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“The new Companies Act (no. 71 of 2008) and its accompanying regulations introduced a new board subcommittee that all state-owned companies, listed public companies, and companies that score above 500 points in terms of regulation 26(2) should have. This new committee is the Social and Ethics Committee.”

Social and Ethics Committees - Blessing or Burden?

The new Companies Act (no. 71 of 2008) and its accompanying regulations introduced a new board subcommittee that all state-owned companies, listed public companies, and companies that score above 500 points in terms of regulation 26(2) should have. This new committee is the Social and Ethics Committee.

The recognition of social and ethical responsibility as an integral part of good governance is not a new theme in South Africa (cf. Rossouw & Van Vuuren, 2010: 211-212). Already in the first King Report on Corporate Governance for South Africa (IoD, 1994) ethics and corporate responsibility emerged as key components of corporate governance. With the publication of the second King Report (IoD, 2002) and the third King Report (IoD, 2009) the themes of social and ethical responsibility gained further prominence.

It is symbolically significant that the very first chapter of the Third King Report is the chapter on: "Ethical Leadership and Corporate Citizenship". Placing this chapter as the first chapter of the King III report is to my mind a recognition that good governance is premised on an ethical foundation. Corporate governance is about enterprise with integrity – as the first King Report already admitted in 1994.

The third King Report addresses the issues of corporate social responsibility and ethics explicitly in the first chapter of King III. Principle 1.2 states that "The board should ensure that the company is and is seen to be a responsible corporate citizen" (IoD, 2009: 22). The reports thus opt for the term "corporate citizen" to capture the ethical relationship of responsibility between a company and its external environment.

In principle 1.3 of King III a further obligation of the board regarding ethics is articulated: "The board should ensure that the company's ethics are managed effectively" (IoD, 2009: 24). In the explanation of what this principle means, the Report spells out in more detail what the process of ethics management entails. The way in which ethics management is described, makes it clear that the focus of ethics management in King III is on the institutionalisation of ethics in the internal structures, systems and processes of the company.
Against the backdrop of these developments in corporate governance in South Africa since 1994, the introduction of the Social and Ethics Committee via the new Companies Act is indeed a significant but not unexpected development.

Social and Ethics Committees
In section 72(4) of the Companies Act it is stipulated that the "Minister may by regulation prescribe that a company or a category of companies must have a social and ethics committee". This committee has to consist of a minimum of three members of the board of directors (or prescribed officers) – one of which must be a non-executive director.

The mandate of the Social and Ethics Committee according to the regulations that accompany the Companies Act is threefold:

the committee has to monitor whether the company complies with relevant social, ethical and legal requirements and best practice codes;
the committee has to bring to the attention of the board any relevant matters within the scope of its mandate; and
the committee has to report to shareholders on matters that fall within the scope of its mandate.

From the above mandate it is clear that the lawmakers had specific areas of social responsibility as well as specific social standards in mind against which they expect companies to measure themselves. In section 43(5) of the Regulations of the Companies Act more clarity is provided on what these areas of social responsibility are, and what standards are applicable. The following areas of responsibility and relevant standards are listed explicitly:

Social and economic development (relevant standards: United Nations Global Compact; OECD recommendations on corruption; Employment Equity Act; Broad-based Black Economic Empowerment Act).
Good corporate citizenship (including promotion of equality, prevention of unfair discrimination, reduction of corruption; contribution to community development; sponsorship, donations and charitable giving; environment, health and public safety).
Impact of the company's activities, products or services on communities.
Consumer relationships (including advertising; public relations; compliance with consumer protection laws).
Labour and employment (including employment relationships; contributions towards the educational development of employees. Relevant standards: International Labour Organisation Protocol on decent work and working conditions).

From the above list of responsibilities and standards that the Social and Ethics Committee has to consider, it is clear that there is a strong emphasis on the responsibility of business towards the communities in which they operate, on social transformation in the workplace, and on the protection of the safety, health and dignity of employees. There is, however, a glaring gap in the remit of the Social and Ethics Committee: no mention whatsoever is made of the responsibility of the Committee to ensure that the ethics of the company is managed effectively as required by Principle 1.3 of the third King Report, which states: "The board should ensure that the company's ethics are managed effectively".

Burden or blessing (in disguise)?
It will be interesting to observe how companies give expression to the requirement of the new Companies Act to introduce Social and Ethics Committees. Will it only take the shape of a ticking-the-box compliance exercise or will it result in companies elevating their social and ethical obligations to a strategic level where the board engages seriously with the company's ethics and its corporate citizenship?

For companies that opt for the first option, Social and Ethics Committees will become an additional burden to which they will reluctantly comply (or seek to escape), because the Companies Act compels them to do so. However, companies that embrace Social and Ethics Committees as an opportunity, can elevate their social and ethical responsibility to board level where it can be integrated into the corporate identity and strategy of the company. Companies in this latter category will do well to broaden the scope of responsibility of their Social and Ethics Committee also to include the King III recommendation on ethics management within the remit of the Committee's areas of oversight. asa

Bibliography
IoD. 1994. King Report on Corporate Governance for South Africa. Johannesburg: Institute of Directors.
IoD. 2002. King Report on Corporate Governance for South Africa. Johannesburg: Institute of Directors.
IoD. 2009. King Report on Governance for South Africa 2009: Johannesburg: Institute of Directors.
Rossouw, D. and Van Vuuren, L. 2010. Business Ethics (Fourth edition). Cape Town: Oxford University Press.

Prof GJ Rossouw, BA (Hons), BTh, MA, PhD, is the Chief Executive Officer at the Ethics Institute of South Africa and Extraordinary Professor at the University of Pretoria.

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