New Companies Act mandates social and ethics committees; May boost BBBEE

Broad based black economic empowerment (BBBEE) has received a boost from a section of the new Companies Act which makes mandatory for certain companies to constitute social and ethics committees.

The Act which came into effect last year calls for establishment of social and ethics committees by the 1st of May 2012. A statement released by the Institute of Directors of Southern Africa (IoDSA) said this bounds all public and state-owned enterprises and companies that had a public-interest score of more than 500 in any two of the five previous; unless exempted.

Addressing an IoDSA seminar, KPMG director Kerry Jenkins pointed out “Companies falling under the ambit of the Act have no choice but to set up these new committees”. Jenkins added that it has to be said that the regulations are not all that clear in certain respects. “This is something new and challenging, and corporate South Africa will have much to debate as we work towards implementing these committees.”

The IoD statement said from a functional point of view, social and ethics committees have to monitor activities with respect to legislation and codes, draw matters to the attention of the board, and report to the shareholders at the annual general meeting. The committee’s scope includes social and economic development; good corporate citizenship; environment, health and public safety; consumer relationship; and labour and employment.

BBBEE cuts across most of these themes. Many companies have in the past established transformation committees which focused on BBBEE issues. But this was largely a function of peer pressure. This pressure was piled up by the King III report which cites the following key paragraph: “Social transformation and redress from apartheid are important and should be integrated within the broader transition to sustainability. Integrating sustainability and social transformation in a strategic and coherent manner will give rise to greater opportunities, efficiencies, and benefits, for both the company and society”. But then King III has been limited in enforcing its principles as it was positioned as a non statutory code.

Jenkins  said “Under the influence of King III and other initiatives, we have moved from a governance model focused exclusively on shareholder value to one that takes into account a much wider range of stakeholders—though, of course, shareholders remain an important constituency”.

“In South Africa, it’s clear that corporate profits and share growth have to be balanced with—and are ultimately dependent on—the maintenance of social peace.” He said social and ethics committees must consist of at least three directors or prescribed officers, and at least one director who has not been involved in day-to-day management of the company for the previous three years.

“It’s interesting and quite appropriate that all the directors do not have to be non-executive” said Jenkins. “The Act also introduces the concept of ‘prescribed officers’ and this is just one of the many areas where companies will be feeling their way.”

“Companies will need to do some internal education to help prevent this becoming a box-ticking exercise, and makes the strategic contribution in the spirit that the Act envisages. We expect that the effectiveness of these committees will ultimately be a function of the board’s commitment to this underlying spirit.”

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