GOVERNANCE IN SOUTH AFRICA: SOCIAL AND ETHICS COMMITTEES ARE AN IMPORTANT INSURANCE FOR COMPANIES

Author: Sarah Burman

Reports of threatened class actions by customers, employees or shareholders against organisations in a range of different sectors have been rife since the outbreak of the Covid-19 pandemic. Despite the variation in the identity of the aggrieved persons, many of the class actions have a central theme: the failure of organisations in responsibly and adequately dealing with issues arising from the pandemic.

With many jurisdictions preparing for the institution of class actions, corporate governance policies and the impact of these policies on organisational stakeholders, is receiving much scrutiny. As mass job losses, drops in share price and compromises to health and safety are becoming evident in the wake of the pandemic, questions are being raised as to whether ethical values are being rigorously applied by management, and boards, to the decision-making and general conduct of organisations.

Whilst the focus on the ethical corporate governance and social responsibility of organisations might be heightened due to the outbreak of Covid-19, the numerous corporate scandals unearthed in recent years have long evidenced the need for drastically improved standards of corporate governance. Recent history has shown that a failure by management to institute, and comply with, appropriate corporate governance and reporting policies, can have a significantly detrimental impact on all stakeholders of an organisation. As a well-known example, consider the monumental negative impact of Steinhoff’s corporate governance failures on the state pensions invested via the PIC.

The appointment of a committee comprising (or mostly comprising) independent members, which seeks to curtail suspect behaviour by the board of a company through oversight and reporting could be an appropriate mechanism to protect the interests of all its stakeholders. Indeed, the King Code has, for a long time, suggested that a company’s social and ethics committee (or a committee similar in nature) could play a part in achieving this goal.

Many organisations begrudgingly comply with the obligation to appoint a social and ethics committee, whose role is largely overlooked and often failing to use the committee to its full potential. It may be conceded that this is not solely the fault of the organisation, as legislation does not fully flesh out the role of the social and ethics committee, particularly insofar as its responsibilities relate to the ethical management of the organisation. However, King Code IV seeks to rectify this by expanding on the role of these important committees, and how they are intended to aid organisations in achieving high standards of corporate governance.

The intention is to create a corporate culture where organisations are aware of the integral part they play in society. In order to encourage the development of such a culture, the social and ethics committee should oversee and report on the organisational ethics, corporate citizenship, stakeholder relationships and sustainable development of the organisation. This can be achieved by monitoring the activities of an organisation and reporting to its board and shareholders on matters that fall within its mandate. In addition to the statutory responsibilities afforded to the social and ethics committee, the management of an organisation may delegate responsibilities to the committee to suit the specific requirements of each organisation.

A limited category of companies is legally required to appoint a social and ethics committee. However, the King Code suggests that all companies, even those that are not legally bound to do so, should appoint a committee with a similar function.

There is inevitably a cost of appointing a committee consisting mostly of independent members. However, if utilised to its full potential, this cost may significantly outweigh the potential loss incurred by companies arising from the failure to detect unethical practices or failings in corporate governance.

For some companies, the failure to implement and follow ethical and socially responsible policies has resulted in both real and potential losses. In some cases, this failure has led to the demise of the company, which resulted in significant losses which could have been avoided if the proper governance structures had been put in place in the first instance.

For more information, please contact Sarah Burman or your usual Herbert Smith Freehills contact: