Social and Ethics Committee Requirements

Companies requiring Social and Ethics Committees

Social and Ethics Committee requirements are defined in the South African Companies Act 71 of 2008 and the Companies Act Regulations.

The following companies are obliged to constitute a Social and Ethics Committee:

♦  Every state owned company,

♦  Every listed public company, and

♦  Every company with a Public Interest Score above 500 in any two of the past five years.


♦  The company is a subsidiary of another company that has a Social and Ethics Committee that performs the function on behalf of that subsidiary company, or

♦  The company has been exempted by the Companies Act Tribunal.

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Public Interest Score

Section 26 of the Companies Act Regulations determines the “public interest” score for a “for profit company” by means of the following equation:

PI Score = Nr_Employees + Nr_Debt + T/O_Million + Nr_Shareholders


PI Score is the public interest score to be determined at the end of a financial year.

Nr_Employees is the average number of employees of the company during the financial year.

“employee” is defined in terms of the Labour Relations Act as, effectively, a person that works for the company for remuneration, excluding an independent contractor.

 Nr_Debt means third party obligations

i.e. both secured and unsecured debt – the company has at year end, in rounded-up millions.

 T/O_Million means the turnover of the company during the year in rounded-up millions.

 Nr_Shareholderes means the number of individuals that,

directly or indirectly, have an interest in any of the company’s issued securities.

It is suggested that, for governance purposes, the PI Score contemplates group, as opposed to company, amounts and totals.

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Social and Ethics Committee Requirements

The Companies Act prescribes the functions of the Social & Ethics Committee as follows:

1. To monitor company activities relative to:

♦  Social and economic development, measured against:

UN Global Compact Principles

OECD Recommendations

The Employment Equity Act


♦  Good corporate citizenship, measured against:

Contributions to the community

Record of charitable payments

Equality, discrimination and corruption measures

♦  Environment, health and safety

♦  Consumer relations and compliance with Consumer Protection laws

♦  Labour, measured against:

ILO Protocol on Decent Work

Employee relationships

Contribution to education

2. To report to the Board

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Section 84 of the Companies Act regulates the actions of the Companies Act Commission should a company not appoint a Social & Ethics Committee.

If a company should have appointed a Social & Ethics Committee, but has failed to do so, the Commission may:

♦  Enter into correspondence with the company;

♦  Engage with the company’s shareholders to inform them of a general meeting;

♦  Convene such a general meeting to appoint a Social & Ethics Committee;

♦  Determine which part of the cost of the general meeting to allocate to each director of the company.

The above mentioned process is subject to appeal and review.

The financial penalty for non-compliance is relatively low, and, for the company itself, is technically zero.  However, administrative and legal costs are likely to be significant if a company intentionally fails to create a Social & Ethics Committee.  In addition, the potential reputational damage and damage to employee morale, as a result of non-compliance, is significant.

Comparing the low cost of compliance against governance and reputational benefits, it is clear that boards should constitute a Social & Ethics Committee as recommended by the Companies Act.

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Constituting a Social & Ethics Committee presents boards with an opportunity to:

♦  Align its social and ethical procedures with the recommendations of King III

♦  Grouping and managing all social and ethical initiatives to better align with the company’s mission and strategy, and

♦  Provide guidance by the board to all of the company’s social and ethical initiatives.

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