Section 72 (4) of the Companies Act, 2008 and regulation 43 (2) states that every state owned company, listed public company and any other company that scored above 500 points in any of two of the previous five years is required to have a Social and Ethics Committee. Subsidiaries of companies that have a Social and Ethics Committee, or those that are exempted do not have to have a committee. A board now has 12 months from 1 May 2011 to constitute the Social and Ethics Committee.
Section 43 (5) of the Companies Regulations, 2011 states that the Social and Ethics Committee has the following functions:
“(a) To 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:
(i) Social and economic development, including the company’s standing in terms of the goals and purposes of:
(aa) the 10 principles set out in the United Nations Global Compact Principles; and
(bb) the OECD recommendations regarding corruption;
(cc) the Employment Equity Act; and
(dd) the Broad-Based Black Economic Empowerment Act;
(ii) Good corporate citizenship, including the company’s:
(aa) promotion of equality, prevention of unfair discrimination, and reduction of corruption;
(bb) contribution to development of the communities in which its activities are predominantly conducted or within which its products or services are predominantly marketed; and
(cc) record of sponsorship, donations and charitable giving;
(iii) the environment, health and public safety, including the impact of the company’s activities and of its products or services;
(iv) consumer relationships, including the company’s advertising, public relations and compliance with consumer protection laws; and
(v) labour and employment, including:
(aa) the company’s standing in terms of the International Labour Organization Protocol on decent work and working conditions;
(bb) the company’s employment relationships, and its contribution toward the educational development of its employees;
(dd) to draw matters within its mandate to the attention of the Board as occasion requires; and
(ee) to report, through one of its members, to shareholders at the company’s annual general meeting on the matters within its mandate.”
The Social and Ethics Committee has to monitor the company’s activities having regard for the relevant legislation, legal and best practices broadly in the following areas:
- Stakeholder management – specifically employees, communities, consumers and the environment.
The Social and Ethics Committee then has to draw these matters to the attention of the board and report on these matters to the shareholders at the annual general meeting.
Given the respective legal responsibilities of the Audit Committee and the Social and Ethics Committee in terms of the Companies Act, it is likely that certain of the activities of both committees’ are of relevance to one another.
In the interests of efficient utilisation of company resources, it is conceivable that assurance, risk management and compliance reports will be used by different board committees in the discharge of their respective responsibilities. Indeed, the combined assurance framework should be expanded to reflect not just the risks over which assurance is provided and who the assurance providers are, but also who the users of the different types of assurance could be.
Some typical internal audit and compliance areas where reporting could provide meaningful input into the Social and Ethics Committee includes the following:
The Social and Ethics Committee is likely to be interested in assurance obtained from the following internal audit reports:
- Ethical Climate Surveys – measures adherence to ethical standards. These include corporate behaviour and practices towards customers, employees, suppliers and legal requirements
- Fraud hotline activity and effectiveness
- Fraud risk assessments and mitigations.
The Social and Ethics Committee is likely to want to use reports from the Internal Audit and Compliance functions to monitor adherence to at least the following laws:
- Basic Conditions of Employment Act No. 75 of 1997
- Competition Act No. 89 of 1998
- Consumer Protection Act No. 68 of 2008
- Employment Equity Act No. 55 of 1998
- Environment Conservation Act Extension No. 73 of 1989 and the Extension Act of 1996
- Financial Intelligence Centre Act No. 38 of 2001
- Labour Relations Act No. 66 of 1995
- National Building Regulations and Building Standards Act No. 103 of 1977
- National Environmental Management Act No. 107 of 1998
- National Water Act No. 36 of 1998
- Occupational Health and Safety Act No. 85 of 1993
- Prevention and Combating of Corrupt Activities Act No. 12 of 2004
- Skills Development Levies Act No. 9 of 1999
- Unemployment Insurance Act No. 63 of 2001 and the Contributions Act No. 4 of 2002.
Given the quantum of laws and regulations in South Africa (over 1500) and the requirement to adhere to them, the role and effectiveness of the company’s Compliance function cannot be understated. King 3 Principle 6.1 states that: “The board should ensure that the company complies with applicable laws and considers adherence to non-binding rules, codes and standards”. Recommended practice is that “The compliance function, its role and its position in terms of reporting should be a reflection of the company’s decision on how compliance is to be integrated with its ethics and risk management”.
Given the new Companies Act and the responsibilities of the Social and Ethics Committee, it is probable that the results of the monitoring activities of the Compliance function and Internal Audit will be on the Social and Ethics Committee agenda.
For the next 12 months, Companies have a unique and early opportunity to organise efficiently their assurance and information needs for their Audit, Risk and Social and Ethics Committees’, ie ensuring:
- Efficient Internal audit planning - effective Combined Assurance Frameworks, conducting of key audits such as Ethical Reviews, and Quality Assurance Reviews of the company’s Compliance Functions
- Effective Compliance Functions - specifically the prioritisation of high risk regulations, deployment of Regulatory Risk Management Plans and the pre-emptive monitoring of compliance to laws
- Integration of sound risk management practices throughout the organisation.
Early planning of the information and assurance needs for all board committees will ensure non-duplication of effort, efficient and non-wasteful use of company resources and relevant and useful information through the governance structures to the company board.