Social and ethics committees gaining traction

By Professor Deon Rossouw, CEO, The Ethics Institute

Social and Ethics Committees (SECs) are provided for in Section 72 (4-10) of the Companies Act, 2008 (Act No. 71 of 2008). But the uptake of these committees in companies is proving to be a challenge when, in fact, it should be seen as an opportunity for companies to build relationships with the communities and consumers they deal with daily. As some companies have discovered, having an SEC becomes more than a “check-box” exercise, and meaningful application has resulted in benefits in terms of strategy, risk management and turnover. SECs should be used to develop a more responsible culture of doing business in a sustainable manner.

Perhaps the biggest achievement of having an SEC is that the issue of sustainability has become a regular agenda item at board meetings. Most SECs have settled into a rhythm of meeting prior to scheduled board meetings and their reports are tabled at subsequent board meetings. As a result, sustainability has become a regular subject for top-level discussion and scrutiny. As sustainability becomes part of the business-as-usual agenda, it becomes incorporated into companies’ operational DNA. Hence, the long-term impact of normalising social and ethical issues in businesses cannot be underestimated.

Another related achievement is that because these issues are being thought about and reported on regularly, sustainability and integrated reports are becoming more credible and useful. Whereas previously, many of these reports were compiled in a hurry and did not necessarily reflect the truth, management now has to report regularly on these issues. So the content for these reports is generated by means of institutional processes and thus better reflects the truth.

However, it should be noted that there remain a number of challenges.

First, inexact and incomplete legislation and regulations continue to create confusion. Legally, the position is that SECs only have a social mandate. Leading companies have used King III as their guide and have incorporated ethics, but this is purely on a voluntary basis. This omission is something that legislators need to rectify soon. A structural challenge is the fact that the mandate of SECs can overlap with those of other board committees such as audit, HR and remuneration. This needs to be addressed to prevent “turf wars” from developing.
A more difficult challenge is that most companies are still grappling with how to produce the right content and quality for SEC reports. Committee members tend to be nonexecutive, so do not have the inside knowledge to be able to assess the reporting, whereas managers are often uncertain about what needs to be reported on. A contributing factor is surely the lack of performance indicators for social and ethics issues, which makes it difficult for all parties to move beyond compliance and towards assessing the real impact of social and ethics performance. This expectation gap causes frustration.

Based on The Ethics Institute’s interaction with hundreds of companies at various training sessions, our overwhelming conclusion is that the key factor of success is an SEC whose agenda is closely aligned with company strategy. This breathes energy into the committee’s operations because members can see the strategic importance of what they are doing, and the board and executive management can see that the company is deriving real value from the work done by the SEC. For example, as we have seen, a mine’s long-term sustainability is dependent on its relationship with the surrounding community and its employees, exactly the area for which the SEC takes responsibility.

To paraphrase, don’t ask what you can do for your SEC, but what it can do for you. If the committee is seen to be delivering value, it will continue to improve and create a genuine virtuous cycle.

This article first appeared in The Regulatory Debates Edition 3