Relevant to LW-ZAF
This article briefly deals with the new social and ethics committee (SEC) applicable to certain companies in terms of the South African Companies Act (CA), 2008. This is especially important in the context of Syllabus Area F (1) – Management, administration and regulation of companies and close corporations (company directors).
It is required of candidates to be able to explain the duties that directors owe to their companies. Directors’ duties have been partially codified in sections 75 and 76 CA 2008. When considering in whose interests directors need to act, it is stated in section 76(3)(b) that directors need to act in the best interests of the company. The common law position that a director has to act bona fide in the best interests of the company is thus now entrenched in the CA.
Even though the common law position is still applicable, and now part of company legislation, the CA did bring some substantial changes to directors’ duties and to whom they owe these duties. It is here where the SEC is of relevance. Section 7(d) CA confirms, for example, that one of the purposes of the CA is to reaffirm the concept of the company as a means of achieving economic and social benefit which is in line with the establishment of a SEC.
The SEC is an important new legislative requirement that companies should be aware of. Knowledge of this committee is of utmost importance in the context of directors’ duties, board committees, corporate social responsibility and governance and accountability requirements of companies. When discussing directors’ duties it is important to know in whose interests they should manage a company. Should they merely act with profit maximisation for the shareholders as their aim or should they also consider the interests of other stakeholders. The introduction of the SEC has an impact on this question and on the fact that directors have to act in an inclusive manner.
In this note the following issues will thus be discussed:
After reading this article you should understand and be able to reflect on:
Section 72 CA 2008 introduces a compulsory social and ethics committee for certain companies.
The idea is that this committee draws certain matters to the attention of the board and to then report to the shareholders. These matters include, inter alia:
All state-owned and listed companies, as well as other companies with a public interest score of more than 500 must have such a committee in place. The number of employees and the turnover are some of the factors that will determine if a company is obliged to have such a committee. The ‘public interest score’ is calculated at the end of a financial year. It is used to determine whether a company must comply with enhanced accountability requirements based on its social and economic impact. For example, one point is awarded for every R1 million in turnover in a financial year and a number of points are allocated being equal to the average number of employees of the company during the relevant financial year.
A minimum of three directors or prescribed officers must serve on a company’s social and ethics committee. One of them must, at least for the previous three financial years, not have been involved in the day-to-day management of the company’s business (Reg 43(4)).
The social and ethics committee has the following functions (Reg 43(5)): to monitor the company's activities, having regard to any relevant legislation, other legal requirements or prevailing codes of best practice. This relates to matters concerning, social and economic development, including the company’s position regarding the goals and purposes as envisaged in, for example, the United Nations’ Global Compact Principles, the Organisation of Economic Co-operation recommendations on corruption, the Employment Equity Act, 1998 and the Broad Based Black Economic Empowerment Act, 2003 as well as record of sponsorships, consumer relationships and labour and employment. Matters relating to good corporate citizenship also fall within their mandate and here reference is made to, inter alia, the promotion of equality, the prevention of unfair discrimination and the reduction of corruption. Further matters within their mandate include environmental, health and public safety issues as well as consumer relationships. Finally labour and employment is also listed and here reference is made to the International Labour Organisation Protocol on decent work and working conditions.
The committee should report annually to the shareholders at the company's annual general meeting on the matters within its mandate (Section 72(8)(e)). The functions of this committee thus consist of reporting as well as monitoring duties.
An assessment of this committee is beyond the scope of this article. But for interest sake a number of comments can be made.
By making provision for this committee, in the CA, South Africa has legislated corporate special responsibility to a certain extent. A committee, like the social and ethics committee, is a good way to protect stakeholder interests and to assist directors to consider these interests when they make business decisions, but then the terms of reference, duties and functions of this committee should be drafted in much clearer terms. Be that as it may, directors, company secretaries etc should be aware of this committee and be clear on its composition, functions and ultimate application.
So, if one returns to the questions asked in the beginning of this note, it should be clear that directors have to act in the best interests of the company. If one looks at the Companies Act as a whole it is clear that this can no longer mean pure profit maximisation for the shareholders. The duty of directors to act in the best interests of the company will include, to a certain extent, the interests of other stakeholders. This note focused on the SEC. Candidates should thus now be clear that directors will have to act in a more inclusive manner when making business decisions in line with their duties having people, profit and planet in mind.
Written by a member of the Corporate and Business Law examining team