Relevant to F4 (ZAF)
This article briefly deals with the new social and ethics committee (SEC) applicable to certain companies in terms of the South African Companies Act (CA), 2008. This is especially important in the context of Syllabus Area F (1) – Management, administration and regulation of companies and close corporations (company directors).
It is required of candidates to be able to explain the duties that directors owe to their companies. Directors’ duties have been partially codified in sections 75 and 76 CA 2008. When considering in whose interests directors need to act, it is stated in section 76(3)(b) that directors need to act in the best interests of the company. The common law position that a director has to act bona fide in the best interests of the company is thus now entrenched in the CA.
Even though the common law position is still applicable, and now part of company legislation, the CA did bring some substantial changes to directors’ duties and to whom they owe these duties. It is here where the SEC is of relevance. Section 7(d) CA confirms, for example, that one of the purposes of the CA is to reaffirm the concept of the company as a means of achieving economic and social benefit which is in line with the establishment of a SEC.
The SEC is an important new legislative requirement that companies should be aware of. Knowledge of this committee is of utmost importance in the context of directors’ duties, board committees, corporate social responsibility and governance and accountability requirements of companies. When discussing directors’ duties it is important to know in whose interests they should manage a company. Should they merely act with profit maximisation for the shareholders as their aim or should they also consider the interests of other stakeholders. The introduction of the SEC has an impact on this question and on the fact that directors have to act in an inclusive manner.
In this note the following issues will thus be discussed:
- the social and ethics committee and to which companies it is applicable
- the functions and composition of the Social and Ethics Committee, and
- some shortcomings and uncertainties relating to the social and ethics Committee.
After reading this article you should understand and be able to reflect on:
- the codified duty of directors to act in the best interests of the company and the role of corporate social responsibility (CSR) issues when giving effect to this duty
- how the SEC will assist the board in performing their duties, and
- the role, functions and composition of the SEC.
The Social and Ethics Committee
Section 72 CA 2008 introduces a compulsory social and ethics committee for certain companies.
The idea is that this committee draws certain matters to the attention of the board and to then report to the shareholders. These matters include, inter alia:
- social and economic development
- good corporate citizenship
- the environment, health and public safety
- consumer relationships
- labour and employment.
Who needs this committee?
All state-owned and listed companies, as well as other companies with a public interest score of more than 500 must have such a committee in place. The number of employees and the turnover are some of the factors that will determine if a company is obliged to have such a committee. The ‘public interest score’ is calculated at the end of a financial year. It is used to determine whether a company must comply with enhanced accountability requirements based on its social and economic impact. For example, one point is awarded for every R1 million in turnover in a financial year and a number of points are allocated being equal to the average number of employees of the company during the relevant financial year.
Composition and functions
A minimum of three directors or prescribed officers must serve on a company’s social and ethics committee. One of them must, at least for the previous three financial years, not have been involved in the day-to-day management of the company’s business (Reg 43(4)).
The social and ethics committee has the following functions (Reg 43(5)): to monitor the company's activities, having regard to any relevant legislation, other legal requirements or prevailing codes of best practice. This relates to matters concerning, social and economic development, including the company’s position regarding the goals and purposes as envisaged in, for example, the United Nations’ Global Compact Principles, the Organisation of Economic Co-operation recommendations on corruption, the Employment Equity Act, 1998 and the Broad Based Black Economic Empowerment Act, 2003 as well as record of sponsorships, consumer relationships and labour and employment. Matters relating to good corporate citizenship also fall within their mandate and here reference is made to, inter alia, the promotion of equality, the prevention of unfair discrimination and the reduction of corruption. Further matters within their mandate include environmental, health and public safety issues as well as consumer relationships. Finally labour and employment is also listed and here reference is made to the International Labour Organisation Protocol on decent work and working conditions.
The committee should report annually to the shareholders at the company's annual general meeting on the matters within its mandate (Section 72(8)(e)). The functions of this committee thus consist of reporting as well as monitoring duties.
Shortcomings and uncertainties
An assessment of this committee is beyond the scope of this article. But for interest sake a number of comments can be made.
- The functions given to this committee are very wide and clear guidance on what is expected from this committee is not provided. Specific terms of reference are not provided. They can, for example, claim any costs or fees for appointing consultants and experts, but they do not have the power to make appointments.
- When considering the various matters that fall within the mandate of the committee it quickly becomes clear that the precise nature of these matters and the extent that the committee must pay attention to it is not clear. Herewith a few examples: The meaning of ‘social and economic development’ as one of the matters that the committee must monitor and report on, is unclear and not defined. Also, reference is made to the Employment Equity Act in the context of ‘social and economic development’, but it is not clear whether the social and ethics committee should take responsibility for employment equity matters and the employment equity plan (as required by the Employment Equity Act). If it is argued that the social and ethics committee must take responsibility for these matters, and thus have more than a mere oversight function, then it can intrude with the functions of other board committees. Furthermore, a clearer definition of ‘health’ and ‘public safety’ would have been beneficial. It is not clear whether it only concerns occupational health, the health of consumers etc.
- There is also uncertainty as to whether this is a board committee or a company committee and this has various implications, for example with regard to the liability of the members of this committee. It is clearly of importance whether the social and ethics committee is a board committee or not. If it is a board committee then the board can delegate certain powers and authority to the committee. This will be in addition to those listed in the Act. If it is a company committee then it will only have the powers and authority as provided for in the Act and Regulations. This also has an impact on the standard of conduct and the liability of the members of this committee, as board committee members are subject to the same duties as directors.
By making provision for this committee, in the CA, South Africa has legislated corporate special responsibility to a certain extent. A committee, like the social and ethics committee, is a good way to protect stakeholder interests and to assist directors to consider these interests when they make business decisions, but then the terms of reference, duties and functions of this committee should be drafted in much clearer terms. Be that as it may, directors, company secretaries etc should be aware of this committee and be clear on its composition, functions and ultimate application.
So, if one returns to the questions asked in the beginning of this note, it should be clear that directors have to act in the best interests of the company. If one looks at the Companies Act as a whole it is clear that this can no longer mean pure profit maximisation for the shareholders. The duty of directors to act in the best interests of the company will include, to a certain extent, the interests of other stakeholders. This note focused on the SEC. Candidates should thus now be clear that directors will have to act in a more inclusive manner when making business decisions in line with their duties having people, profit and planet in mind.
- DW Wilkinson, ‘Will Social and Ethics Committees Enlighten Shareholders? A Comparison of the South African provisions relating to Social and Ethics Committees with the Enlightened Shareholder Value Approach in the United Kingdom Companies Act 2006’, LLM Dissertation, University of Johannesburg (Nov, 2011).
- Joubert, ‘Reigniting the corporate conscience: reflections on some aspects of social and ethics committees of companies listed on the Johannesburg Stock Exchange’, in Visser, C and Pretorius, JP (eds) Essays in Honour of Frans Malan (2014) 190.
- N Locke in I Esser and MK Havenga (eds), Corporate Governance Annual Review (2012, LexisNexis), at 66ff.
- MK Havenga, ‘The Social and Ethics Committee in South African Company Law’, THRHR (2015) at 285.
- HJ Kloppers, ‘Driving Corporate Social Responsibility (CSR) through the Companies Act: An Overview of the Role of the Social and Ethics Committee’ (2013), 16 PER 166.
- I Esser, ‘Corporate Social Responsibility: A Company Law Perspective’, South African Mercantile Law Journal (2011) 23 at 317.
- I Esser in Du Plessis et al, Principles of Contemporary Corporate Governance (3rd edition) at 392.
Written by a member of the F4 examining team