Social and Ethics Board Committees – More red tape?

The May 1 deadline for South African companies to establish a Social and Ethics Board Committee has come and gone amidst a growing perception of excessive regulation within the corporate landscape of South Africa.

Section 72 (4) of the Companies Act, 2008 read with regulation 43 (2) states that every state owned company, listed public company and any other company that scored above 500 points in any of two of the previous five years is required to have a Social and Ethics Board Committee. A company’s public interest score is essentially the determinant for the financial reporting standards it must adopt and is calculated by proportionately awarding points for the average number of people employed during the financial year, the amount of unsecured debt held by third parties, turnover and the number of individuals with a beneficial interest in the company.

These committees are to have equal standing with audit committees with an overarching purpose of ensuring that the moral obligation inherent in the legislation’s intent is manifest consistently in the correct behaviour across the breadth of the company’s activities. The act contains a variety of measures that can be applied for non-compliance, including fines, sanctions and prosecution.

More recently, a global audit, advisory and tax firm ran a survey in association with the IOD in Southern Africa to determine how many companies had complied with the May 1, 2012 deadline to establish a Social and Ethics Board committee. A spokesperson for the firm indicated that only half the companies had set up the committee at the time of asking. ‘Directors could face penalties for non-compliance’, he said.

Compliance with applicable laws should however as per King Report on Governance for South Africa 2009 be understood not only in terms of the obligations that they create, but also for the rights and protection they afford effectively incorporating both the social and ethical effects of business decisions. In this case an ethics-focused magnifier within a company’s corporate machinery forces the employees of that company to consider the potential effects of their decisions on both the reputation of the company and the rights of their consumers respectively.

This could provide clues as to the hesitancy demonstrated by companies with respect to implementing the May 1, 2012 deadline. With the reputation of the company and the rights of its consumers catapulted to the fore, the risks associated with overlooking the recommendations of the committee or the failure of the same committee to flag ethical issues has raised some questions as to which members of the committee would be liable if there are social or financial implications down the line.

These compliance risks should however in retrospect formed part of companies’ risk management processes where the risks of non-compliance would have been identified, assessed and responded to through the companies’ risk management processes as described in chapter 4 of the King Report on Corporate Governance 2009. The failures of companies to comply, hence, could be construed as a failure to incorporate compliance risk into their risk management processes.

For assistance in training and advice relating to Governance, Strategy and Leadership please go to www.sinkorswim.co.za or contact us on roger@sinkorswim.co.za.

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