At the crux of the problem, seems to be the tension associated with the fact that so many of the market participants are private enterprises that feel that the mere existence of transformation legislation is a form of overreach.

It is on the back of this that the Minister of Labour - Thulas Nxesi - has proposed a new way of dealing with institutions that fail to live up to the transformation mission of the country.

In the proposed amendments to the Employment Equity Act, the Minister wants to be able to impose fines of up to 10% of turnover on companies that do not comply with equity targets.

Additionally, the Minister proposes banning such businesses from state contracts. This approach gravitates towards a punitive regulatory regime. Whether such a regime would facilitate better outcomes on the transformation question is difficult to tell.

The literature across the world indicates that regulation is most effective when it follows a model of compliance incentives for market participants, balances the costs of compliance, and provides latitude for corrective enforcement for the regulators.

The delicate nature of the transformation question in South Africa is that the understanding of the need to transform individual businesses as a method of facilitating overall social transformation, is something that every business leader should instinctively buy into.

Buy-in

If it turns out that the buy-in doesn't exist, that speaks more to the difficult and delicate questions regarding the transition into democratic rule that weren't ventilated thoroughly.

Of the two options tabled by Minister Nxesi, the penalty regime is one that might be easier to administer but has profoundly problematic side effects.

If the penalties themselves are imposed on a business, traditional agency theory would tell you that the cost would either be passed on to the end user or to the shareholders.

Alternatively, creative loopholes around the system could be found. It is not inconceivable for an entity that seeks to avoid penalties to simply employ black staff members as full-time equivalent staff, and simply outsource critical functions to affiliate entities that fall outside the definition of employee, but perform the tasks associated with employment.

This would undermine the entire penalty regime, as such companies would not only escape scrutiny because their annual reports would indeed indicate a dominance of black workers, but would also amplify their empowerment scorecards even when transformation in substance is not in place.

A second variable

That feeds into the second variable of intervention that Nxesi has proposed - denial of access to state contracts. This would of course matter to businesses that are reliant on the state for their sustainability.

But the evidence in South Africa is that businesses that contract with the state, essentially bind themselves into a relationship characterised by bureaucracy and late payments.

As a result, viable businesses have balanced their portfolios to reduce reliance on state contracts. This reality means that his best intentions notwithstanding, Minister Nxesi might just find that the punitive approach to regulation when so many market players no longer take you seriously, does absolutely nothing to deal with the transformation conundrum of South Africa.