King IV, released on 1 November 2016 and effective for financial years commencing 1 April 2017, expands on the role of the Social and Ethics Committee (SEC) as provided for in the Companies Act:
- It ascribes the role of oversight of and reporting on, responsible corporate citizenship, sustainable development and stakeholder relationships and organisational ethics to the SEC (Part 5.3 Recommended practice 68).
- It encourages organisations that are not required by law to establish SECs to allocate relevant oversight to a dedicated committee or to add it to the responsibilities of another committee (Part 5.3 Recommended practice 68).
- It recommends a higher standard for the composition of this committee than is required in the Companies Act. King IV recommends that a majority of the committee members should be non-executive members of the governing body so as to ensure that independent judgement is brought to bear (Part 5.3 Recommended practice 70).
Panellists agreed that having the SEC as a legislative requirement is a huge step in the right direction. However, the impact of the committee on the organisation’s sustainability matters is dependent on the extent to which the activities and mandate of the SEC are taken seriously by the board. SECs should not just be tick box compliance, in order to meet the terms of the Companies Act.
The progress of SECs over the last five years has been frustratingly slow. Many SECs focus only on legislated social aspects, such as B-BBEE. While B-BBEE is a massive issue in South Africa, SECs need to broaden their scope to include a wide variety of material social, ethics, and governance issues – the SEC is at core of integrating sustainability into the business.
The disappointingly high number of applications from companies for exemption from having an SEC was highlighted. Of the 52 applications received by the Companies Tribunal, 13 were granted and 39 refused.
It was emphasised that business exists in society and not in isolation. Nonetheless, companies are often very inward focused with top management deciding what they think is material to stakeholders, rather than looking outwards and engaging stakeholders. The panel agreed that the board needs to be much more involved in understanding stakeholders.
King IV places a new emphasis on the roles and responsibilities of stakeholders. Not only must the Board consider the interests and expectations of stakeholders as intrinsically valuable, but King IV now specifically recognises the roles and responsibilities of stakeholders. Active stakeholders are required to hold the Board and the company accountable for their actions and disclosures. The panel was of the view that companies respond to a combination of regulation, codes, and criticism. This criticism should be delivered through shareholder activism raising social and ethical questions about the company.
The SEC has a key role to play with regard to stakeholder engagement and needs to ensure that its members have the skills and experience to oversee this process.
SEC member skills and experience
Many SEC members have excellent business and financial experience, but lack skills, knowledge, and experience in the area of sustainability. It was noted that many boards are have technocratic tendencies, resulting in limited insight into sustainability matters. This is further compounded by the fact that they are largely rewarded based on the achievement of short term financial targets. As such, boards are often of the opinion that they can ‘work around’ social issues, rather than viewing the SEC as an important tool to addressing these matters.
As such, it was recommended that the board conduct an SEC skills analysis to check that this committee has the appropriate skills. SEC’s lacking key skills will not have the ability to guide the board, and reduce the company’s risk with regard to social and ethics matters. In cases where the SEC does not yet have the requisite skills, they could invite experts to provide multidisciplinary input.
The SEC is an instrument to elevate and bring awareness regarding social and ethics issues – it is not there to replace other committees. Nonetheless, the other board committees are often territorial. They will need to have a clear understanding of the role of the SEC if they are to buy-into the committee, and collaborate on stakeholder engagement, risk management, and strategy.
Fortunately, further guidance on the SEC will be provided to companies through the King IV practice notes which are currently being developed. The panel also recognized that the creation of an effective SEC is a journey, and that the use of platforms to share success stories, measures that are working well, and challenges experienced would be an important dimension in the success of this journey.
EY Trialogue Sustainability Forums are held frequently throughout the year and bring together sustainability practitioners to discuss a range of topics. This post is based on a EY Trialogue Sustainability Forum held on 18 March 2017. The following panelists participated in the discussion:
Dr Ven Pillay
Ven has over 20 years of experience in sustainable development and is currently an independent Sustainability Advisor to Executives and Boards of various corporate clients. Her tertiary background is in science with a PhD from the University of Witwatersrand. She specialises in the accountabilities of the Social and Ethics Committee of the Board, Integrated Reporting and Corporate Social Responsibility. She is currently a Trustee at the Endangered Wildlife Trust; and is also a Non-executive board member and Chair of the Social and Ethics Committee of Areta Health and Continental Tyre (SA). Previously she served as Vice President: Sustainability at AngloGold Ashanti; was an Advisory Committee member at the United Nations Global Compact (SA); and lectured in sustainability for the doctorate programme at the Gordon Institute of Business Science (GIBS).
Ntombi has over 30 years’ experience in Human Resources and currently holds various executive and non-executive directorships, including being the Chairman of the Social and Ethics Committes of Mpact and Murray & Roberts. She holds an LLB and has worked in financial services, manufacturing, electronic and print media industries throughout her career. For 15 years she ran her own HR management consulting business and before that was an HR executive at Independent Newspapers, Nampak and the SABC.
Advocate Simmy Lebala
Advocate Lebala has been conferred Senior Counsel status from 2008 and has been an acting judge in the North Gauteng court. He is a member of the Pretoria Bar Council and Chairperson of the Companies Tribunal. He holds an LLB from the University of Zululand and an LLM from Georgetown University in Washington. He was appointed evidence leader in the Arms Deal Commission, is a lecturer in trial Advocacy Training and is accredited for commercial laws mediation.
Karen is the Head of IoDSA Sustainable Development Forum. She has a wide range of experience in the sustainability field and extensive knowledge around social and ethics committees. Her focus is on embedding and integrating sustainable development into daily business practice, promoting positive change: she has deep experience in the energy, mining and financial services sectors.