Social and Ethics Committees: The Journey Begins

The new Companies Act (71 of 2008), which came into effect on 1 May 2011, mandates that certain companies have to constitute social and ethics committees by 1 May 2012. The Act requires all public and state-owned companies, as well as other companies that had a public-interest score of more than 500 in any two of the five previous years to do so, unless exempted.

“Companies falling under the ambit of the Act have no choice but to set up these new committees, but it has to be said that the regulations are not all that clear in certain respects,” says Kerry Jenkins, a director at KPMG. “This is something new and challenging, and corporate South Africa will have much to debate as we work towards implementing these committees.”

Jenkins was addressing the first of a series of seminars on the new social and ethics committee held by the Institute of Directors in Southern Africa (IoDSA).
Introducing the topic, Jenkins reminded delegates that the new Act makes many changes to the regulatory, accountability, transparency and governance required of companies. The Act is intended to modernise and simplify South African company law, and the provision for social and ethics committees directly reflects changing emphasis of the country’s governance model. “Under the influence of King III and other initiatives, we have moved from a governance model focused exclusively on shareholder value to one that takes into account a much wider range of stakeholders—though, of course, shareholders remain an important constituency,” Jenkins explains.

This new thinking recognises that a company’s long-term sustainability is ultimately dependent on the value it delivers to the wider society in which it operates. “A country’s governance model is ultimately determined by the socio-economic and political environment,” Jenkins says. “In South Africa, it’s clear that corporate profits and share growth have to be balanced with—and are ultimately dependent on—the maintenance of social peace.”

Social and ethics committees must consist of at least three directors or prescribed officers, and at least one director who has not been involved in day-to-day management of the company for the previous three years. “It’s interesting and quite appropriate that all the directors do not have to be non-executive,” Jenkins says. “The Act also introduces the concept of ‘prescribed officers’ and this is just one of the many areas where companies will be feeling their way.”

From a functional point of view, social and ethics committees have to monitor activities with respect to legislation and codes, draw matters to the attention of the board, and report to the shareholders at the annual general meeting. The committee’s scope includes social and economic development; good corporate citizenship; environment, health and public safety; consumer relationship; and labour and employment.

The sheer volume of laws, regulations and codes that would be of interest to the committee is daunting in the extreme. Jenkins argues that one of the key success factors for companies will be the effective use of existing resources and functions within the company and its committees. For example, while the audit and compliance committees both have different remits, a lot of the work they do will be helpful to the social and ethics committee—and vice versa.

On a practical level, Jenkins recommends that companies approach this matter in a phased manner, beginning with putting the necessary structures in place, planning meticulously, and then executing and reporting. “KPMG’s approach is not intended to be definitive, but to provide a starting point,” she says. “Companies will need to do some internal education to help prevent this becoming a box-ticking exercise, and makes the strategic contribution in the spirit that the Act envisages. We expect that the effectiveness of these committees will ultimately be a function of the board’s commitment to this underlying spirit.”