I strongly believe that it will continue to be at the core of our success in the years to come. N. R. Narayana Murthy Chairman and Chief Mentor Infosys Annual Report 2010-11

The Global Perspective A view from the USA Getting Your Company Ready for an ESOP: The Ownership Culture Perspective: By: Virginia J. Vanderslice & Alexander P. Moss Praxis Consulting Group, Inc. ✔ Initial Perceptions of Employee Ownership: Suspicion and Skepticism: Employees often learn that they have become shareholders through an announcement by the company president or CEO, after the transaction is completed. It is typical for employees to greet such an announcement with suspicion and skepticism. This reaction may arise from any of several sources. ESOPs as “Something for Nothing.” Trading Compensation or Benefits for Company Stock. Replacing Other Benefits with an ESOP.

The Global Perspective A view from the USA Getting Your Company Ready for an ESOP: The Ownership Culture Perspective: By: Virginia J. Vanderslice & Alexander P. Moss Praxis Consulting Group, Inc. ✔ Cultural Contradictions: The nature of a company’s culture before and at the time an ESOP is implemented can greatly affect employees’ initial responses to the ESOP and the company’s ability to transition to a culture that maximizes the performance-enhancement opportunities that employee ownership presents. ✔ Misaligned Ownership Expectations Diverse expectations of employee ownership that people bring to their roles in ESOP companies present a major challenge. Until people’s expectations for “ownership” are consistent throughout an ESOP company, tensions arising from disappointed expectations may present a roadblock to maximizing company performance. This is as much a problem for companies that only see their ESOP as a financial tool as it is for companies that want to make their ESOP the foundation for developing a high-performance ownership culture. Command and Control Management Styles. A History of Distrust

Turning Ownership into Motivation There are five major categories of activities through which an ESOP company can reinforce employees’ understanding of the linkages and develop company practices that strengthen the linkages. These are; ongoing communication, education, - Broad business literacy - Skills Training - Corporate governance participation, short-term incentives shared vision and foresight The Global Perspective A view from the USA Source: The Ownership Culture Perspective: Praxis Consulting Group, Inc.

The Global Perspective A view from the United Kingdom “Growing the economy is the Coalition’s most pressing priority. Lessons from the financial crisis have exposed our economy as too narrowly focused on certain sectors and regions, with the majority of our companies structured around one type of business model. We need to fundamentally change our economy to ensure long term growth is strong and more evenly balanced in the future. One of the centerpieces to creating this sustainable growth is to encourage more responsible and more diverse ways of running a business in Britain today.I want this to be the decade of wider employee ownership.” Norman Lamb; Minister for Employment Relations, Consumer and Postal Affairs July 2012

The Global Perspective A view from the United Kingdom – Sharing Success List of the Nuttal Review Recommendations Promoting and raising awareness of employee ownership Raising awareness of employee ownership within the Government, and ensuring continuity Raising awareness and demand through a Right to Request employee ownership Ensuring employee ownership and employee buy-outs are well known business concepts Improving employee owned companies’ access to finance Reducing the complexity of employee ownership by providing simplified ‘off the shelf’ models for employee ownership Avoiding unintended regulatory burdens upon employee owned companies Graeme Nuttall UK Government adviser on employee ownership July 2012

The Global Perspective A view from the United Kingdom – Sharing Success List of the Nuttal Review - Implementation Recommendations Through the Minister for Employment Relations, the Department for Business, Innovation and Skills should, within three months of this review, publish an Action Plan showing actions taken to implement its recommendations and others aimed at promoting employee ownership. The Minister responsible for employee ownership should produce a ‘one-year on’ report 12 months after the formal Government response to this review, reporting publicly on progress made on promoting employee ownership and the implementation of these recommendations. The Minister for employee ownership should convene a small ‘sounding board’ of sector representatives to advise him or her periodically on the direction of implementation and on new opportunities to promote employee ownership. Graeme Nuttall UK Government adviser on employee ownership July 2012

Conclusions The establishment of an ESOP amounts to fundamental transformation of the business. The impact of both overt and subtle changes in the social relations manifest immediately after the announcement of the intension to establish one. Honesty and integrity are essential prerequisite that can maintain and sustain mutual relationships. Facilitated change management processes should kick-in right from the beginning not only when problems manifest, that may be too late. The over-arching goal of the ESOP concept should not be limited to advancing enterprise goals and objectives, it should be to harmonize the interests of employees along with those of society and nation building in general. South Africa, is still focused at the Local Enterprise level, while the developed and developing world is concerned with the transactional and broader industry and sector level sustainability over the long-term.

Harmonisation of divergent interests
SA and other SADC states Industry and Sector Local Community Enterprise Pursuit of Broadbased BEE Goals should harmonise with the employees’ and community interests

Some Recommendations ESOPs and Workers’ Trusts as empowerment vehicles should gain greater recognition by both business owners and employees. An institutional framework, perhaps outside of the government structures but in direct collaboration with government is needed. The emerging trend of ESOPs and the Right to Request, may have special significance for the sustainability of the South African industries and economy. Make special effort to create an enlightened view of the complexities of the operational environment. Apply Systems Thinking to recognise and manage the paradoxical situations that arise. Apply Foresight to create a desired common future for the enterprise in the context of its operational environment. On-going communications, active participation, skills development and education shall remain the corner stones of building trust and confidence in a sustainable ESOP enterprises.

Thank You

Providing insights that enable Foresight