SOCIAL AND ETHICS
The Social and Ethics Committee (SEC) is a governance committee and plays a vital role in relation to corporate governance. It is advisory and monitoring in nature. SEC provides a good way to protect stakeholder interests and to assist directors and shareholders of companies when protecting stakeholder interests. SEC ensures that companies do indeed monitor and report on whether the business produces social and ethical benefits to the economy, workplace, society, and natural environment. SEC reports contributes to sustainable reporting by business.
Section 72 of the Companies Act No 71 of 2008 (the Act) that deals with the SEC carries the heading: “Board committees”. It thus seems that while the SEC is a statutory committee with specific legal duties of monitoring and reporting, it also assists the board in exercising its social and ethics governance responsibility.
Section 72 (4) of the Act authorises the Minister of Trade and Industry to prescribe, through the use of Regulations 2011:
- Categories of companies that must have a social and ethics committee, if deemed desirable having regard to the annual turnover, workforce size or the nature and extent of the activities of such companies;
- Functions to be performed by the social and ethics committee; and
- Rules governing the composition and conduct of social and ethics committee
Regulation 43(1) requires State-Owned Companies as well as Listed Public Companies and any other company that has in any two of the previous five financial years scored above 500 points in terms of their Public Interest Score card to appoint a SEC.
Subsidiary Companies do not need to form a SEC if its Holding Company has a SEC that will substantially performs the functions of a SEC on behalf of a Subsidiary as per Regulation 43 (2) (a).
The Act allows companies to apply to the Companies Tribunal for exemption from the requirement of having a SEC under two conditions. The two conditions are stated in section 72 (5) of the Act as follows:
(a) the company is required in terms of other legislation to have, and does have, some form of formal mechanism within its structures that substantially performs the function that would otherwise be performed by the social and ethics committee in terms of this section and the regulations; or
(b) it is not reasonably necessary in the public interest to require the company to have a social and ethics committee, having regard to the nature and extent of the activities of the company.
An exemption granted by the Tribunal in terms of section 72 (5) of the Act, if satisfied that the company meets the requirements of section 72 (5) (a) or (b) is valid for period of five (5) years or shorter period as the Tribunal may determine at the time of granting the exemption, unless set aside by the Tribunal in terms of section 72 (7) of the Act.
Factors considered to be material in determining public interest is the company’s annual turnover, the size of its workforce, as well as the nature and extent of its activities. Other factors include social, economic and development factors.
In considering whether or not to grant an exemption, such social and economic factors include SEC functions that needs to be fulfilled:
- To monitor the company’s activities by having regard to applicable legislation, codes of best practice and any legal requirements as specified;
- To draw matters within its mandate to the attention of the board as occasion requires; and
- To report to the shareholders of the company at the annual general meeting on matters within its mandate.
The committee has the usual powers and obligations of a board committee as it is statutory in nature. However, Regulation 43 is very specific and requires it to monitor matters, relating to:
Social and Economic Development, with a focus on:
- The United Nations Global Compact Principles – these are ten universally accepted principles in the areas of human and labour rights, environmental responsibility and anti-corruption;
- The Organisation for Economic Co-operation and Development recommendations regarding corruption;
- The prescripts of the Employment Equity Act; and
- The Broad Based Black Economic Empowerment Act, Good corporate citizenship, ensuring that the company:
- promotes equality, prevents unfair discrimination and reduces corruption; and
- Partakes in community development and keeps records of sponsorship donations and charitable giving’s, considers the Environmental, health and safety concerns:
- In particular, the Impact of the company’s activities on its products or services
- Considers the Company’s advertising, public relations and compliance with consumer protection laws, Labour and Employment:
- considers the company’s standing in relation to the International Labour Organisation Protocol on decent work and working conditions; and
- educational development of employees.
In terms of social and economic development factors mentioned above, it means that a company can be denied an exemption from establishing a SEC if the Tribunal is not satisfied that the company has a mechanism to handle corruption.
The Tribunal’s concern is with regards to size of the company’s workforce, which is not clear for one to say the size of the company’s workforce is sufficient to exempt the company from forming a SEC. In some instances, companies will state that the company has one employee and as a result it is not necessary to form a SEC.
In terms of the nature and extent of the activities of companies it is not clear as to what constitutes the nature and extent of the activities of companies. Some companies will justify that they be exempted on the basis that their nature and extent of their activities does not warrant them to have a SEC citing among other reasons “the company is a Ring-Fenced Company with restricted or limited capacity as provided in their Memorandum of Incorporation” and as such only performs certain functions of which does not impact on the functions of SEC as outlined in Regulation 43 (2) and some will indicate that they are Special Purpose Vehicle.
Regarding section 72 (5) (a) of the Act, the Act does not make mention of other legislations contemplated therein which requires companies to have some form of a SEC, the only Act that one is familiar with, that compels companies to have SEC is the Companies Act No 71 of 2008, itself. In the case of AB Inbev Africa (Pty) Ltd the application was refused on the basis that the applicant did not attach supporting documents or evidence to support the claim that there are structures in place that would perform the functions prescribed by the Social and Ethics Committee and that the applicant is bound by the structures.
Regulation 43 prescribe the minimum membership of a SEC. In terms of this Regulation, the committee must consist of a minimum of three (3) directors or prescribed officers. At least one (1) of these directors must be a director who is not involved in the day to day management of the company’s business and who was not involved in the management of the company in the preceding three financial years.
Although some companies are struggling to comply with the requirements of SEC, others are embracing it because they see strategic benefit. By having a SEC, a company stands to benefit in that the company will be applying best practice recommendations of the King III Report by taking board responsibility for the company’s social and ethics performance. Furthermore it is likely to bolster shareholder and investor confidence in the company as the corporate responsibility and ethics performance of the company will be enhanced.
The Act also makes provision for actions to be taken against companies that do not comply with the requirement of having a SEC. The failure to comply with the Regulations is a reportable irregularity and breach of the Act. Section 216 of the Act which is the penalty provision, states that a person may be convicted of an offence in terms of the Act and liable where they have contravened sections 213 (1) of the Act which deals with “breach of confidence” or section 214 (1) which deals with “false statements, reckless conduct and non – compliance.” Such liability will result in a fine or imprisonment for a period not exceeding 10 years, or to both a fine and imprisonment. Section 216 of the Act goes on to state that in any other case or in instances of any other breach of the Act, the person may be convicted to a fine or to imprisonment for a period not exceeding 12 months or to both a fine and imprisonment. Therefore, for companies not to form a SEC when it falls into the categories of companies required to do so and not exempted by the Tribunal amounts to contravention of the Act resulting in a fine or imprisonment for a period not exceeding twelve (12) months or to both a fine and imprisonment.
In light of the fact that the Tribunal can only grant exemption under conditions mentioned in section 72 (5) (a) or (b) above, the question is which other legislations are requiring companies to have some form of formal mechanisms within its structures that perform SEC functions? Secondly since it is not clear as to what constitutes the “nature and extent of the activities of the companies” it is therefore proposed that the Act be amended to indicate what constitutes the nature and extent of companies activities.
There is however a view that says it is not necessary to be prescriptive so as to allow the Tribunal to exercise its discretion depending on each case.
The Tribunal has amongst other reasons declined exemption on the basis that companies do not furnish enough or detailed information as to why it is not reasonably necessary in the public interest to appoint a SEC, particularly more emphasize on the nature and extent of their activities. The Tribunal’s reasons for declining exemption is mainly that it is not convinced about the company’s submission that it has a formal mechanism within its structure that substantially performs SEC functions on its behalf because in most instances the companies do not attach documents or evidence supporting their claim.