The introduction by the Companies Act of the requirement for certain companies to have a social and ethics committee (S&E Committee) gives legal backing and imposes legal obligations in relation to a company’s responsibility to a broad range of stakeholders, including employees, consumers, customers, the public and communities. In short, the provisions of the Companies Act in relation to the S&E Committee give legal substance to many of the governance principles and recommendations set out in King III.
At first glance, one may think that the S&E Committee is mandated to deal with the “so called soft issues”. While it is true that the S&E Committee is required to monitor and report on non-financial activities, it is important to note that the S&E Committee has the same legislative standing as the Audit Committee (being the only two statutory committees prescribed by the Companies Act).
Furthermore, it is accepted in business today that it is not only financial matters that are critical to the success and sustainability of a company and that there are many so called “soft issues” covered by the S&E Committee which could have a serious impact on a company’s reputation and ultimate success.In terms of the Companies Act and Regulations, the S&E Committee, if required to be established, has onerous and broad responsibilities that, if not complied with, carry potential liabilities for not only the directors and prescribed officers who sit on the S&E Committee, but for all directors.
The board has ultimate responsibility to ensure that a S&E Committee is appointed and functions effectively. Whilst not yet tested in a court of law, it is prudent that directors and prescribed officers understand their role as members of this S&E Committee.
A good starting point is to ensure that the S&E Committee has an appropriately documented terms of reference that is understood by all the members of the S&E Committee, and is approved by the board.The terms of reference should set out the purpose of the S&E Committee, its mandate, roles and responsibilities, authority and scope. The S&E Committee will typically rely on executive management’s reporting systems and processes, which may need to be refined to produce the information the members require to be able to discharge their duties.The S&E Committee has a monitoring and reporting role on matters that fall within its scope.
This scope is broad and wide-ranging and includes such matters as the Organisation for Economic Co-operation and Development (OECD) recommendations regarding corruption, the United Nations Global Compact Principles, the International Labour Organisation Protocol (currently no guidelines are provided for the latter two) and various South African statutes, codes and best practice.
At KPMG, we appreciate that the S&E Committee’s authority is wide and multi-faceted and accordingly presents a challenge when it comes to monitoring activities across such a diversity of areas.The diagram illustrates the role of the S&E Committee as an oversight body. The S&E Committee’s mandate, although dictated by the Companies Act’s Regulations, is an assurance provider and an oversight body for the Board, Shareholders and other Stakeholders (e.g. regulators, employees, suppliers, customers, communities, etc.).
The S&E Committee should discharge its responsibilities by engaging with executive management on matters such as Environmental risks, CSI Spend, Employment Equity, Ethics, Health and Safety issues, BEE and Compliance with numerous laws and regulations. The committee should also review the reporting of these matters and will therefore need to ensure that management are able to provide sufficient information tools, policies, independent assurance and monitoring mechanisms to satisfy the business needs and responsibilities of the committee.