Author: Tendai Mrerwa
Environmental, Social and Governance (ESG) considerations form part of the key factors that holding companies, investors and government entities consider when deciding which entities to invest in or partner with. Companies must pay critical attention to how their business affects the environment, the society that they operate in as well as the economic conditions of such societies. It has, therefore, become vital that companies have a Social and Ethics Committee (SEC) as one of their board committees. Let’s consider the composition, functions, strategy, policy framework, procedures and processes of the SEC using lessons from South Africa.
In South Africa, the Companies Act and the Companies Regulation require that state owned companies, listed public companies and companies that have had a public interest score of at least 500 points in any two of the previous five years, appoint an SEC. The public interest score is calculated using parameters such as number of employees; third-party liabilities; turnover and number of stakeholders.
The SEC must comprise of not less than three members and at least one of the directors who serves on the committee must be a non-executive director who is not involved in the day-to-day management of the company or has not been within the previous three financial years.
It is important to note that the King IV Code on Corporate Governance, which is a book of guidelines for companies in South Africa, further provides that majority of the members of the SEC should be non-executive members.
The SEC’s main functions include monitoring the performance of the company in terms of social and economic development; good corporate governance; environment, health and safety; consumer relationships as well as labour and employment matters.
The SEC has a further mandate that the company implements a corporate compliance programme in relation to identifying and evaluating corruption-related risks.
The King IV Code on Corporate Governance provides that the scope of the SEC should include oversight of the ethics within a company. The Code states that the SEC should further ensure, monitor and report on company ethics, responsible corporate citizenship, sustainable development and stakeholder inclusivity.
As with any other board committee, a Charter or Terms of Reference must be in place to guide the committee by setting out the authority and specific responsibilities of the SEC. This may also allow for suitably qualified persons to be co-opted onto the committee to render such services as may be necessary to assist it in its deliberations. This could include the appointment of a health and safety representative.
Considering the increased importance of the SEC, the South Africa Companies Act has put controls in place to ensure that the SEC operates effectively. These controls include receiving notices and the attendance of any general shareholders’ meetings and being heard at such meetings with regards to the committee’s functions.
The committee may also require from any director or employee any information necessary to ensure the effective performance of its functions.
Establishing an SEC and its effective performance can bring about a number of benefits to such a company. This includes an enhanced relationship with the society or community they operate in; improved reputation; increased staff morale which also leads to higher productivity and retention of the best employees; stable operating environments; mitigation of the costs associated with non-compliance such as shareholder value or punitive costs from breaches; and also increased access to new markets, consumers and investors.
Most importantly, the setting up of the SEC is the right thing to do.
Based on the above, it is clear that it has become crucial that countries emulate the South African example by making the formation of an SEC mandatory for listed companies and companies with a high public interest score.
It is also imperative that companies embrace this new era of ESG by setting up the SEC to help improve their ESG score.