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Thou shalt be ethical
​Malan, Daniel
3/4/2010
​In this article Daniel Malan, head of the Unit for Corporate Governance in Africa at the University of Stellenbosch Business School, explains why the social and ethics committees envisaged by the draft Companies Regulations won't work.
 
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The draft Companies Regulations, published in December 2009, require public and state-owned companies to appoint a social and ethics committee, as well as a social and ethics advisory panel. 

Although there are certain exemptions, this effectively means that public companies need to create new structures to monitor and report on issues that are already highly regulated – such as transformation, corruption, environment, health and safety, consumer relationships, labour and employment. 

According to the regulations, a company's social and ethics committee should comprise no less than three company directors, and be supported by an advisory panel comprising employees (excluding management), experts (registered members of a related profession such as environmental assessment, health, sociology, law or ethics) and community representatives. 

The social and ethics committee is supposed to monitor the company's activities – mainly related to compliance – in matters relating to social and economic development, corporate citizenship, the environment, health and public safety, consumer relationships, and labour and employment. In addition, the committee has to consult with the advisory panel and report to the board and the shareholders.

In other words: Appoint a committee to monitor what you are (legally) required to do and what you are probably monitoring already through other committees, and then appoint an advisory panel to assist them to do this. There is no requirement to incorporate any of these aspects into any existing reporting practices even though the concept of integrated reporting features strongly in the third King Code of Governance for South Africa (King III). 

Rather, the committee has to draw matters to the attention of the board "as occasion requires" and report to the shareholders at the annual general meeting. In tough economic times, this will not come cheaply. The regulations state clearly that the company must pay all the expenses "reasonably incurred" by the committee, as well as the costs of the advisory panel. Almost anticipating that these structures will not be very effective, the regulations also stipulate that the company must pay the fees of any consultant engaged by the committee.

The draft regulations should be opposed on both a superficial and a more fundamental level. Firstly, while the intention of a more structured and focused approach to social and ethical issues should be applauded, the introduction of two new layers within any company is the wrong way completely to try to achieve this. 

In practice there is probably going to be a long list of companies applying for exemption, arguing – correctly – that compliance, socio-economic development, environmental, health and safety, labour and other issues are already adequately addressed in the company. If new committees are formed, there is likely to be duplication, turf protection and substantial wastage of resources. With regards to the advisory panel, there is likely to be a scramble to get some familiar faces drawn into a formal structure, with a few meetings per year allowing companies to tick the box as opposed to a more comprehensive and continuous stakeholder engagement process.

On a more fundamental level the regulations should be seen in the context of the debate about voluntary and mandatory standards. Those in favour of voluntary standards argue that companies will be more effective if they self-regulate, that more innovation will result, that customisation will allow more effective approaches at the individual company level, and so on. On the other hand, supporters of mandatory standards argue that companies are too lazy or greedy to be trusted with self-regulation, and that mandatory standards will result in standardised and comparable performance and information. 

This debate is currently raging specifically with reference to sustainability reporting, but also applies in this context. This is not an either/or debate, but more about striking the right balance between the two. While regulation is a necessity in most areas addressed by the regulations, it should be acknowledged that there is already effective existing regulation, and that most companies have compliance functions to manage this. 

Effective social and ethics management is not about compliance, but about building an ethical corporate culture. This is explained eloquently in the King III practice notes on ethics management. The practice notes ascribe most of the proposed functions of the social and ethics committee to the company's internal audit function, which seems to be far more appropriate.

Companies can be forced to comply with the law because the state can introduce severe penalties for legal infringements. Companies cannot be forced to be ethical. To demonstrate this lopsided approach, the regulations require companies to assess their performance in terms of the ten principles of the United Nations Global Compact, an initiative that prides itself as the largest voluntary corporate citizenship initiative in the world! When social and ethics committees are introduced in response to sound ethics management and ethical leadership they can be very effective. When they are introduced to comply with the law, they are doomed to fail. Companies and other stakeholders should get this message across to the lawmakers before it is too late.

  • Daniel Malan is the head of the Unit for Corporate Governance in Africa at the University of Stellenbosch Business School and the KPMG Special Advisor on Ethics and Governance. The views and opinions of the author do not necessarily reflect those of the University of Stellenbosch Business School or KPMG. He may be contacted at daniel.malan@usb.ac.za.

 

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