Do social and ethics committees still need guidance?

Regulation 43 of the Companies Act 71 of 2008 (the Act) mandated that all state owned companies, listed public companies and any other company that scores above 500 public interest points set up a social and ethics committee (SEC) as a board subcommittee by 1 May 2012.

The mandate is arguably quite straight-forward. The SEC has to monitor whether the company complies with various social, ethical and legal requirements and best practice codes; to bring relevant matters to the attention of the board; and to report to shareholders on matters within its mandate. Accordingly, the specific duties of the SEC are “to monitor” and “to report” across a range of social and ethical areas.

However, a criticism that has been levelled against the legislation is that it is not sufficiently clear - be that as regards the committee’s responsibilities and duties, which matters need to be brought to the attention of the board or when and how it should do so, or the manner or format in which reporting needs to be done. Instead of viewing this lack of clarity as a fault or a problem, it should in fact be viewed favourably in that the Act is not prescriptive about what organisations must do. Instead the Act allows for a measure of interpretation that can be aligned with the nature and goals of the organisation.

In terms of achieving greater clarity as regards the committee’s mandate, the following five points can provide assistance.

  1. It is important to take into account the overall intention of the legislation and to define its intended outcome.

    The overall intent of the Act is well articulated in The Purpose of Social and Ethics Committees in South Africa (June 2014) prepared by The DTI Consumer & Corporate Regulation Division. It states that the purpose is:

    To promote good corporate governance, ethical conduct, transparency, accountability, responsibility, fairness and adherence to legislation relative to the communities impacted by the company and relative to its customers, shareholders, employees and other stakeholders.

    The intention of the Act can also be deduced from the name of the committee - that is to create a specific focus on the organisation’s social and ethical behaviour. In effect, the Act enforces good corporate citizenship via a triple bottom line approach. While recognising the positive economic impact of an organisation’s pursuit of a financial bottom line, the Act extends this to encompass social and environmental dimensions.

    The outcomes this represents are sound stakeholder relationships and an ethical culture, both of which are supportive of or synonymous with the triple bottom line. Therefore, the organisation’s social responsibilities amount to actively taking into account the interests of its stakeholders, including employees, consumers and communities. The organisation’s environmental role incorporates health, public safety and the impact of the company’s activities, products and services. And its ethical duties include (at the very least) the prevention of unfair discrimination and the reduction of corruption, which needs to be extended to the proactive management of ethics and the pursuit of an ethical culture.

    Both of these outcomes - sound stakeholder relationships and an ethical culture - are beneficial for all organisations, not least because they serve to avoid the cost of the opposite – of losses incurred when relationships break down (for example, when employees strike) and of financial and reputational damage when ethical breaches occur.

  2. In order to address the scope of the SEC mandate, the following is an interesting example:

    The weather service is much like a SEC in that it is also tasked with monitoring and reporting – in their case, monitoring and reporting on the weather. Their duties/responsibilities also have a future orientation. For example, where possible the service would be expected to provide early warnings about potentially dangerous weather conditions to enable people to protect themselves and their property. The SEC’s duties should be seen to encompass the same future orientation, namely to provide guidance and advice to the organisation about the potential impact of the organisation’s social and ethical conduct, thereby enabling the organisation to remedy unacceptable situations.

    However, a noteworthy difference is that the weather service is completely unable to influence the weather in any way, even if they know what conditions are to follow. Applying this to the SEC’s duties and responsibilities via the following question is informative: Is the SEC expected to do anything about the social or ethical conduct and conditions that it monitors within the organisation? The answer is clearly that the intention of the legislation was not to create a committee that simply observes what was happening and reports thereon, but rather to create a committee that acts to influence the organisation positively in its social and ethical performance.

  3. The SEC should clarify what tasks should be or are being fulfilled by other board committees, as well as what is already being done by other departments in the normal course of the organisation’s operation and other legal reporting obligations.

    In the latter regard, this could include the promotion of equality; the prevention of unfair discrimination; the organisation’s record of sponsorship, donations and charitable giving; the organisation’s advertising and public relations; and its contribution towards the educational development of its employees.

    Where tasks are performed by others, the SEC needs to define what information or evidence it requires that would provide assurance that the task has been successfully achieved.

    The SEC should strive to build cooperation and good communication between its activities and those of the organisation’s other board committees and operational structures. This serves to ensure that information is appropriately shared and that there is no duplication of work.

  4. Given that the SEC is both statutory and a board subcommittee, the board can chose to delegate further responsibilities to the SEC beyond its legal duties in order to provide better support to the organisation’s social and ethics objectives and strategy. This could, for example, encompass the three principles set out in Chapter 1 of King III (The King Report on Corporate Governance):
    Principle 1.1: Provide effective leadership based on an ethical foundation
    Principle 1.2: Ensure that the Company is and is seen to be a responsible corporate citizen
    Principle 1.3: Ensure that the Company’s ethics are managed effectively.

  5. It is useful for the committee to distinguish between monitoring activities and responsibilities and the standards against which those activities need to be monitored.

    The Act outlines five focus areas that address monitoring activities and responsibilities namely, social and economic development; good corporate citizenship; the environment, health and public safety; consumer relationships; and labour and employment. To define its mandate further, the SEC needs to define exactly what it is going to monitor in each of these areas and how it is going to monitor these areas.

    The Act requires that monitoring should be done relative to any relevant legislation, other legal requirements or prevailing codes of best practice. However, except as outlined below, the regulations do not provide detailed guidance on what the relevant legislation, other legal requirements and best practice codes are.

    • In the area of social and economic development, the codes and laws that are mentioned are:
      • The United Nations Global Compact Principles
      • The OECD recommendations regarding corruption
      • The Employment Equity Act
      • The Broad-Based Black Economic Empowerment Act.
    • In the area of good corporate citizenship and environment, health and public safety no specific codes or laws are mentioned.
    • As regards consumer relationships, the organisation is required to comply with consumer protection laws.
    • In the area of labour and employment the organisation’s activities need to be monitored relative to The International Labour Organisation Protocol on decent work and working conditions.

    The SEC and/or the organisation’s board can decide on what other legislation or best practice codes are applicable, which is likely to include the following:

    • King III (The King Report on Corporate Governance)
    • The Prevention and Combating of Corrupt Activities Act
    • The Protected Disclosures Act
    • The Occupational Health and Safety Act
    • Labour legislation including the Basic Conditions of Employment Act and the Labour Relations Act.

By Cynthia Schoeman