RSM South Africa

The Social and Ethics Committee - A bird's eye view

An interesting feature in modern company law is that the Social and Ethics Committee (“S&E Committee”) of a company, as provided for in the Companies Act No 71 of 2008 (the “Companies Act”), creates an opportunity for such a company to consider its social footprint within a uniquely South African context.

Every state owned company, listed public company, and any other company that has a public interest score of above 500 points in 2 of the previous 5 years, are obliged in terms of Section 72 and regulation 43 of the Companies Act to establish and maintain an S&E Committee.

Calculating the public interest score of a company

The public interest score of a company is calculated at the end of each financial year of the company, as the sum of the following:  

  • The number of points equal to the average number of employees of the company during the financial year
  • One point for every one million rand (or portion thereof) in third party liability at the financial year end
  • One point for every one million rand (or portion thereof) in turnover during the financial year
  • One point for every individual who, at the end of the financial year, is known by the company to have, directly or indirectly, a beneficial interest in any of the company’s issued securities, or to be  members of a non-profit company

Thus for a company that had in its previous financial year:

  • An average of 355 employees;
  • A turnover of R40 million;
  • At year end R28 million of liabilities; and
  • 80 shareholders

The public interest score would be calculated to 503 (355+40+28+80)

Composition of the S&E Committee

A company’s S&E Committee must comprise of not less than 3 directors or prescribed officers of the company, at least one of whom must be a director who is not involved in the day to management of the company’s business, and must not have been so involved within the previous 3 financial years. Unlike the Audit Committee, which is the only other committee required by the Companies Act, the members of the S&E Committee are presumably appointed by the board, however Section 72 and regulation 43(4) are silent on this point. 

Exemptions IN TERMS OF THE COMPANIES ACT

Companies to which the regulation applies must appoint an S&E Committee, unless such company has applied to the Companies Tribunal on the basis that:

  • It is a subsidiary of another company that has a formal mechanism within its structures that substantially performs the function that would otherwise be performed by the S&E Committee, and the formal mechanism of such other company will perform the functions required by this regulation on behalf of that subsidiary company, or
  • If it is not reasonably necessary in the public interest to require the company to have an S&E Committee, having regard to the nature and extent of the activities of the company. For example, the exemption will cater for companies which are purely of an investment nature.

Such an exemption will need to be approved by the Companies Tribunal and may only be granted for up to a period of 5 years at a time.

FUNCTIONS OF THE S&E COMMITTEE

Regulation 43 of the Companies Act states that in addition to a board’s responsibilities to its shareholders, it is required to give attention to the matters of the S&E Committee, which committee must monitor and report on, amongst others, as follows:

  • Social and economic development
  • Good corporate citizenship
  • The environment, health and public safety
  • Consumer relationships
  • Labour and employment

Over and above monitoring and reporting, the functions of the S&E committee in terms of Regulation 43(5) of the Companies Act include the following:

1. Monitor the company’s activities, having regard to any relevant legislation, other legal requirements or prevailing codes of best practice, with regard to matters relating to –

  • Social and economic development, including the company’s standing in terms of the goals and purposes of -
    • - The 10 principles set out in the United Nations Global Compact Principles; and
    • - The OECD recommendations regarding corruption;
    • - The Employment Equity Act, as amended;
    • - The Broad-Based Black Economic Empowerment Act, as amended;
  • Good corporate citizenship, including the company’s –
    • Promotion of equality, prevention of unfair discrimination, and reduction of corruption;
    • Contribution to development of the communities in which its activities are predominantly        conducted or within which its products or services are predominantly marketed;
    •  Record of sponsorship, donations and charitable giving;
  • The environment, health and public safety, including the impact of the company’s activities and of its products or services;
  • Consumer relationships, including the company’s advertising, public relations and compliance with consumer protection laws;
  • Labour and employment, including –
    •    The company’s standing in terms of the International Labour Organization Protocol on decent    work and working conditions;
    • - The company’s employment relationships, and its contributions toward the educational development of its employees;

2. To draw matters within its mandate to the attention of the board as occasion require; and

3. To report through one of its members, to the shareholders at the company’s annual general meeting on the matters within its mandate.

4. To ensure that the company’s ethics is managed effectively (as recommended in principle 1.3 of the King Report on Governance for South Africa, 2009, including –

  • Leadership demonstrating support for ethics throughout the company;
  • A strategy for managing ethics that is informed by the negative and positive risks the company faces;
  • Ethical standards are articulated in a code of ethics and supporting ethics policies;
  • Structures, systems and processes are in place to ensure that the various boards, employees and supply chains are familiar with and adhere to the company’s ethical standards;
  • Ethics performance is included in the scope of internal audit and reported on in the company’s integrated annual report;
  • Ethics is imbedded in the corporate culture;
  • Drawing matters within its mandate and terms of reference to the attention of the board as occasion requires; and
  • Reporting, through the Chairperson of the S&E Committee, to the shareholders at the company's annual general meeting on any part of the business of the meeting that concerns the S&E Committee’s functions.

RIGHTS OF THE S&E COMMITTEE

The Companies Act explicitly grants an extensive list of rights to the S&E Committee. In terms of Section 72(8) of the Companies Act, the S&E Committee is entitled to:

  • Require from any director or prescribed officer of the company any information or explanation necessary for the performance of the committee’s functions;
  • Request from any employee of the company any information or explanation necessary for the performance of the committee’s functions;
  • Attend any general shareholders’ meeting;
  • Receive all notices of and other communications relating to any general shareholders’ meeting; and
  • Be heard at any general shareholders’ meeting contemplated in this paragraph on any part of the business of the meeting that concerns the committee’s functions.

The company must also pay all the expenses reasonably incurred by its S&E Committee, including (if the S&E Committee considers it appropriate) the costs or the fees of any consultant or specialist engaged by the S&E Committee in the performance of its functions.

in conclusion

Regulation 43 has focused attention on important issues that many companies may have neglected in the past. It elevates social and ethics matters to board level, thus ensuring that they are treated as matters of strategic importance. Companies with effective S&E Committees stand to gain on many fronts that contribute to their overall sustainability. These could include greater public trust, improved risk, compliance, and ethics management, and stronger stakeholder relations.

Michelle Hendricks

Manager: Company Secretarial, Cape Town

References:

The Companies Act & Regulations, Act No 71 of 2008

The Companies and Intellectual Property Commission (“CIPC) website

Corporate Governance, the Directors Guide, Fifth Edition

The Social And Ethics Committee Handbook, Second Edition


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