Social and ethics committees: a value or a cost?

The Companies Act mandates that every state-owned company, listed public company and any other company that scores more than 500 public interest points in any two of the previous five years establish a social and ethics committee by 1 May 2012. Since the public interest score is based on the number of employees, number of shareholders, annual turnover and third-party liability, this will generally only exclude small companies. Subsidiaries also don’t need a social and ethics committee if the holding company’s committee performs this role on their behalf.

The committee needs to be appointed by the board, and should comprise no less than three directors or prescribed officers (senior managers or executives), at least one of whom has served as a non-executive director for the previous three financial years.

The functions that the act assigns to the committee are to monitor the company’s activities relative to social and economic development; good corporate citizenship; the environment, health and public safety; consumer relationships; and labour and employment. The committee is also required to draw matters to the attention of the board as required, and to report to the shareholders at the company’s annual general meeting.

But will this be yet another initiative that adds costs (especially given the seniority of the committee members) without also adding value?

The answer lies, in part, in assessing the intention of the act. This can be deduced from the name of the committee; that is, to create a specific focus on the company’s social and ethical behaviour. These outcomes – harmonious stakeholder relationships and a sound ethical culture – are positive for businesses. Added to that, they also 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.

The cost versus value question is also answered by analysing the outcome of the committee’s functions. In effect, it enforces good corporate citizenship by following a triple bottom line approach, which extends its focus beyond a single, economic bottom line to encompass social and environmental dimensions. Their social responsibilities amount to actively taking into account the interests of their stakeholders, including employees, consumers and communities. Their environmental role incorporates health, public safety and the impact of the company’s activities, products and services. And their ethical duties include the prevention of unfair discrimination and the reduction of corruption.

This approach – good corporate citizenship and a triple bottom line – is widely recognised and supported, most notably by the King III Report on Corporate Governance in South Africa. The King III recommendations concerning stakeholders and ethics are also implicit in the social and ethics committee legislation.

This approach also rests on a sound rationale. Globalisation and communication information technology, among other factors, have facilitated the massive growth of the power of business, epitomised by global, multinational businesses that often eclipse the power of national governments. This has given rise to a societal expectation that this vast influence is balanced with the responsibility to deliver an economic outcome, and to act as good citizens by also recognising their responsibility to support the people, communities and environments they engage with and impact.

For those organisations that do not pursue a triple bottom line approach, this legal requirement will probably not be persuasive. Their committees are likely to amount to an expensive exercise, aimed at a minimal ‘tick-box’ approach.

But, for organisations that strive to be good corporate citizens and are prepared to embrace the associated responsibilities, their social and ethics committees should not only work, but should also add value to the company.

There are two additional factors that these companies should take into account, which will further enhance the role of the committee.

First, the social and ethics committee should include a member of the company’s audit committee (or risk or compliance committee). This ensures that information is appropriately shared (for example, an ethics report), and avoids potential duplication between these committees.

Second, organisations should guard against the social and ethics committee assuming the role of the sole custodian of ethics in the workplace. While the committee provides a formal ‘home’ for ethics – which is lacking in many organisations – it cannot take on the employee’s ethical responsibilities, and it should not take on the moral responsibility of others. Instead, the committee’s success will rest on the extent to which it achieves buy-in from all members of the organisation to their role and contribution to the company’s ethical status.

By Cynthia Schoeman
Published in the Wits Business School Journal, Issue 29