The Companies Act No. 71 of 2008 requires every state-owned company, every listed public company and any other company with a public interest score which exceeds 500 points in any 2 of the previous 5 years (“Threshold”), to appoint a social and ethics committee. A private company which exceeds this Threshold must make this appointment within 1 year of the date on which the Threshold was exceeded.
This article sets out how a private company’s public interest score is calculated, the circumstances under which a company may be exempt from having to appoint a social and ethics committee, the composition and functions of a social and ethic committee and the consequences of failing to appoint such committee.
A company’s public interest score is calculated at the end of each financial year by adding the following –
- a number of points equivalent to the average number of employees of the company during the financial year;
- 1 point for every R1 million or portion thereof, in third party liability of the company at the end of its financial year;
- 1 point for every R1 million or portion thereof, in turnover of the company during its financial year; and
- 1 point for every individual who, at the end of the financial year, is known to have a direct or indirect beneficial interest in the company’s issued securities (or in the case of a non-profit company, 1 point for every member of the company or member of an association which is a member of the company).
A company which is required to appoint a social and ethics committee may apply to the Companies Tribunal for an exemption from such requirement.
The Companies Tribunal may grant an exemption, for a period of 5 years or less, if it is satisfied that the company is required in terms of other legislation to have some form of mechanism which substantially performs the functions of a social and ethics committee or, if having regard to the nature and extent of the company’s activities, it is not reasonably necessary to impose such requirement on the company.
Should a company be a subsidiary of a holding company which already has a social and ethics committee, and such committee will perform the functions on behalf of the subsidiary, then the subsidiary is not required to appoint a social and ethics committee. In this instance, there is no need for the subsidiary to apply for an exemption, as such subsidiary is not, in the first instance, required to appoint a social and ethics committee.
Composition and functions:
A social and ethics committee must be constituted by a minimum of 3 directors or prescribed officers of the company, one of whom must be a director who is not involved in the day-to-day management of the company’s business and must not have been so involved in the company’s previous 3 financial years.
A company’s social and ethics committee has, inter alia, the following key functions –
- monitoring the company’s activities in relation to any relevant legislation or other legal requirements or codes of best practice in relation to –
- social and economic development and the company’s standing in relation to the goals and purposes of the United Nations Global Compact Principles, the Organisation for Economic Co-operation and Development recommendations regarding corruption, the Employment Equity Act No. 55 of 1998 and the Broad Based Black Economic Empowerment Act No. 53 of 2003;
- good corporate citizenship;
- the environment, health and public safety, including the impact of the company’s activities and its products or services;
- consumer relationships, including advertising, public relations and compliance with consumer protection laws; and
- labour and employment, including working conditions, the company’s employment relationships and the company’s contribution towards the educational development of its employees;
- drawing matters within the committee’s mandate to the attention of the company’s board as required; and
- reporting to the shareholders at the company’s annual general meeting of the shareholders on matters which are within the committee’s mandate.
Failure to appoint a social and ethics committee:
Should the board of directors of a company fail to appoint a social and ethics committee, the Companies and Intellectual Property Commission (“CIPC”) may take steps to convene an annual general meeting of the shareholders of the company to make the appointment and to assign a pro rata share of the cost of convening the meeting to each director of the company who knowingly failed to make the appointment.
It is good practice for a private company to calculate its public interest score at the end of every financial year and to determine whether there are other social and ethics committees within its corporate structure in order to establish whether the company is required to appoint a social and ethics committee.
Should it be determined that the company is indeed required to appoint a social and ethics committee, it is then advisable to consider whether the company could qualify for an exemption from such requirement by the Companies Tribunal.
Whether a company could qualify for exemption, and whether or not it should elect to proceed with such an application, would depend on the circumstances of each case. Should the company not qualify for an exemption or fail to obtain one, the board of directors of the company would then be required to proceed to appoint a social and ethics committee within the prescribed time limits to avoid CIPC from taking steps to convene a shareholders’ meeting of the company and assigning costs to the company’s directors.
VDMA’s team of experts is at your disposal for any assistance that you may require in relation to compliance with the Companies Act No. 71 of 2008 and its requirements in relation to social and ethics committees.
Published 30 June 2021