2. black economic empowerment, legitimacy

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Accounting and Finance 49 (2009) 3758

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BlackwellPublishingLtdOxford,UKACFIAccountingand Finance0810-53911467-629XTheAuthorsJournalcompilation 2008 AFAANZXXXOriginalArticleS.F.Cahan,C.J.van StadenS.F.Cahan,C.J.van Staden

Black economic empowerment, legitimacy and the value

added statement: evidence from post-apartheid

South Africa

Steven F. Cahan, Chris J. van Staden

Department of Accounting and Finance, University of Auckland Business School, Auckland,1010, New Zealand

Abstract

We examine why companies in South Africa voluntarily provide a value added

statement (VAS). The VAS can be used by management to communicate with

employees and thereby establish a record of legitimacy. Since we want to establish

if the VAS is used to establish symbolic or substantive legitimacy, we examine whether

production of a VAS is associated with actual performance in labour-related areas.

To measure labour-related performance, we use an independent Black Economic

Empowerment (BEE) rating. We find that BEE performance is significantly and

positively related to the voluntary publication of a VAS. Our results suggest that

BEE performance and disclosure of a VAS are two elements of a strategy used by

South African companies to establish their substantive legitimacy with labour.

Key words

: Labour relations; Accounting disclosures; Substantive legitimacy;

Black economic empowerment; South Africa

JEL classification

: M41

doi

: 10.1111/j.1467

-

629x.2008.00280.x

1. Introduction and motivation

As financial reporting becomes increasingly harmonized at a global level, the

continued voluntary disclosure of a value added statement (VAS) by many

We thank Jayne Godfrey, Michael Keenan, Joanne Locke, Rachel Morley, Dean Neu, DerylNorthcott, Hector Perera, Jilnaught Wong, and participants at the 2005 Auckland RegionAccounting Conference for their helpful comments. We also thank the participants and

commentators at the 2006 Interdisciplinary Perspectives on Accounting Conference in Cardiff,the 2006 Accounting and Finance Association of Australia and New Zealand Annual Conferencein Wellington, and the 2007 American Accounting Association Conference in Chicago.

Received 14 May 2008; accepted 26 June 2008 by Ian Zimmer (Deputy Editor).


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South African companies remains an accounting oddity. The VAS is a supplemental

statement that shows the value added in production and how that value is

distributed among the companys various stakeholder groups. Historically, the

VAS has been produced on a widespread basis in only a few instances, mostnotably in the UK in the late 1940s/early 1950s and 1970s (e.g. Burchell et

al

.,

1985) and more recently in South Africa (e.g. Van Staden, 2003). Both Burchell

et al.

(1985) and Van Staden (2003) find that increased production of the VAS

coincided with the ascendancy of labour in the UK and South Africa, respectively.

This suggests that companies use the VAS to establish or reinforce their legitimacy

with labour.

1

Less clear is whether companies use the VAS to establish substantive or

symbolic legitimacy. Based on the literature on corporate social responsibility

(CSR), under the symbolic approach, [r]ather than actually change its ways,the organization might simply portray or symbolically manage them so as

to appear

consistent with social values and expectations (Ashforth and Gibbs,

1990, p. 180). Therefore, a company with poor labour relations or practices

might provide a VAS because its competitors and other companies are providing

the VAS. In contrast, the substantive approach involves real, material change in

organizational goals, structures, and processes or institutionalized practices

(Ashforth and Gibbs, 1990, p. 178). Under the substantive view, only companies

that actually have good performance in labour-related areas will have incentives

to disclose a VAS.

Of course, it is often not easy to distinguish between these two types of legitimacy

because; to do so requires a credible measure of good labour performance. In

the present study, we use the companys performance in the area of Black

Economic Empowerment (BEE) as a measure of labour performance. We view

BEE practices as being critically important for South African companies

because of the countrys past and continuing racial inequities. In that context, a

companys ability to promote the employment of black South Africans and to

improve their chances for advancement will be central in establishing legitimacy

with labour (who are largely non-white).

We examine whether companies that are relatively more progressive in theirBEE practices are more likely to publish a VAS. A significant positive relation

between substantive labour performance and publication of a VAS would suggest

that the VAS is part of a strategy being used by South African companies to

establish substantive legitimacy with labour. A negative or no relation between

the BEE ratings and disclosure of a VAS would suggest that companies use the

1

We do not believe that the VAS is the only mechanism used to establish legitimacy, noris it our intention to identify all the mechanisms that a company might use to establishlegitimacy with labour. As accounting researchers, we are interested in whether the VAS,which is an accounting-related disclosure, is one mechanism that companies use to establishsubstantive legitimacy with labour.


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VAS as part of an effort to establish symbolic legitimacy or that the publication

of the VAS is motivated by factors unrelated to labour performance. Our results

indicate that, ceteris paribus

, BEE performance is significantly and positively

related to the production of a VAS. This indicates that production of a VAS iscorrelated with actual BEE performance.

Our study makes two main contributions to the literature. First, we add to the

very limited body of research on the VAS. Although both Burchell

et al.

(1985)

and Van Staden (2003) link the production of the VAS to the ascendancy of

labour at the country level, neither study attempts to explain why the production

of a VAS might differ between companies within a country. Furthermore, as

noted before, publishing the VAS is a reporting oddity and examining the

motives behind this is interesting in its own right.

Second, and more generally, we also contribute to a broader literature on therelation between a companys CSR disclosures and its actual CSR performance.

For example, Patten (2005) notes that environmental disclosures are often seen

as misleading because the disclosures do not appear to accurately measure a

companys environmental performance. On the other hand, Al-Tuwaijri et

al

.

(2004) find a positive relation between good environmental performance and

environmental disclosures. In the present study, we add to the general debate on CSR

disclosures versus performance by focusing on an unusual voluntary disclosure

(the VAS) and a unique context (i.e. post-apartheid South Africa).

To our knowledge, we are also the first study to examine the link between

race-related labour practices and accounting disclosures. Although race-related

issues are by no means absent from the accounting literature (e.g. Annisette,

2003; Bernardi et

al

., 2005), we are the first to show an empirical association

between a companys race-related labour performance and the type of account-

ing reports that it voluntarily provides.

The paper starts with background on the VAS, followed by the theoretical

background and an overview of the development of labour policies in South

Africa. This is followed by a discussion of our method, data and results for our

empirical analysis, and the final section contains our conclusions.

2. Background on the value added statement

The concept of value added was initially used in 1790 in the first North

American Census of Production (Gillchrist, 1970) and has since been adopted

by most industrial nations in the calculation of gross national product. The

accounting definition that is most often used in the VAS calculates value added

as sales less the cost of bought in goods and services. Suojanen (1954) defines

the firm as an enterprise or decision-making centre for the participants (i.e. the

enterprise theory). He also suggests the value added concept for incomemeasurement as a way for management to fulfil its accounting duty to the various

interest groups. This makes him one of the first writers to suggest the value

added concept in terms of accounting for the results of an enterprise.


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The publication of the VAS has waxed and waned over the years. According

to the literature, the publication of the statement originated in the UK: initially

in the late 1940s/early 1950s and then again in the 1970s. The literature is not

replete with many other examples of the publication of the VAS. There aresome references to publication in Europe, Australia and New Zealand, but it

would appear that after the second waning in the UK (early 1980s), the publication

of the statement has nearly disappeared worldwide. In the USA, companies

never showed an interest in publishing the statement.

2

The incidence of South African companies publishing the VAS has increased

over time with 43 per cent of industrial companies producing a statement in

1997 and we found that by 2002, 55 per cent (125 of 228) of companies listed

in the industrial sector on the Johannesburg Securities Exchange (JSE) published

a VAS.The stakeholders typically represented in the VAS includes employees as

providers of labour, capital providers (both loan capital and equity capital), the

government (apparently as provider of infrastructure), and the company itself in

terms of the part of value added that is reinvested. Burchell

et al.

(1985) indicate

that value added could be regarded as a performance measure that puts employees

on par with other interests in the enterprise. Gray et

al

. (1996) describes the

VAS as a purportedly employee-related development, and employees are also

often cited as the group of users of financial information that should get the most

use from the value added statement (e.g. Morley, 1978; Seal, 1987). Furthermore,

IAS1 (International Accounting Standards Board, 2003) indicates that entities

should also present VAS when employees are regarded to be an important user

group.

Van Staden (1998, 2003) finds strong evidence that management in South Africa

see the VAS as having an important role in its relations with employees. For

example, he finds that 89 per cent of managers responding to his survey use the

VAS to communicate with employees. This was the most frequently cited reason

for publishing a VAS in his study. Furthermore, managers also use the VAS to

indicate social responsibility on the part of the company (83 per cent), to condition

employee expectations regarding future wages (81 per cent), to communicatewith uninitiated and less sophisticated users (81 per cent), and to facilitate wage

negotiation and collective bargaining (80 per cent). Each of these reasons can be

linked, directly or indirectly, to employees or to the companys role as an

employer. Stainbank (1992) reports, in another South African study, that the value

added statement is mainly used for employee communication (96 per cent) and

wage negotiations (74 per cent).

2

The non-publication of the statement did not seem to deter US researchers from doingresearch on the accounting concept of value added since value added can usually be calcu-lated from information published by the companies (see e.g. Riahi-Belkaoui, 1996; Bao andBao, 1996).


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Therefore, the work of Van Staden (1998, 2003) and Stainbank (1992) provide

evidence that the VAS can be viewed as an employee-related development in

the context of South Africa. However, this raises a related question: Given its

usefulness to employees, why is it that not all South African companies providea VAS?

3. Theoretical background

A review of the literature on the VAS found a large number of articles, books

and research reports published since 1954, when Suojanen (1954) wrote the

article linking the VAS with the enterprise theory. However, Burchell

et al.

(1985) provide the first and probably most comprehensive attempt to

explain the theoretical motivation behind the interest in publishing the VAS, astatement that has never been required by statute or governed by accounting

standards in any country.

3.1. The theory of Burchell et al. (1985)

Burchell

et al.

(1985) aim to describe and analyse the relationship between

accounting change and social change, as highlighted by the value added event

in the UK. They describe three arenas (or complexes of issues, institutions,

bodies of knowledge, practices and actions) that intersected in the 1970s to

form a constellation with value added as an important element. In their view,

this constellation explains the sudden upsurge of interest in the VAS in the UK

in the 1970s. The three arenas that were identified are: the threat of government

intervention in the standard setting process, macro-economic management

under conditions of full employment, and industrial relations that were dominated

by powerful trade unions and a growing acceptance of industrial democracy.

Van Staden (2003) applies the framework of Burchell

et al.

(1985) to the

South African situation and concluded that two of the three arenas were present

in South Africa. These are the arena dealing with macro-economic management

(although in the South African situation this was related to job creation ratherthan productivity growth) and the arena dealing with industrial relations (the

impact of powerful trade unions). Van Staden relates these issues to the theories

of political economy and concludes that the desire to gain legitimacy from a new

set of powerful stakeholders provide a plausible explanation for the sustained

publication of the statement in South Africa.

3

3

De Villiers and Van Staden (2006) also observe legitimating behaviour when SouthAfrican companies first published more environmental information and then less whenthey realized that the priorities of the ANC government were job creation and equitableemployment, and not environmental.


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The theory of Burchell

et al.

(1985) is very useful for explaining why the

VAS has appeared for periods in certain countries, but it does not explain why,

within a country, some companies disclose a VAS while others do not. To

answer this question, we draw on organizational legitimacy theory.

3.2. Organizational legitimacy theory

Although organizational legitimacy suggests that an organization should be

operating within the norms and expectations of the society within which it

operates to be regarded as legitimate, achieving legitimacy is a multifaceted

process. Strategic organizational legitimacy views legitimacy as a resource that

management can deploy or use to obtain societal support, making legitimacy

management heavily dependent on communication between the organizationand its various audiences (Suchman, 1995). Organizational legitimacy represents

the reaction of observers to the organization as they see it (Suchman, 1995). In

this regard Barnett (2007, p. 800) suggests that trust arises and relationships

improve as stakeholders observe a firms CSR activities, not as a consequence

of a firms use of direct influence tactics to capture their favour. Barnett suggests

that the ability of the company to improve stakeholder relations through CSR

depends on prior relationships and that stakeholders base their assessment of

new information regarding the companys CSR on their prior knowledge.

In the accounting literature, legitimacy theory is often used to explain why

companies are publishing voluntary social and environmental information, as

this goes beyond the information that is legally required to be published. The

literature is replete with studies defining and describing organizational legiti-

macy and how (voluntary) disclosures are generally used to achieve legitimacy

(e.g. Dowling and Pfeffer, 1975; Lindblom, 1994; Deegan and Rankin, 1996;

Milne and Patten, 2002). Disclosures are necessary to demonstrate legitimacy,

otherwise a legitimate organization might face a legitimacy threat if its stake-

holders are not aware that it is operating within their norms and expectations

(Newson and Deegan, 2002). Various strategies can be used to obtain legitimacy

(Dowling and Pfeffer, 1975; Lindblom, 1994). These strategies range fromchanging organizational goals, methods and outputs (substantive) to managing

and changing perceptions about the companys goals, methods and outputs

(symbolic). In this way the process of legitimization can therefore be symbolic

or substantive (Ashforth and Gibbs, 1990).

Several empirical studies find that companies publish more environmental

information in reaction to increased environmental exposures or some environ-

mental event (see e.g. Patten, 1992, 2000; Deegan and Rankin, 1996). Although

the results of these studies support legitimacy theory, some researchers (see e.g.

Neu et

al

., 1998; Patten, 2005) point out that it is not possible to know whichof the legitimacy strategies the companies are following; that is, are they adapting

their outputs, goals and methods to conform with societys expectations

(substantive legitimacy) or are they instead just using disclosures to project an


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2009 AFAANZ

image of being legitimate (symbolic legitimacy)? Campbell (2007, p. 950) suggests

that it is important to distinguish between the rhetoric of socially responsible

corporate behaviour and substantive action. Therefore, based on the environmental

disclosure literature, whether companies use voluntary disclosures to establishsubstantive or symbolic legitimacy is unclear, but nevertheless important to determine.

South African companies (like all companies) need to be regarded as legitimate

by their stakeholders, particularly the most powerful stakeholders. As we will

show, in South Africa the most powerful stakeholder is (and was since the mid-

1980s) labour and their representatives, being the powerful labour unions and

the African National Congress (ANC) labour coalition government. Analogous to

studies that relate environmental disclosure to environmental performance, we

examine whether disclosure of a VAS is related to a companys substantive

labour performance. However, our tests are inherently more powerful than priorstudies that examine CSR disclosures because, in those studies, the relevant

stakeholder often has little or marginal power (e.g. green political parties,

conservation groups). As we discuss in the next section, labours power and

influence in South Africa is huge. This creates a setting in which South African

companies will have substantial incentives to establish legitimacy in the eyes of

labour.

4

However, in line with Barnett (2007), stakeholders of South African com-

panies will only regard labour initiatives as credible from companies that are

making substantive progress with labour.

In our later empirical analysis, we test this by examining whether companies

with good labour relations (which we proxy using BEE performance) are more

likely to produce a VAS. As good labour relations could manifest itself in the

publication of the VAS and progress on the BEE measures, we are not suggesting

causality; rather, we are reporting on associations between these.

4. The South African labour situation

In this section, we substantiate our claim of labours huge power and influence

in South Africa by providing an overview of the historical development of the

labour policies of the ANC, the traditional party of the black majority and thecurrent ruling party of South Africa.

5

4

Although we expect that the need to ensure substantive legitimacy will motivate companiesto disclose a VAS, we stress that we are not attempting to identify labours legitimate orfair share of the value added. Estimating this amount is probably not possible in any case,but more importantly, labour and management will always have different views on what isa legitimate share. In our definition of legitimacy (borrowed from Suchman, 1995), legitimacyinvolves being more meaningful, more predictable, and more trustworthy. An employer can

exhibit these qualities even if it does not always pay or give the employees everything thatthey want.

5

Catchpowle and Cooper (1999), Van Staden (2003) and De Villiers and Van Staden (2006)provide comprehensive reviews of the social and economic backdrop in South Africa.


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From the 1940s, the ANC opposed capitalism and private enterprise. It had

(and still has) strong alliances with the South African Communist Party (SACP)

and the Congress of South African Trade Unions (COSATU) (the largest

trade union movement in South Africa). The communist party was obviouslyanticapitalism, and COSATU was antiprivate enterprise in that they believed

that their members would be better off in nationalized (state) enterprises.

Before its un-banning in 1990, one recurring theme of the ANC was that apartheid,

inequality and capitalism were integrally related and that state intervention

was therefore needed to create a more equitable and just economic system

(Catchpowle and Cooper, 1999). Williams and Taylor (2000, p. 24) describe the

ANCs economic policy for most of the struggle as a mixture ofdirigisme

and

socialist reform of the economy via nationalization of the mines, banks and

monopoly industries.The ANC, in its efforts to bring about majority rule in South Africa, called

for economic sanctions and disinvestment by the international community in

order to force change by economic isolation. This contributed to an economic

slowdown in South Africa which no doubt helped to usher in the new dispensation

in South Africa. Furthermore, even after its un-banning, the ANC often talked

about nationalization as a means of obtaining capital for redistribution. As a

result, business continued to view the ANC as antibusiness (anticapital) and

pro-labour, and during the 1980s when it became clear that the ANC would be

the next government, business feared the result.

6

However, when the ANC took over the government in 1994, it changed its

economic policies and embraced the free market principles that were operating

in South Africa because realistically there was no alternative as it would have

be impossible for the ANC to develop a socioeconomic restructuring program

that was independent of the existing worldwide capitalist system (Catchpowle

and Cooper, 1999; Williams and Taylor, 2000). Although many supporters of

the ANC (including the SACP/COSATU alliance) were shocked by this shift in

ideology, the ANC continued to push for labour-related reforms, and as a result,

the labour market became much regulated. In addition, the government adopted

the Black Economic Empowerment (BEE) program in order to encourage theemployment of black people at all levels of business, and also to encourage

black entrepreneurs and black business ownership.

Since then, the labour unions continue to wield a sizeable influence. There

are signs that their alliance with the ANC is not so strong anymore. If the ANC/

COSATU/SACP alliance breaks up, and COSATO and the SACP form a new

alliance and can mobilize the support of the unemployed (currently more than

6

It is important to note that even though the ANC was un-banned during 1990 and becamethe elected government in 1994, business knew since the mid-1980s already that the gov-ernment was going to change and that the disenfranchised was going to become the newgovernment or strongly represented by the new government.


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40 per cent

7

), the ANC might lose power and a new labour government might

form. Even if this does not occur, currently there is constant friction with the

COSATU movement concerned about wage levels versus profits and executive

salaries.

8

What this episode suggests is that business still sees powerful labouras a major threat in South Africa and has incentives to establish and maintain

their legitimacy in the eyes of labour.

5. The BEE measures and rating

We use an independent rating of BEE performance in South Africa as a measure

of a companys labour practices, as empowerment of non-white people is one of

the most important goals in South Africa. The BEE ratings that we use in this

study have been compiled by Empowerdex, an economic empowerment ratingagency in South Africa.

9

We use Empowerdexs 2004 ratings that, to our

knowledge, were the first comprehensive rating of South African companies

based on BEE performance. Their methodology is available on their website

and includes establishing benchmarks using public available information as

well as additional information supplied by companies on request (Empowerdex,

2004). Empowerdex calculates a total BEE score (out of 100) based on seven

subcategories (each out of 100) and then rank the companies according to their

BEE score. These categories indicate progress in advancing the interests of

black (non-white) people in the following areas: ownership in the company,

management (directors and executive directors), employment equity (including

top-management), skills development, affirmative procurement, enterprise

development (developing black business partners, including suppliers), and

corporate social investment (being investment towards education and community

development).

7

The very high unemployment rate in South Africa also raises concern about the currenteconomic policies of the ANC (e.g. Williams and Taylor (2000, p. 37) indicate that the fiscalpolicies have constructed an economy which goes nowhere in terms of conditions of life forthe greater majority of people) and the appropriateness of the ANCs pro-business policies.

8

In a more recent development, Jacob Zuma has been elected as leader of the ANC inDecember 2007 and it is generally believed that he will succeed Thabo Mbeki as presidentin 2009. Zuma has the support of the labour unions and is likely to be antibusiness. TheNew Zealand Herald

reports as follows: uncertainty over his policies and his strongleft-wing backing have caused jitters among many investors . . . [m]arkets fear Zuma couldreverse Mbekis centrist policies, which have fuelled the longest period of growth inAfricas economic powerhouse (Simao, 2007).

9

Empowerdex is an independent economic empowerment rating and research agency. Itwas founded in 2002 by Vuyo Jack and Chia-Chao Wu and became involved in the sphereof BEE research with the release of South Africas first empowerment-based survey.Empowerdex is funded through subscriptions and claims to have no political agenda otherthan to reveal progress towards broad-based BEE in South Africa.


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We used a report published by the Financial Mail

in 2004 (Top Empowerment

Companies), which reported the top 200 companies in terms of BEE (F.M.,

2004). This list has been compiled by Empowerdex after they benchmarked all

362 Johannesburg Securities Exchange-listed companies.We have several comments about the BEE program and BEE ratings. First,

compliance with the BEE policies was not (and is still not) compulsory. South

African companies can respond in some, none, or all of the seven specific areas

identified above. Therefore, companies that are making progress on BEE

objectives are doing so because they want to rather than because they are forced

to do so.

10

Second, we focus on the first release of BEE ratings in 2004. In other

words, the ratings will reflect the progress of the first movers or early adopters

of BEE practices. The companies that rate highly in this round will likely be the

most innovative and progressive employers. Third, the BEE ratings are noteasily exaggerated or falsified. The ratings are determined by an independent

rating organization based on publicly available information. Therefore, to get a

high rating, the company must be taking real actions, and companies cannot

manage the rating figures in the way they can manage their earnings.

11

Together, these points give us confidence that the BEE ratings are measuring

the companys substantive progress in the BEE areas. Said differently, they are

not purely cosmetic or symbolic measures.

Equally important, the BEE ratings are a measure of relative, not absolute,

BEE progress. Therefore, higher ratings suggest the company is doing well

compared to other South African companies. It does not mean that the company

is a perfect or ideal employer. Furthermore, given South Africas apartheid past

where black people were discriminated against, we expect that most companies

would be starting from a low base in terms of their BEE practices. Hence, on

average, we expect the South African companies to rate lowly in the initial BEE

ratings in 2004.

6. Method and data

The purpose of our analysis is to examine whether the publication of a VASis statistically related to a companys BEE rating where the BEE rating is a

10

For example, in 2002, companies did not have to comply with BEE policies to beawarded government contracts. This is still the case in 2006.

11

Although there could be a view that companies are just making symbolic appointments to

executive positions, in the South African context where BEE is seen as such an importantissue, there is not really much scope to do it at this level as these individuals will objectto be treated in this way and will have the support of the majority view. In addition, theseindividuals are very highly remunerated and as Campbell (2007) indicates, committingsignificant resources to an issue is an indication that it is taken seriously.


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proxy for the companys actual labour progress.

12

In our rating system, good

BEE performers have high BEE ratings; therefore, a positive association

between the BEE rating and VAS disclosure would support the contention that

the VAS is being used as part of a strategy to establish substantive legitimacywith labour.

For these analyses, our dependent variable is a binary variable that is coded

1 if the company provided a VAS and 0 otherwise. We label this variable VASDUM

.

Because our dependent variable is dichotomous, we use logistic regression in

our multivariate tests.

We use two different specifications of the BEE scores that are provided by

the Financial Mail

. We use the total BEE score (

BEESCORE

), which is based

on seven subcategories. ForBEESCORE, a higher value indicates better BEE

performance.

13

Second, we use the score for each of the separate BEE subcategories.The subcategories cover the following areas (variable labels in parentheses):

ownership (BEE_OWN), management (BEE_MAN), employment equity (BEE_EE),skill development (BEE_SKILL), affirmative procurement (BEE_AFFIRM),

enterprise development (BEE_ENTRPSE) and corporate social investment(BEE_SOC). For the individual categories, our expectation is that it should be

easier for companies to make progress on those dimensions that are firm-

specific. For example, BEE_AFFIRM, BEE_ENTRPSE and BEE_SOC involve

the participation and cooperation of organizations outside the company, whereas

BEE_OWN, BEE_MAN, BEE_EE and BEE_SKILL focus on the company itselfand, hence, are likely to be easier to control.

However, because companies might be motivated to produce a VAS for a variety

of reasons, we include additional variables to represent other stakeholder-

related demands. Therefore, in our multivariate tests, we include control variables

for shareholder, creditor and government demands. Since all prior research

examining motives for disclosing a VAS has been qualitative, the selection of

our control variables is based on intuition and the broader accounting choice

literature. For example, some of our control variables are motivated by costly

contracting theory. However, as Carpenter and Feroz (2001) and Chalmers and

Godfrey (2004) point out, economic theories like costly contracting theoryshould be viewed as complementary to legitimacy theory.

We represent shareholder demands using the number of analysts following

the company at the end of the financial year (ANALYST). This variable is aproxy for the degree of investor interest in the company. We expect that where

12 Our tests do not require that we use BEE ratings but require a measure of substantivelabour performance. However, very few measures of substantive labour performance are

available. Furthermore, given the context where race-related labour issues are paramount,the BEE ratings are attractive both from a theoretical and practical standpoint.

13 We also run our tests using the rank of the BEE score (i.e. an ordinal rather than intervalmeasure) and obtain qualitatively similar results.


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The AuthorsJournal compilation 2009 AFAANZ

there is greater investor interest, there will be greater demand for disclosures,

and this could include demand for a VAS. Therefore, we expect the coefficients

forANALYST to be positive. To capture the demands of creditors, we use the

ratio of long-term liabilities to total assets (LEVRGE). While creditors havefixed claims against the company, they want to know whether their funds have

been used to fund wealth transfers to other stakeholders, and the VAS can

provide some information on that (since the VAS shows how the value added is

divided among the different stakeholder groups). Therefore, LEVGR should

have a positive coefficient. Furthermore, we expect that companies that are

large will be relatively more important from the governments perspective

which is consistent with the political cost hypothesis (e.g. Watts and Zimmerman,

1978). As a result, the government will want to monitor those companies more

closely and, in particular, will be concerned about how those companies treatthe competing stakeholder groups such as labour. We use the natural log of

the market value of equity to measure firm size (FIRMSIZE), and we expect

FIRMSIZE to be positively related to disclosure of a VAS.14 Finally, since more

profitable companies and fast growing companies have been shown to provide

more disclosure (e.g. Lang and Lundholm, 1993; Barnett, 2007; Campbell, 2007),

we include the companys return on assets (ROA) (i.e. net income scaled bytotal assets) and year-to-year growth in sales (SGROW) as additional control

variables.15

Therefore, for our multivariate tests, we estimate the following model using

logistic regression:

VASDUM=0+1BEE variable+2ANALYST+3LEVRGE

+4FIRMSIZE+5ROA+6SGROW,

where theBEE variable can be BEESCORE or the score for an individual BEEsubcategory. In this model, we use the coefficient of the BEE variable (1) totest the association between the BEE rating and disclosure of a VAS. If 1 is

14 Another reason to control for firm size is to control for the influence of governmentcontracts. Although it is not a legal requirement that companies comply with BEE policiesto gain government contracts, companies might perceive that it is important. If so, largecompanies, which are the most likely to gain government contracts, might pursue pro-gressive BEE policies to gain these contracts. Therefore, including firm size controls forthis alternative explanation.

15 Campbell (2007) suggests that companies that have a weaker financial performance

are less likely to engage in CSR than those with stronger financial performance, whileBarnett (2007) suggests that doing too well financially can lead to a stakeholder perceptionthe company is not doing enough CSR. The company might therefore publish additionalinformation to show that all stakeholders are still treated fairly despite the stronger financialperformance. The VAS can conceivably be used for this.


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positive and significant, this would indicate companies with higher BEE ratings

(i.e. more substantive labour progress) are more likely to provide a VAS. This

would be consistent with the view that the VAS is a part of a strategy to gain or

maintain substantive legitimacy and establish a history or prior knowledge ofbeing a trustworthy company. On the other hand, if1 is insignificant or negativeand significant, this would indicate no relation between BEE performance and

the VAS or a negative relation between BEE performance and the VAS (i.e. in

the latter case, poor BEE performers provide a VAS). This evidence would be

consistent with the view that the VAS is used to mislead employees or to create

symbolic legitimacy.

We collect our financial data from the McGregor BFA database, a commercial

database with financial data of all South African listed companies. We use the

2002 data for our analysis and include all 228 companies listed on the industrialsector of the Johannesburg Stock Exchange in our sample.16 After eliminating

those with incomplete data, we have complete data for 186 South African

companies, 118 that publish and 68 that do not publish the VAS. We find that

the companies publishing the VAS are spread across the spectrum of industries

in our sample. We find at least one disclosing company in each of the 22 industries

represented in our sample, and in 18 of the 22 industries, we find at least half

of the companies provide a VAS.

We collect the BEE scores and rankings from the website of the Financial Mail(South Africas leading business periodical) (www.financialmail.co.za) . Because

the Financial Mail website only reports the top 200 companies in terms of

BEE performance, if a company is not reported, we give this company a zero

forBEESCORE (and for each subcategory) and we give it a BEE rank of 200

(which is the lowest rank for the 200 ranked companies). This seems reasonable

since the company ranked 200 had an overall BEE score of 4.47 (out of 100)

and scored zero on several of the subcategories. Of 186 sample firms, 73 or

39.2 per cent are not ranked in the top 200.17

16 We use 2002 data since the 2004 BEE ratings would have been based on BEE performanceprior to the end of 2004. Moreover, we expect that a companys BEE performance wouldreflect the companys long-term efforts in the BEE area. That is, we do not expect that agood performer would have become a good performer overnight. Rather, it would reflect thecompanys long-term strategy and commitment to improve its labour relations with blackemployees. Therefore, even though released in 2004, the BEE rating can be viewed as ameasure of labour progress over a historical period that includes 2002. We also use the 2002period because we want a period before the BEE ratings were available. It is possible thatcompanies might see the BEE ratings as a substitute for disclosure of a VAS. In that case,

a good BEE performer might have less incentive to disclose a VAS after the BEE ratingsbecame available.

17 We find qualitatively similar results when the non-ranked firms are excluded from theanalysis.
http://www.financialmail.co.za/http://www.financialmail.co.za/


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7. Results

Panel A of Table 1 provides descriptive data for the independent variables.

The mean (median) BEESCORE is 11.690 (7.150) with a range from 0 to55.320. Because the index has a theoretical maximum of 100, the averages

suggest that South African companies are starting at zero in terms of BEE, which

is not surprising given South Africas past where black people were discriminated

against in the workplace. From our perspective, we are interested in relative

performance (rather than absolute performance) so this only requires that we

have dispersion in our BEE measures.

For the seven subcategory scores, the highest mean is forBEE_MGT(15.061).

BEE_MGTreflects the companys performance in terms of having black directors

and managers.

18

The means forBEE_OWN, which measures black ownership,and BEE_SKILL, which measures the implementation of skills development

programs, are also relatively high (i.e. 14.409 and 14.413, respectively). The lowest

mean is forBEE_ENTRPSE (7.000). BEE_ENTRPSE reflects the companys

involvement in black enterprise development programs. Consistent with our

expectations, the companies perform better on the four firm-specific dimensions.

In addition, the median for five of the seven categories (all except BEE_OWNand BEE_MGT) is zero, which reinforces the view that the South African

companies are starting from a zero base in terms of BEE performance. However,

it is also worth noting that some companies are extremely progressive. For

example, the top score forBEE_MGT, BEE_SKILL and BEE_SOC is 100 (the

highest score possible). Even BEE_EE and BEE_AFFIRM, which have thelowest high scores, have top scores of 77.8 and 71.5, respectively. Therefore, it

is clear that some companies have made significant progress on these individual

dimensions of BEE.

Panel B of Table 1 provides a breakdown of the sample by industry. The largest

industry concentrations are in retail (25 firms) and software (24 firms). However,

overall the sample captures firms from a diverse set of industry sectors.

Table 2 provides univariate tests that examine the relation between BEE

performance and the VAS. Specifically, we compare the BEE variables betweenthe VAS providers (118 companies) and the VAS non-providers (68 companies).

Using the overall score, the mean forBEESCORE for the VAS providers is 15.395

(column 1) while the mean for the non-providers is 5.261 (column 2). This

difference is statistically significant at the 0.01 level based on both a parametric

18

The BEE measures on which progress were made by the more progressive companies inour sample are those requiring a (substantial) commitment of resources (large salaries forblack managers/top management and directors). This indicates a substantive commitmentand distinguishes it from symbolic actions which most often manifest in mere rhetoric infinancial reports, press releases and other releases.


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Table 1

Descriptive statistics and industry breakdown for 186 South African companies

Panel A: Descriptive statistics

Panel B: Industry breakdown

Variable Mean SD Minimum Median Maximum

Labour variables

BEESCORE 11.690 13.894 0.000 7.150 55.320

By subcategory

BEE_OWN 14.409 19.814 0.000 4.800 96.200

BEE_MGT 15.061 23.142 0.000 3.250 100.000

BEE_EE 11.522 19.902 0.000 0.000 77.800

BEE_SKILL 14.413 22.992 0.000 0.000 100.000

BEE_AFFIRM 8.700 16.472 0.000 0.000 71.500

BEE_ENTRPSE 7.000 15.670 0.000 0.000 85.000BEE_SOC 8.209 21.659 0.000 0.000 100.000

Control variables

ANALYST 6.591 3.334 2.000 9.000 9.000

LEVRGE 0.118 0.135 0.000 0.077 0.660

FIRMSIZE 17.077 2.346 10.860 16.999 23.340

ROA 0.054 0.319 2.460 0.076 2.130

SGROW 0.183 0.485 0.860 0.155 4.340

Industry N Industry N

Auto 6 Information technology 4

Beverage 2 Leisure 9

Building 14 Media 11

Chemicals 5 Oil and gas 3

Diverse 4 Pharmaceuticals 2

Electric 9 Retail 25

Engineering 5 Software 24

Food 14 Steel 2

Forestry 3 Support 15

Health 5 Telecom 1Household 10 Transportation 11

Panel A provides descriptive statistics forBEESCORE, the subcomponents ofBEESCORE, and the

control variables. BEESCORE is a measure of black economic empowerment and is based on seven

subcategories: ownership (BEE_OWN), management (BEE_MAN), employment equity (BEE_EE), skill

development (BEE_SKILL), affirmative procurement (BEE_AFFIRM), enterprise development

(BEE_ENTRPSE), and corporate social investment (BEE_SOC). ANALYSTis the number of analysts

following the company at the end of the financial year. LEVRGE is the ratio of long-term liabilities to

total assets. FIRMSIZE is the natural log of the market value of equity. ROA is net income scaled by

total assets. SGROW is the year-to-year growth in sales. Panel B provides the number of firms by

industry. SD, standard deviation.


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t-test and non-parametric Wilcoxon rank sum test. Together, these results indicate

that publishing the VAS is positively and significantly related to BEE performance.The results for the seven subcategory scores are similar. In each case, the

providers (column 1) have higher subcategory scores than the non-providers

(column 2), and in each case, the difference is significant at the 0.01 level based

Table 2

Univariate tests for differences in Black Economic Empowerment (BEE) scores between value added

statement (VAS) providers (118 companies) and VAS non-providers (68 companies)

VAS providers VAS non-providersVariable Mean (SD) Mean (SD) t-statistic WilcoxonZ

BEESCORE 15.395 (14.150) 5.261 (10.828) 5.105*** 5.984***

By BEE subcategory

BEE_OWN 18.636 (19.914) 7.075 (17.478) 3.983*** 5.473***

BEE_MGT 18.858 (23.182) 8.472 (21.700) 3.011*** 4.505***

BEE_EE 14.829 (21.531) 5.784 (15.216) 3.051*** 3.690***

BEE_SKILL 19.589 (23.573) 5.434 (15.363) 4.436*** 5.556***

BEE_AFFIRM 11.341 (17.942) 4.115 (12.388) 2.940*** 3.345***

BEE_ENTRPSE 9.423 (17.895) 2.794 (9.518) 2.831*** 3.991***

BEE_SOC 11.603 (25.717) 2.318 (9.212) 2.870*** 3.166***

*** indicates significance at the 0.01 level (two-tailed). This table provides the results of tests of

differences between companies that did and did not voluntarily disclose a VAS. BEESCORE is a measure

of BEE and is based on seven subcategories: ownership (BEE_OWN), management (BEE_MAN),

employment equity (BEE_EE), skill development (BEE_SKILL), affirmative procurement (BEE_AFFIRM),

enterprise development (BEE_ENTRPSE), and corporate social investment (BEE_SOC).

Table 3Pearson correlation matrix forBEESCORE and control variables

BEESCORE ANALYST LEVRGE FIRMSIZE ROA

BEESCORE

ANALYST 0.061

LEVRGE 0.057 0.021

FIRMSIZE 0.515*** 0.270*** 0.105

ROA 0.101 0.156** 0.032 0.245***

SGROW 0.080 0.034 0.007 0.091 0.034

** and *** indicate significance at the 0.05 and 0.01 levels (two-tailed), respectively. This table

provides Pearson correlation coefficients forBEESCORE and the control variables. BEESCORE is a

measure of Black Economic Empowerment (BEE). ANALYSTis the number of analysts following the

company at the end of the financial year. LEVRGE is the ratio of long-term liabilities to total assets.

FIRMSIZE is the natural log of the market value of equity. ROA is net income scaled by total assets.

SGROWis the year-to-year growth in sales.


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on a t-test or Wilcoxon test. Overall, Table 2 shows that BEE performanceand disclosure of a VAS are positively related on a univariate basis, which

supports the view that the VAS is part of a package used to establish substantive

legitimacy.Table 3 provides the Pearson correlation matrix for the independent variables.

The highest correlation is between BEESCORE and FIRMSIZE (r= 0.515).This confirms the need to control for firm size asBEESCORE could be proxying

for a firm size effect. In other words, in our multivariate tests, we hold firm size

constant in order to examine the incremental effect ofBEESCORE when companies

are the same size. In addition, FIRMSIZE is also significantly correlated with

ANALYSTS and ROA, indicating that for this sample of South African companies,

large companies are followed by fewer analysts and are more profitable.

Table 4 contains the results for our main logistic regressions. We begin byestimating a benchmark model that includes all of our control variables but

excludes our test variable (BEESCORE). In this model, we find that disclosureof a VAS is significantly related to firm size and profitability as expected. On

the other hand, contrary to our prior expectations, companies with higher leverage

are less likely to disclose a VAS. The benchmark model has a NagelkerkeR2 of

23.8 per cent, which suggests that the control variables can explain 23.8 per

cent of the variation in the decision to disclose the VAS across companies. 19

In model 1A, we include BEESCORE. We find that BEESCORE is positivelyrelated to VASDUM and is significant at the 0.01 level. This indicates that theBEE rating has incremental explanatory above and beyond the control variables.

Specifically, holding the number of analysts, leverage, firm size,ROA, and salesgrowth constant, companies with high BEE scores are much more likely to disclose

a VAS. The results for the control variables are consistent with the benchmark

model (i.e. LEVRGE, FIRMSIZE and ROA are significant). The Nagelkerke R2

for model 1A is 29.4 per cent, which represents a 23.5 per cent increase over

the benchmark model.

It is possible that industry is an omitted variable in that some industries

might be more progressive in terms of BEE and might also be more likely to

provide a VAS. Therefore, BEESCORE might be capturing industry trendsrather than specific differences at the firm level. To control for a possible industry

effect, we add 21 industry dummy variables to model 1B. We also show these

results in Table 4, although for brevity, the coefficients for the industry dummy

variables are unreported. In model 1B, BEESCORE remains positive and highly

significant after controlling for industry effects. For the control variables,

FIRMSIZE and ROA are significant with positive signs. Finally, the Nagelkerke

R2 for model 1B is 50.5 per cent, which represents a 71.8 per cent increase overmodel 1A. This indicates that the industry variables have substantial explanatory

19 In logistic regression, the standardR2 cannot be computed. The NagelkerkeR2 is a pseudo-R2 and can be interpreted similar to theR2 in ordinary least-squares regression.


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TheAuthors

Journalcompilation2009AFAANZ

Table 4

Estimated results from logistic regression ofVASDUMon Black Economic Empowerment (BEE) score and other

Variables

Expected

sign

Benchmark model

Coefficient (Wald statistic)

Model 1A

Coefficient (Wald statistic)

Model 1B

Coefficient (

Labour variables

BEESCORE + 0.053*** 0.093***

(7.475) (12.362)

REV/EMP

Control variables

ANALYST + 0.012 0.023 0.063

(0.048) (0.169) (0.848)

LEVRGE + 2.324* 2.372** 1.995

(3.075) (3.030) (1.493)FIRMSIZE + 0.381*** 0.232*** 0.195**

(19.674) (5.596) (2.852)

ROA + 0.928* 1.125** 1.665**

(1.673) (2.761) (2.761)

SGROW + 0.150 0.085 0.193

(0.197) (0.062) (0.179)

Constant 5.512*** 3.444** 1.548

(13.204) (4.288) (0.486)

Industry dummies Excluded Excluded Included

2 log likelihood 208.675 199.304 158.468

NagelkerkeR2

0.238 0.294 0.505

*, ** and *** indicate significance at the 0.10, 0.05 and 0.01 levels (one-tailed), respectively. This table provides

a measure of BEE. ANALYSTis the number of analysts following the company at the end of the financial year. L

total assets. FIRMSIZE is the natural log of the market value of equity. ROA is net income scaled by total asset

REV/EMP is labour intensity defined as revenue per employee measured on an annual basis.


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power that is incremental to the variables already in the model. In other words,

there are industry trends in terms of disclosure of the VAS. However, our results

show that even after controlling for industry effects, companies with higher

BEE scores are still more likely to disclose a VAS, a finding that is consistentwith substantive legitimacy.20,21

To examine the sensitivity of the results to our choice of control variables,

we estimate models 1A and 1B using alternative measures for shareholder,

creditor and government demands since ANALYST, LEVRGE and FIRMSIZEmight measure these constructs with noise. We use the average trading volume

of shares during the year as an alternative measure for shareholder demands,

the interest expense ratio (interest expense/sales) as an alternative measure for

creditor demands, and the effective tax rate (taxes paid/pre-tax income) as an

alternative measure for government demands. When these variables are used inplace ofANALYST, LEVRGE andFIRMSIZE,BEESCORE remains positively and

significantly related to VASDUM at the 0.01 level in both models 1A and 1B(results untabulated). We also estimate models 1A and 1B with these variables

included in addition toANALYST,LEVRGE andFIRMSIZE. Our results (untabulated)are qualitatively unchanged.

Although our previous results strongly suggest that BEE performance and

disclosure of a VAS are related, an alternative explanation is that BEE performance

could be a proxy for labour force intensity. Specifically, companies that rely

more heavily on labour have more incentives to improve their labour relations

and BEE practices. Therefore, labour intensity could be an omitted variable in

our earlier models; that is, disclosure of the VAS could be driven by labour

intensity rather than BEE performance.

To examine this possibility, we include a control for labour intensity in our

models. We measure labour intensity using the revenue per employee measured

on an annual basis (REV/EMP). Greater revenue or income per employee wouldindicate less labour intensity since fewer employees are required to generate

each dollar of revenue or income. Table 4 provides these additional results.

In model 2, which uses REV/EMP to control for labour intensity and

BEESCORE to measure BEE performance, we find thatREV/EMP is significantlyassociated with VASDUM, andREV/EMP has a negative coefficient. This indicates

20 In supplemental tests (unreported), we also estimate our logistic regression model usingthe BEE subcategory scores in place ofBEESCORE. Because there are seven subcategoryscores, we run seven separate models where we include one subcategory score in eachmodel. The subcategory score is positive and significant in five of the seven models. Thissuggests that no one subcategory is driving our main results.

21

To address concerns that FIRMSIZE might not capture the governments interest in aSouth African context, we also estimate a model where we replace FIRMSIZE with thenumber of employees (WRKFORCE). Companies with larger work forces are likely tocapture more political attention. When WRKFORCE is included, the coefficient forBEESCORE remains positive and significant at the 0.01 level.


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that as labour intensity decreases (i.e. as REV/EMP increases), companies areless likely to provide a VAS as we would expect. However, after controlling for

the effect of labour intensity, we find that BEESCORE is still significantly and

positively related to VASDUM. This indicates that the effect of BEE performanceis incremental to labour intensity and our five other control variables.22

8. Conclusion

We examine whether there is a statistical association between BEE performance

and disclosure of a VAS. We find that there is a positive association, indicating

that companies with good labour performance are more likely to provide the

VAS. This effect is incremental to the effects of analyst following, leverage,

firm size, profitability, sales growth and industry effects. Furthermore, we showthat our results are not explained solely by differences in labour intensity. Overall,

our results support the contention that the VAS is an element of a strategy to

develop substantive legitimacy with labour.

Our results confirm the Barnett (2007) contention that without a commitment

to CSR and a history in the area, any attempt at legitimacy will probably be

regarded as symbolic. Therefore, only companies that were serious about

establishing a history of substantive legitimacy persisted with the disclosure of

the VAS and they were also the first movers when it came to BEE progress

(before it was compulsory or necessary for government contracts). It shows that

these were the companies that over time wanted to give a consistent message

that they are concerned about labour/empowerment issues. Our results suggest

that BEE performance and disclosure of a VAS are two elements of a strategy

used by South African companies to establish their substantive legitimacy with

labour.

Like any research, our study has some limitations and these should be con-

sidered in the interpretation of the results. We do not take into account the con-

tent of the VAS as our focus is on the decision to disclose or not disclose the

VAS. We acknowledge that analysing the content of the VAS could be a fruitful

area for future research, but such a study would have to be limited to companiesthat actually publish a VAS, whereas our study focus on the decision to publish

the statement. In addition, while we argue that the BEE measures are an indication

of substantive progress in the labour area, it remains a possibility that the BEE

ratings reflect symbolic actions. However, in the context of South Africa where

the majority of the population wants BEE to happen, it seems unlikely that

business would be able to hold out against the wishes of the majority and that

the symbolic appointees would not speak out.

22 We also estimate model 2 using the income generated per employee in place ofREV/EMP. Our results forBEESCORE are consistent with Table 4.


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2. black economic empowerment, legitimacy

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