EXECUTIVE SUMMARY

The Department of Trade and Industry (the dti) and the Companies Tribunal[1] hosted a seminar on social and ethics committees (SEC) on the 9^th February 2017 at the Development Bank of Southern Africa in Midrand, South Africa. The purpose of the seminar was to discuss how Social and Ethics Committees (SECs) can be made more effective in such a manner that creates value not only for the company but also its stakeholders, employees, consumers, communities and investors amongst others.  Furthermore, the seminar aimed to raise more awareness about SECs as well as encourage their active involvement in the affairs of their respective companies.  The rationale is that companies should not only be concerned with profit maximisation but also ensure that communities, employees and the environment do not suffer harm as a result of their operations.

As background, companies have a legal requirement to establish SECs. Section 72 (4) and Regulation 43 of the Companies Act 71 of 2008 (The Act) require that all listed public companies, state owned companies and any other company that score above 500 public interest points (PI Score) must have a social and ethics committee. SECs were established as a statutory board committee to ensure that companies act in a responsible manner as well as contribute to the economic and social development of the communities in which they operate. As things stand, the specific role of the SECs is to monitor the companies’ activities with regard to social and economic development; good corporate citizenship; the environment, health and public safety; consumer relationships; labour and employment; draw matters within its mandate to the attention of the Board and; report to the shareholders on the matters within its mandate.

The seminar was structured to include presentations from different perspectives followed by discussions. An estimated 122 people from industry, policy makers, community representatives, non-governmental organisations/community based organisations (NGO/CBO), regulators, academics and other specialists in the field of corporate governance, ethics and community development attended and thus brought to the seminar a valuable mix of experiences and perspectives particularly in respect of how SECs can be made more effective going forward.

A summary of the key issues that emerged from the seminar deliberations are as follows:

• All things considered, the SEC exists to address issues of company sustainability in all respects as seen and perceived by the stakeholders it interacts with. The primary role of the SEC is therefore to assure all stakeholders that business is being conducted in an ethical manner or measures are in place to move towards more ethical practices.
• The role of the SEC should be to provide a social conscience to the company and should not be seen as an additional extra to what a company should be doing. In terms of ethics, these should permeate through the entire organisation and therefore be seen as a value driver and not regulatory burden.
• There is low penalty for non-compliance and as such some companies may continue to act as they wish with little regard to the need to have effective SECs.
• In establishing an SEC, it is important to look at the skills, background and competencies of the committee members in order to ensure that they address all the issues within their mandate.
• Notwithstanding the compliance areas, it is important to note that SECs tend to address those issues that are relevant to their respective companies. Globally pegged concepts that have no relevance to the day to day operations of the company are least understood and let alone implemented.
• The SEC should provide leadership to the company by ensuring that business is conducted in an ethical manner for purposes of maximising benefits in respect of the environment, social and economic aspects. Corporate social responsibility whilst important is not the primary function of the SEC.
• The recently published King IV principles[2] of November 2016 have since elevated the importance of SECs to focus on outcomes than a tick box compliance exercise. Companies are now required to report on outcomes related to the functions of the SEC.
• A number of factors explain why companies apply for exemptions from the SEC requirement. Exemptions are not only driven by not wanting to be ethical but also because the companies do not fit into the category of companies that are required to have SECs.

The key recommendations and areas of actions are as follows:

• SECs should not be seen as a compliance committee but rather go beyond issues of compliance. In any event, the audit committee exists to address matters of compliance. It is recommended that the Companies and Intellectual Property Commission (CIPC) and related stakeholders like civil society groups take proactive action towards ensuring that companies move beyond compliance.
• The burden of non-compliance should be extended to the company chief executive officer (CEO) in order to ensure effectiveness.
• The current compliance areas are largely drawn from the global arena but are equally covered by the South African bill of rights in clearer ways. The recommendation is that the compliance requirements should instead be heavily influenced and derived from the bill of rights than global concepts some of which overlap with domestic legislation.
• Develop a practice note on SEC that is aligned to both King IV and the companies’ regulations. The CIPC to lead in this area.
• Redraft the functions of the SEC in order to give more clarity as well as make them measurable, the dti to lead.
• The SEC report like other company reports must be audited in order to check the existence of the SEC and its level of functionality. The CIPC to lead.
• At a functional level, the SEC should continually assess what is happening in the company instead of being reactive.
• In the process of procuring goods and services, government should consider whether companies have functional SECs especially if they fall within the threshold of companies that should comply with the SEC requirement.
• Communities should be empowered to consider class action and approach companies that should comply with the SEC requirement but do not do so or merely comply by ticking boxes.
• More awareness should be raised on the benefits of ethics and the need for companies to continuously address unethical practices.
• A combination of monetary penalties as well as the naming and shaming of companies involved in unethical practices should be implemented.
• Amendments to the current Companies Act of 2008 should be effected in order to ensure that external companies comply with the SEC requirement. the dti to lead.
• The CIPC needs to aggressively issue compliance notices to companies that do not comply with the SEC requirement.
• Civil society should be more active in matters related to the ethical conduct of companies especially the big corporates.
• Shareholders through the nominations committee that have a significant influence with regards to the appointment of SECs and should play a bigger role in ensuring that SECs are effective or properly constituted.
• The CIPC should be more active in ensuring that the benefits of compliance are understood by companies. Increasingly investors want detail that demonstrates growth, brand value and compliance with local requirements.