May 6,2012 / News / Legal Brief

South African company law and labour & employment law sometimes have an overlap that organisations may not be aware of. Whereas company law does not have much inroad into contracts of employment, there are larger structural issues which the new Companies Act provides for, and which certain organisations are under an obligation to comply with. In particular, certain companies now have an obligation to appoint a social and ethics committee, which will have functions involving, inter alia, oversight of compliance with certain labour legislation.

WHICH COMPANIES MUST APPOINT A SOCIAL AND ETHICS COMMITTEE?

The new Companies Act, 71 of 2008 (“Companies Act”) which came into effect on 1 May 2011, provides in section 72 of the Companies Act, as well as in section 43 of the Regulations issued under the Companies Act, that certain companies must appoint a social and ethics committee. The types of companies which are obliged to adhere to this requirement are –

  • every state-owned company;
  • every listed public company;
  • and every other company which has scored above 500 in the public interest score, in any two years in the previous five year period.

The public interest score is calculated with reference to –

  • a number of points equal to the average number of employees of the company during the financial year;
  • one point for every R1 million (or portion thereof) in third party liability of the company, at the financial year-end;
  • one point for every R1 million (or portion thereof) in turnover during the financial year; and
  • one point for every individual who, at the end of the financial year, is known by the company ““
    • in the case of a profit 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.

The determination as to whether or not a person holds a “˜beneficial interest’ and the identification of holders of beneficial interest in the securities of the company may prove to be very important. Note that the holder of the beneficial interest may not necessarily also be the registered shareholder. The relevant term is defined in section 1 of the Companies Act. Regulation 2 states that the definitions contained in section 1 of the Act apply equally to the Regulations. The definition in section 1 reads as follows ““
“˜beneficial interest’, when used in relation to a company’s securities, means the right or entitlement of a person, through ownership, agreement, relationship or otherwise, alone or together with another person to ““
(a) receive or participate in any distribution in respect of the company’s securities;
(b) exercise or cause to be exercised, in the ordinary course, any or all of the rights attaching to the company’s securities; or
(c) dispose or direct the disposition of the company’s securities, or any part of a distribution in respect of the securities, but does not include any interest held by any person in a unit trust or collective investment scheme. In section 1 “˜individual’ is defined as “˜a natural person’.

Thus, any natural person who (directly or indirectly) has a right or entitlement (by virtue of any of the reasons set out in the section above) to receive a distribution, exercise rights or dispose of the securities or any part of a distribution in relation to the securities of a company will be regarded as having a beneficial interest and must be allocated one point when calculating the PIS of the company. It is not inconceivable that employees in an ESOP could qualify as “˜individuals who have a beneficial interest in the securities’ of the company.

WHEN MUST THE COMMITTEE BE APPOINTED?

Every company which must appoint a social and ethics committee must do so within 12 months after the effective date of the Companies Act. Alternatively, any company which is formed after the effective date of the Companies Act, and which is required to appoint a social and ethics committee, must do so within one year after meeting the requirements. Bearing in mind that the Companies Act came into effect on 1 May 2011, those companies which have an obligation to appoint a social and ethics committee, ought to have done so already.

The Companies Act provides for a mechanism in terms of which companies which must appoint a social and ethics committee could apply for an exemption. Any exemption will apply for a limited period of five years only, unless the tribunal tasked with allowing the exemption only grants a shorter period. Any exemption may also be set aside on application to the tribunal which granted it.

HOW MUST THE COMMITTEE BE MADE UP?

The social and ethics committee must be made up of not less than three directors of the company, one of whom must not currently be, and must not in the last three financial years, have been involved in the day to day running of the company, in other words, a non-executive director.

WHAT ARE THE FUNCTIONS OF THE COMMITTEE?

A social and ethics committee must monitor, report back to the board, and draw relevant matters to the attention of the board in regard to the company’s development and achievement of social and economic goals. These goals include the following compliance objectives ““

  • compliance with the recommendations regarding corruption released by the Organisation for Economic Co-Operation and Development (Revised Recommendation of the Council of the Organisation for Economic Cooperation and Development on Combating Bribery in International Business Transactions). These recommendations include taking steps in the areas of bribery of foreign public officials, accounting standards, banking, financial and other provisions, and ensuring that adequate records are kept and are available for inspection and investigation;
  • compliance with United Nations Global Compact Principles, which relate to –

HUMAN RIGHTS

  • Principle 1: support and respect the protection of internationally proclaimed human rights; and
  • Principle 2: make sure that they are not complicit in human rights abuses.

LABOUR

  • Principle 3: uphold the freedom of association and the effective recognition of the right to collective bargaining;
  • Principle 4: the elimination of all forms of forced and compulsory labour;
  • Principle 5: the effective abolition of child labour; and
  • Principle 6: the elimination of discrimination in respect of employment and occupation.

ENVIRONMENT

  • Principle 7: support a precautionary approach to environmental challenges;
  • Principle 8: undertake initiatives to promote greater environmental responsibility; and
  • Principle 9: encourage the development and diffusion of environmentally friendly technologies.

ANTI-CORRUPTION

  • Principle 10: work against corruption in all its forms, including extortion and bribery.

Other objectives include setting objectives and measuring achievement of objectives in regard to good corporate citizenship, which should give effect to promotion of equality, the prevention of unfair discrimination, and reduction of corruption. Social and ethics committees must also provide for the company’s contribution to the development of communities in which the company predominantly conducts its activities or in which it markets its products and services.

Additional functions of the social and ethics committee are to ensure compliance with the company’s standing in terms of the International Labour Organisation (“ILO”) Protocol on decent work and working conditions, and to provide for contributions towards the educational development of its employees.

The ILO instrument in particular, will be an important instrument for the social and ethics committee to consider when analysing whether the company is in compliance, and it will also be important to make sure that proper advice is obtained in regard to the company’s adherence to ““

  • The Basic Conditions of Employment Act, 75 of 1997, in regard to providing employees with minimum terms and conditions of employment. This piece of legislation in particular, will be an important source of obligations against which the ILO objectives can be compared;
  • The Employment Equity Act, 55 of 1998, in regard to ensuring compliance with imperatives to eliminate discrimination;
  • The Skills Development Act, 97 of 1998, in regard to establishing educational development structures for employees; and
  • The Labour Relations Act, 66 of 1995 to ensure that the ILO objectives for fair collective bargaining are adhered to.

It is clear that the wide scope of oversight for which a social and ethics committee will be responsible for will mean that committee members will have to have specific skills, knowledge and understanding of the areas which the social and ethics committee must administer. Failing individual competence in these areas, committee members should ensure that they are receiving legal advice,
particularly when it comes to the application of labour law to the objectives which are required to be met.

Section 72 of the Companies Act entitles the social and ethics committee to seek and receive specialist advice in regard to any of the issues which are in the sphere of responsibility of the committee.

Committee members should ensure that such advice is sought and obtained, particularly in light of the fact that the Companies and Intellectual Property Commission (“the Commission”) may notify the company to convene and to appoint the social and ethics committee if the company fails to do so. If a company fails to take any action after receiving such notice, the Commission can notify the holders of the company’s securities that a meeting will be held to convene and to appoint the social and ethics committee, and can at such meeting appoint the committee. The Commission can also hold the directors of the company personally responsible for a pro-rata cost of convening the general meeting.