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Social and Ethics Committees: The Basics

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Caveat Legal

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What is it? The Social and Ethics Committee of a company (“SE Committee”) is one that is concerned with a company’s responsibility in areas dealing with social, commercial and environmental matters. It was formally introduced into South African law through the Companies Act, No 71 of 2008.  In this article, I aim to provide an understanding of the SE Committee within the context of the Companies Act.

Which company needs one? Not every company needs to appoint an SE Committee. The relevant criteria are set out in Section 72 of the Companies Act, read with the relevant Regulations.  A company’s impact on the public interest plays a major role in determining this. State owned companies and listed companies are automatically required to appoint an SE Committee. For other entities, aspects such as their annual turnover and debt, workforce-size and number of shareholders/members are taken into account in order to calculate a public interest score.  If a company has a public interest score of more than 500 in any two of the preceding five years, it is required to appoint an SE Committee.

A company which is technically required to appoint an SE Committee may apply to be exempted from doing so under certain circumstances. These include where the company is required by another law to have a structure in place that has objectives similar to those of the SE Committee; where the company’s activities are of a nature and extent that do not impact on the public interest; and lastly where a company is a subsidiary of a company that has an SE Committee which also acts on behalf of – and monitors and reports on the social and ethics aspects of – the subsidiary company.

 

Calculating the Public Interest Score The score is calculated at the end of a company’s financial year, through the following formula –

Public interest score = A + B + C + D

A = average number of employees of the company during the financial year

B = one point for every R1 million (or portion thereof) in third party liability of the company, at financial year end

C = one point for every R1 million (or portion thereof) in turnover during the financial year

D = one point for every individual who, at the end of the financial year, is known by the company to, directly or indirectly, have a beneficial interest in any of the company’s issued securities (or in the case of a non-profit company, to be a member of the company, or a member of an association that is a member of the company)

Practical example of a company having the following at the end of its financial year:

  • Average of 400 employees
  • R30 million turnover
  • Liabilities of R25 million
  • 50 shareholders

The sum would be 400 + 30 + 25 + 50, having a resulting public interest score of 505.

What are its functions? The functions of an SE Committee include monitoring the company’s activities, bearing in mind any legal requirements or prevailing codes of best practice, with regard to matters relating to-

  • social and economic development, including the company’s standing in terms of the goals and purposes of-
  • the 10 principles set out in the United Nations Global Compact Principles;
  • the OECD recommendations regarding corruption;
  • the Employment Equity Act; and
  • the Broad-Based Black Economic Empowerment Act;

Ø  good corporate citizenship, including the company’s-

  • promotion of equality, prevention of unfair discrimination, and reduction of corruption;
  • Contribution to development of the communities in which its activities are predominantly conducted or within which its products or services are predominantly marketed; and
  • record of sponsorship, donations and charitable giving;

Ø  the environment, health and public safety, including the impact of the company’s activities and of its products or services;

Ø  consumer relationships, including the company’s advertising, public relations and compliance with consumer protection laws; and

Ø  labour and employment, including

  • the company’s standing in terms of the International Labour Organization Protocol on decent work and working conditions; and
  • the company’s employment relationships, and its contribution toward the educational development of its employees.

Who does it report to? The SE Committee must bring matters within its mandate to the attention of the company’s board of directors as and when necessary. Furthermore, a SE Committee member must represent the SE Committee at its annual general meeting, and report to the company’s shareholders on the matters within its mandate.

What happens if a company doesn’t comply? Sections 84(6) and (7) of the Companies Act (read with the Companies Amendment Act) provide that if, a company which is required to appoint a SE Committee fails to appoint one, the Companies and Intellectual Property Commission (“CIPC”) can –

  • issue the non-compliant company with a notice to the company to provide reasons why CIPC should not proceed to convene a shareholder’s meeting for purposes of making an appointment within an acceptable period. CIPC may –  
  • give notice to the shareholders of a meeting to appoint an SE Committee and then convene the meeting and appoint one; and
  • apportion to each director on a pro-rata basis the cost of convening a meeting to appoint an SE Committee if a director knowingly permitted the failure to appoint one.

In addition, the Companies Act provides for other actions that can be taken against non-compliant companies. These can be found in Chapter 7 of the Companies Act – “Remedies and Enforcement”.

Companies which  do not meet the criteria required for appointing an SE Committee may experience a sense of relief. However, the focus areas of the SE Committee are important and should ideally still be borne in mind by those companies – perhaps not through a formal SE committee but in other effective ways.

Shaylyn McDonald

Shaylyn has an LLB (Cum Laude) from Wits and was admitted as an attorney in 2008 after having completed her articles at Werksmans where she rose to the level of senior associate. After joining Bell Dewar (now Fasken) she took up an in-house position at TransUnion where she rose to the level of general counsel. Shaylyn joined Caveat in 2018, specialising in corporate and commercial work.

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