Contemporary corporate governance has evolved beyond a narrow focus on profit maximisation. Companies are now subject to heightened scrutiny regarding their treatment of employees, their environmental impact, and their engagement with the communities in which they operate. The Companies Act 71 of 2008 (“the Act”) introduced social and ethics committees (“SEC”) as a statutory mechanism to assist companies to oversee and manage these non-financial risks, which are often overlooked when focused on key performance indicators (KPI’s) for profits and other margins in companies. This article examines the categories of companies mandated to establish SECs in their companies, and to dive into the content that a properly drafted Terms of Reference should offer to the SEC. 

Mandatory SEC’s 

The Act recognises that companies function as corporate citizens, possessing not only rights but also corresponding responsibilities. To give effect to these obligations, the Act mandates the establishment of an SEC for specified categories of companies in terms of section 72 of the Act and prescribed regulations. Regulation 43(1) of the Companies Regulations, 2011 (“Regulations”) provides that listed public companies, state-owned companies, and any other companies that have a public interest score of more than 500 points in any two of the previous five years in terms of regulation 26(2) must establish functioning SECs. 

Companies falling under the list of Regulation 43(1) must appoint an SEC comprising at least three directors or prescribed officers. Crucially, at least one of these directors must be a non-executive director who is not involved in the day-to-day management of the business. This ensures an element of independent oversight.

Voluntary SEC

Any entity may voluntarily establish an SEC, considering the requirements associated with the formation and operation of such a committee. The King IV Report on Corporate Governance (“King IV Report”) recommends that companies not required to form an SEC may consider delegating certain of the responsibilities typically handled by an SEC to an existing committee or office bearer with similar functions as an SEC. The King IV Report recommends that SECs should move beyond a "tick-box" compliance approach. The King IV Report recommends that the SEC be positioned to support the board in shaping and maintaining an ethical corporate culture. It integrates social and environmental performance into the core strategy of the business rather than treating it as a side project. This is also echoed in the new King V Code.

Governance documents for SEC’s

The SEC operates as an internal governance mechanism designed to ensure that commercial objectives are pursued in a manner consistent with ethical standards and broader societal expectations. The Terms of Reference (or often referred to as the Code of Conduct) serves a salient role in identifying the establishment, structure, operations and objectives of a SEC.

The Terms of Reference of a SEC, read together with applicable legislative frameworks, can be deemed as the heartbeat of integrating social and environmental performance into the core strategy of the business. 

Some of the aspects that must be catered for in the Terms of Reference of a SEC include, without limitation: 

• The compliance duties of the SEC. 
• Assessment of the impact of the company on the economy and industry in which it operates. 
• Assessment of the impact of the company on the social environment in which it operates.
• The prescribed composition and term of the members of the SEC, as well as the indication of events that will disqualify a member from being appointed as part of the SEC. 
• The various approval processes and delegation of authority afforded to the SEC.
• Development of anti-competitive and collusive behaviour in the company. 

Other documents that could also assist in guiding the SEC on their functions and roles often include the policies, directives and procedure documents that apply to the company. Furthermore, the SEC may also develop and adopt a work plan on an annual basis to map out and track the continued effectiveness of the committee.  

Gone are the days when only state-entities require SECs. In a day and age where reputational damage can destroy a company overnight, the establishment of a functioning and effective SEC is a critical proactive mechanism. It ensures that the company remains profitable not only from a financial perspective but also in terms of its social responsibility and ethical standards. By embedding sound governance and responsible business practices into its operations, the company is positioned to achieve sustainable performance while upholding its broader obligations to stakeholders. Reach out to our Corporate Advisory Team for guidance in setting up your SEC and developing practical and compliant Terms of Reference documents for your SEC. 

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