Future proofing the social and ethics committee

The Companies Act, No. 71 of 2008¹ (the Act) introduced the social and ethics committee (SEC) concept to South African corporate law, and with effect from 1 May 2012, mandated certain categories of companies to constitute and maintain a SEC.

Initially, some companies constituted SECs merely as a tick-box exercise to comply with the Act, with SEC detractors viewing the committee as a training ground for new non-executive directors (NEDs) and a ‘waiting room’ for NEDs wanting to ‘scale down’ responsibilities. However, the growing importance of stakeholder inclusivity and the widespread acceptance of ESG and sustainability (ESG+S) have placed the SEC and its evolving role in the spotlight.

In recent years, many key South African role players have taken note of the SEC’s increasing importance, including the Department of Trade, Industry and Competition (DTIC). On 1 October 2021, the DTIC published the latest draft of the Companies Amendment Bill for public comment (the Bill).² The Bill proposed, inter alia, several SEC-related amendments to the Act, which included the following, relating to public companies –

• A SEC report in a prescribed form³ must be presented at public company annual general meetings (AGMs), and must be approved by way of an ordinary shareholders resolution.

• Where the SEC report is not approved, engagement with shareholders who voted against the SEC report will be required and, within a period of four months, a statement on the outcome of such engagement must be published on the company’s website and SENS (if listed). Such statement will also form part of the SEC report to be presented at the company’s next AGM.

• Public company SEC members must be appointed, or reappointed, as the case may be, at each AGM of the company.

• Public company SECs are to include no less than three directors, with the majority of such directors to be independent and not to have been involved in the day-to-day management of the company during the previous three financial years.

• SEC vacancies are to be filled within 40 days.

While there appears to have been little progress in the legislative process, with public comments on the draft Bill still being considered by the DTIC, this is nevertheless a good time to consider further refinements to the SEC construct, including the points highlighted below.

1. SEC functions

Regulation 43(5) of the Companies Regulations (Reg 43(5)) sets out the statutory functions of the SEC, whilst the King IV Report on Corporate Governance for South Africa, 2016 ‘broadens’ the SEC’s role to include “oversight and reporting of organisational ethics, responsible corporate citizenship, sustainable development and stakeholder relationships”. The matters set out in Reg 43(5)(a) were broad to start off with and have, over time, ‘unofficially’ expanded in scope. Considering that Reg 43(5) has been in effect since 2012, it is proposed that the prescribed matters be formally updated to account for recent developments, such as the increasing imperative of addressing the climate crisis, whilst simultaneously empowering the SEC to provide strategic leadership on these items, instead of limiting itself to mere compliance oversight.

2. ESG and sustainability

ESG+S has increasingly become a key business imperative for companies to consider and incorporate in their strategies, operations and reporting. In South Africa, much of a company’s responsibility for governing ESG+S practices and related matters falls on the SEC. Despite initially being categorised as non-financial factors, ESG+S has proven to possess rising financial implications for companies (many investors take ESG+S performance into consideration when deciding whether to invest in a company). Given the ever-expanding scope of ESG+S factors for SECs to consider and the increasing amount of time required to be spent thereon, as well as the growing financial implications associated with ESG+S compliance (and non-compliance), it is suggested that greater structure and certainty be given to the SEC’s ESG+S function, either in Reg 43(5) or in the next iteration of the King Code.

3. Cross committee membership

Cross committee membership encourages pollination of thinking between members of the different board committees and gives such members a deeper understanding of the risks and opportunities faced by the company, as well as the strategies to address these. It might be worth-while to consider the merits of mandated cross committee membership (i.e. for at least one audit committee (AuditCom) or risk committee member to also serve on the SEC).

4. Qualifications, skills and experience

The Bill proposes that the Minister may prescribe the minimum qualification requirements for SEC members. Considering the wide ambit of the SEC’s mandate, it may make sense to prescribe the qualification requirements for a minimum portion of the SEC, with it being sufficient for other members to have SEC-relevant experience. This approach will help to ensure that the SEC comprises a mix of relevant qualifications, skills and experience.

Despite not having been promulgated yet, the Bill’s proposed amendments to the Act should be welcomed. However, to truly ensure the SEC’s future relevance, key aspects, such as its functions and members’ competence requirements, would need to be updated.

1.Section 72 of the Act, read with Regulation 43 of the Companies Regulations, 2011 (‘Companies Regulations’) provides for the establishment of SECs.
2.The 2021 draft contained some departures from the prior version, published on 21 September 2018.
3.The SEC report must detail (i) how the SEC performed its functions; (ii) how the SEC fulfilled its mandate; and (iii) that there were no instances of material non-compliance to report.

Johann Piek is a Director | PSG Capital

This article first appeared in DealMakers, SA’s quarterly M&A publication.

DealMakers is SA’s M&A publication.
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