Companies Amendment Act: Who is required to form a social and ethics committee?

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These committees, mandated under the Companies Act, No. 71 of 2008, and refined by the Companies Amendment Act 16 of 2024, play a key role in ensuring that businesses adhere to social, environmental, and governance standards. The recent amendments underscore the growing focus on corporate responsibility, particularly in light of changing global and local expectations.

Committee criteria

The requirement to establish an SE committee is guided by specific criteria. Companies that must comply include state-owned entities, listed companies, and companies with a public interest score (PIS) exceeding 500.

The PIS, calculated annually, reflects a company's societal impact by assessing factors such as the number of employees, turnover, and liabilities. For example, a company with 430 employees, a turnover of R50m, and liabilities of R20m would score 600 on the PIS, making the establishment of an SE committee mandatory.

Management areas

The SE committee oversees several areas crucial to a company’s ethical and regulatory compliance. These responsibilities include ensuring adherence to international frameworks such as the United Nations Global Compact, as well as South African legislation like the Employment Equity Act and the Broad-Based Black Economic Empowerment Act.

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Furthermore, the committee is tasked with promoting good corporate citizenship, addressing issues such as discrimination and corruption, and fostering community engagement. This extends to ensuring that the company’s operations align with environmental, health, and public safety standards – safeguarding both public welfare and the environment.

In addition, the SE committee manages consumer relations by ensuring compliance with consumer protection laws and oversees the company's public relations strategies. Labour practices are also a key area of focus, with the committee ensuring that the company’s employment practices adhere to international standards for decent work, fostering fairness and equity throughout the organisation.

Committee composition

The composition of the SE committee is another area of focus in the amended Companies Act. For public and state-owned companies, the committee must predominantly consist of non-executive directors who have not been involved in day-to-day management for at least three years, ensuring independence. Other companies are required to have at least one non-executive director on the committee. These stipulations aim to promote objectivity and transparency in the oversight process.

The Companies Amendment Act 16 of 2024 introduces important updates to the SE committee framework. One notable change is the enhanced reporting requirements, which mandate that public companies, state-owned enterprises, and companies with a PIS exceeding 500 in any two of the last five years must present a detailed SE committee report at their annual general meetings. This amendment promotes transparency and ethical governance, holding companies accountable to their stakeholders.

Exemptions

The legislation also clarifies exemptions under Section 72(5), offering companies more flexibility. Companies with established mechanisms that perform similar functions or subsidiaries of companies with compliant SE committees may apply for exemption, allowing them to manage their ethical responsibilities more effectively without duplicating oversight efforts.

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Consequences of non-compliance

However, non-compliance with SE committee requirements can lead to serious consequences. The Companies and Intellectual Property Commission (CIPC) is empowered to issue notices to companies that fail to comply, requiring them to establish an SE committee within a prescribed period.

If a company continues to disregard these requirements, the CIPC can instruct shareholders to convene a meeting and appoint a committee. Directors who knowingly allow such non-compliance may be held personally liable for the costs of convening the necessary meetings.

Enhance corporate governance

The evolution of South Africa’s SE committee framework reflects a broader emphasis on corporate responsibility. Companies are increasingly expected to balance profit motives with ethical governance, ensuring that they operate in the best interests of society. By adhering to these updated legislative requirements, businesses can enhance their corporate governance practices and align themselves with both local and global standards of ethical conduct.

In this evolving regulatory environment, companies that embrace these changes stand to benefit, not only through improved stakeholder relations but also by positioning themselves as leaders in ethical and responsible business practices.