Contrary to what the name implies, a company’s social and ethics committee (SEC) has nothing to do with behaviour in social situations. Rather, it allows the company to monitor and measure the impact that certain specified activities have on communities and the public at large.
In terms of the Companies Act and its associated regulation 43, all state-owned companies, all listed companies, and all other companies that, in any two of the previous five years, have had a public interest score above 500, are obliged to constitute an SEC. A public interest score is calculated at the end of each financial year and is influenced by the average number of employees at the company, the number of shareholders, the turnover of the company, and the company’s third-party liability.
Furthermore, the Companies and Intellectual Property Commission (CIPC) requires confirmation that a company has established an SEC. The CIPC also states that companies may apply for exemption from the SEC requirement to the Companies Tribunal, under certain conditions.
The social and ethics and the audit committees are the only ones prescribed by the Companies Act. The King IV Report on Governance for South Africa provides further guidance.
It is clear that because certain areas (see next sub-section) of a company’s operations can have a dramatic positive or negative impact on the lives of communities and of the company itself, strict monitoring is necessary to ensure that impact is maximised or minimised, as the case may be. It is also clear that the SEC is, therefore, a vital component in a company’s governance structure.
A joint study from the Institute of Directors in Southern Africa (IoDSA) and the Ethics Institute, titled Social and Ethics Committee Trends Survey Report 2021 and published at the end of that year, has shed further light on the workings of SECs, following an initial survey in 2020. Data from 91 organisations (SMEs 35%, mid-sized organisations 37%, and large organisations 27%) in 13 sectors provided insight into the nature, composition, effectiveness, and challenges of the typical South African SEC. Of the 91, 21% or around a fifth were non-profit organisations.
Download the IoDSA report on social and ethics committees.
Behind the scenes of SECs
The SEC’s mandate involves monitoring a company’s activities in terms of:
- Social and economic development – this includes the company’s standing in terms of the goals and purposes of, among others, the OECD recommendations regarding corruption;
- Good corporate citizenship – this includes, among others, the company’s promotion of equality, prevention of unfair discrimination, and reduction of corruption;
- Environment, health and public safety;
- Consumer relationships; and
- Labour and employment.
Because the SEC elevates these issues of how a company conducts its business to the level of the board of directors, it ensures that they receive appropriate attention. Companies with a well-functioning SEC not only have the necessary principles down on paper, but they actually put those principles into practice at all levels of the company – this brings added benefits such as increased sustainability, stronger stakeholder relations, greater public trust, and more effective risk compliance.
To grasp the negative consequences of failure to establish an ethical culture and operate as a good corporate citizen, we need look no further than the likes of Bell Pottinger, Bain, McKinsey, KPMG and other multinationals. These giants spared no effort in participating in underhanded activities and in the process, caused untold damage to South Africa. They have, however, paid a high price, even having to close up shop. Others are still paying and yet others still have to pay. There are many more such disappointing examples.
SECs would therefore seem to have their work cut out for them. And indeed, the IoDSA report specifies some of the major challenges and operational impediments these committees face.
The main challenge encountered most/all of the time, is that the organisation does not understand the role and mandate of the SEC (27%). Committees also struggle with too much focus placed on compliance at the expense of oversight (19%), and too broad an agenda (17%).
Slightly encouraging is that only 13% reported challenges caused by corruption, fraud and unethical behaviour within the organisation.
Other thought-provoking challenges include lack of funding and resources (14%), insufficient support (12%), and lack of commitment from SEC members (8%).
Despite these obstacles, 78% agree that the SEC adds value, while 74% view it as effective and as important in comparison to other committees, respectively.
“It should be recognised that the SEC is still a relatively young governance structure, and it is therefore no surprise that it suffers typical teething problems,” says the report, adding that “the SEC attained a remarkable level of maturity, even though its institution in organisations only became mandatory a mere nine years ago on the 1st of May 2012.”
SECs at work
Most committees affirmed that they receive reports on organisational ethics management. “This is a remarkable finding,” says the report, “since oversight of organisational ethics is not included in the statutory mandate of the SEC. Both King III and King IV, however, recommend that governing bodies should govern organisational ethics, which provides a plausible explanation …” for this phenomenon. However, a drop of 8% from 2020 to 2021 is concerning.
Respondents stated that in most cases, SEC matters are a standing item at board meetings, though some 17% indicated that SEC matters are either discussed as an ‘ad hoc’ item or under ‘other matters’. Again, there was a concerning decrease of 9% from 2020 to 2021. But, the report notes, “Overall, the results are encouraging and indicate that boards generally take the function of the SEC seriously. More must be done though to remove impediments that may reduce the perceived importance of the SEC.”
In terms of reporting to shareholders, the number of SECs reporting in both written and verbal formats almost doubled from 2020, constituting more than half. This might indicate an improved perception of importance concerning SEC matters. Around 13% indicated that no SEC activities are reported at the annual general meeting, but this could be because many SECs are not standalone committees.
Moving to the topics on which committees spend most or all of their time, respondents reported that employee health and safety (76%) and matters related to organisational ethics (74%) take up the bulk of their efforts. Fraud and corruption prevention take up 65% of the SECs’ time investment.
Conversely, SECs seldom or never spend their time on matter relating to advertising (59%), biodiversity (58%), climate change mitigation (57%), and responsible and transparent tax practices (52%). Since climate change is heavily impacted by the operations of companies – some have a heavier impact than others – it is concerning that the topic does not get as much time as it should, considering that it is specifically listed in the mandate of the SEC.
Finally, the average SEC meets four times a year, the same frequency as 2020. The lowest number of meetings was one in both 2021 and 2021, and the highest dropped to six, from 12 in 2020.
Other features of SA’s typical SEC
In terms of gender diversity, men (58%) are better represented than women (42%). The IoDSA report notes that SECs perform better in this aspect than other board committees, both locally and internationally.
“Viviers et al. (2017) found that women were only 25% of the membership of board committees in South Africa on average.”
Globally speaking, meanwhile, the Governance Metrics International (GMI) rankings of 2013, using a board sample of 5 977 organisations, found that women hold only 11% of board membership positions (Gladman et al. 2013). Within the GMI, South Africa was ranked fifth in terms of board gender diversity.
“Against this background, the SECs sampled in this report had significantly higher representation of women, indicating that SECs may lead the way in terms of gender diversity on boards in South Africa.”
When it comes to ethnic diversity, Black Africans are the best represented group in SECs. “However, compared to national demographics, Black Africans remain the most under-represented group on SECs, which highlights that more needs to be done to improve transformation of boards and board committees. Compared to the 2020 data, Black African representation has increased from 35% to 44%, indicating a fair improvement.”
Most SECs designated themselves as, indeed, social and ethics committees. This was the most popular naming convention in 2020 (65%) and 2021 (55%), followed by social ethics and transformation committee, or SETC, with 13% in 2021. Fourteen new designations were identified in 2021, bringing the total number of variants to 26, compared to 12 in 2020.
The variety of committee names, says the IoDSA report, might lead to potential incoherence. It might also indicate that the focus of the SEC becomes diluted when it joins with another committee. Data collected shows that, while most SECs are standalone committees that operate on their own, around 31% indicated that they have combined with another committee. This is almost double the 2020 amount, and is worrisome because it allows for less time to be spent on SEC-related matters.
As for the reason for the SEC’s establishment, most (43%) were set up with the objective of establishing and fostering an ethical culture in the organisation – this proactivity is encouraging, notes the IoDSA report. Compliance with the Companies Act increased to 37%, with compliance with King IV followed thereafter. Reactive reasons, such as corporate scandals, dropped from 7% to 1% – this may indicate that companies are learning from their mistakes.
For more vital statistics, refer to the IoDSA report.
