The development of a corporate social and ethical behaviour is a journey and not a destination for every company and even starting from a low base is still worth reporting.
The public and private sectors clearly still have much to do. Management in particular needs to be aware of the full extent of the breadth and depth of activities, operations and procedures that need to be tracked and reported on to the SEC.
Although these are important and onerous requirements, the implementation of the SEC requirements provides an opportunity to all reporting companies to tell their staff and the communities in which they operate, about their achievements.
Outlined below is a recommended approach to compiling a comprehensive management report to the social and ethics committee.
GROUNDWORK NEEDED
The Companies Act – establishing the ground rules
The intention of the Act is to bring about a more structured and focused approach to social and ethical issues encountered in the workplace, requiring management to report in a standardised and comparable manner on these issues to the SEC.
Complying with the provisions of the Act must be the point of departure of management when compiling the SEC report.
All state-owned companies, JSE listed public companies and all other companies that have a public interest score in excess of 500 points, are obliged to establish an SEC.
The SEC is a committee of the board comprised of a minimum of 3 directors, one of whom must be an independent non-executive director. The committee can obviously have more than 3 members.
The functions of the SEC cover both monitoring and reporting responsibilities. The SEC has an overarching responsibility to monitor and report directly to the shareholders at the AGM on all aspects of corporate sustainability and the social & ethics performance of the company, which responsibility neither the audit committee nor the risk committee of the board has.
The mandate, responsibilities and powers of the SEC as defined in sections 72(4) to (10) of the Companies Act, should be taken seriously by the board and management.
Failure to comply with the provisions of the Companies Act as regards the SEC is an offense and subjects the company and all its directors to sanction as outlined in section 84(6) of the Act.
Regulation 43 of the Companies Act defines the role, function, task and responsibilities of the SEC. Furthermore, section 72(8) of the Companies Act bestows certain powers and rights upon the SEC, enabling it to fulfill both its monitoring and reporting roles.
The mandate of the SEC is outlined in Regulation 43(5) and in exercising these responsibilities the SEC has to take into consideration the following parameters:
- Any relevant legislation;
- Other legal requirements; or
- Prevailing codes of best practice.
King III
The King Report on Governance for South Africa 2009 is a direct consequence of the promulgation of the Companies Act 2008 and changes in governance trends internationally.
King III encompasses 75 principles of sound corporate governance applicable to all companies in South Africa. These cover, amongst others, the company’s ethics, stakeholder relationships and conducting business in a sustainable manner. It does not, however, deal with aspects of the social and ethics committee referred to in the Companies Act.
Areas to be covered in the management report
Section 43(5) of the Act requires management to monitor the company’s activities with regard to its social impact and provides a brief list of legal requirements or prevailing codes of best practice under each of the following areas.
The guidelines covering these 5 areas indicate that management should also pay attention to and ensure compliance with the provisions of a range of laws of Parliament.
Social and economic development
The Act specifically mentions the following possible sources, being:
- the company’s standing in terms of the goals and purposes of:
- the 10 principles set out in the United Nations Global Compact Principles;
- the OECD (Organisation for Economic Co-operation and Development) recommendations regarding corruption;
- the Employment Equity Act; and
- the Broad-Based Black Economic Empowerment Act
Good corporate citizenship
This includes the company’s:
- promotion of equality, prevention of unfair discrimination, and reduction of corruption;
- contribution to development of the communities in which its activities are predominantly conducted or within which its products or services are predominantly marketed; and
- record of sponsorship, donations and charitable giving.
The environment, health and public safety, including the impact of the company’s products or services
The content of this section will differ from enterprise to enterprise and it would be difficult to outline a generic approach.
Consumer relationships and compliance with consumer protection laws
The content of this section will also differ from enterprise to enterprise, but perhaps less so than the previous section. It will be particularly relevant to B2C enterprises and management should ensure that the required topics are adequately covered.
For example, a policy and procedure to closely watch customer complaints on hellopeter.com or in the printed media, could be outlined.
Labour and employment
This could include:
- the company’s standing in terms of the International Labour Organization Protocol on decent work and working conditions; and
- the company’s employment relationships, and its contribution toward the educational development of its employees.
Develop the report using a themed approach for each SEC meeting
It is recommended that the five areas to be reported per section 1.3, in turn be used as a theme for each successive SEC meeting held.
This might mean that the same theme will only be touched on every second year or so, depending on the number of SEC meetings held during a year.
Schedule at least enough meetings to cover all the themes in a year
The Act does not prescribe a number of meetings to be held by the SEC and these also need not coincide with the board meetings of the company held during the same year, although it might be convenient to do so.
In our opinion the SEC should meet at least quarterly during the first few years in order for its members to become familiar with the subject matter and for the committee to properly assess and comment on the management reports.
The content, quality and comprehensiveness of the management report also need to develop over a period of time and quarterly SEC meetings will greatly assist in this.
Empower management and staff at all levels of the company to contribute to the report
The participation by all levels of management and staff in compiling the periodic management report will add an important element of validity and openness to assessing the company’s endeavours.
Firstly, the board of directors must take responsibility for the social and ethical performance of the company, and be seen to be doing it. This implies that these aspect must feature in the board-driven enterprise risk management framework and internal audit processes of the company.
Secondly, the report content should not become a separate report to be compiled periodically, but should be integrated into the regular operational / financial management reports prepared by each department or division.
Analyse all business activities of the company to determine if it needs to be reported on
The first task of management is to determine the business activities and operational structures to be covered by its report. All activities which deal with / relate to either the social responsibility or ethical focus of the enterprise, should be included.
Analysed across the five reporting areas per Section 43(5) of the Act the following typical corporate activities are likely to be reported on:
The list of activities shown below is a general outline only and the management of each reporting enterprise must review and assess their specific circumstances.
Social and economic development:
- Job Creation
- Supply chain: ethical procurement and fair operating practices
- Community / economic development
- Community education & training
Good corporate citizenship
- Environmental sustainability
- Code of conduct
- Fraud prevention & detection
- Legal & regulatory compliance
The environment, health and public safety, including the impact of the company’ products or services
- Integrated SHEQ management framework
- Employee health & assistance
- Employee & public safety
- Risk management
- Renewable energy programmes
Consumer relationships and compliance with consumer protection laws
- Consumer / supplier / stakeholder relationships
- Corporate reputation & branding
Labour and employment
- Oganised labour
- B-BBEE
- Employment Equity
- Skills development
- Workforce profiles
- Ethical labour practices.
STRUCTURE AND CONTENT OF THE REPORT
The report to the SEC, unlike the traditional management report to the board which deals with the financial and operational aspects of the enterprise, deals with all the non-financial and non-operational aspects of doing business. These matters are no less important than the financial and operational details of doing business. Unfortunately, it has largely been ignored by businesses all these years, but for a few exceptions. Only with the Companies Act 2008 coming into effect in 2012, have qualifying enterprises been forced to consider and report on it.
In my view most enterprises have positive elements that can be reported on in this regard. This 4-Part series hopefully will assist those enterprises to bring out their good stories.
Define deliverable targets under each reportable heading
Section 1.3 dealt with the typical activities of a company with regard to its social impact and ethical culture. It provided a brief list of legal requirements or prevailing codes of best practice under each of five key reporting areas.
Management should outline its approach to and deliverable goals or targets in respect of each of these activities. The ongoing corporate efforts represent a journey rather than a destination.
Most targets will probably span more than 1 financial year going forward but this does not in itself present a difficulty. However, where a multi-year program is outlined, provision must be made to identify the current year’s targets for the SEC’s information. This will enable them to understand and be able to assess management’s current efforts.
To substantiate the report by management to the social and ethics committee, it might be wise to undertake a company-wide ethics survey amongst employees. Such a survey should be undertaken at least every 2 years and preferably annually. It could provide credible results based on the perceptions and experiences of these stakeholders over a period of time. Where weaknesses are identified, management should attend to it.
Of key importance is the level of confidence and trust these stakeholders would attach to the survey, illustrating that it should preferably be undertaken by an independent third party.
Report on delivered output using tables and graphs
It is important to avoid a dry, technical report with masses of detail which will drive any reader to sleep. Rather focus on using colour when presenting data in table-format and graphs which retain the attention and interest of the reader.
Create paragraph headings and sub-heading in easy-on-the-eye colours instead of the usual black fonts.
It might be advisable to retain the services of an experienced wordsmith to assist with content and lay-out preparation for the first few meetings of the SEC.
Each report should contain comparatives from the previous period
The members of the SEC need to be provided with comparative details for at least the most recent two reporting periods. Management should also consider providing a forecast for the next two periods going forward.
It might not be practical to cover future periods which extend beyond the current financial year, given that budgeted expenditure and other efforts have not yet been finalised.
If so, this should be highlighted in the report.
Deviations from the targeted deliverables
It is inevitable that not all outputs will meet or exceed the targeted results during a reporting period. This could be due to a number of valid business, operational or other reasons and it’s important that the report deals with such deviations and the reasons for it in a frank and honest manner.
More importantly, the report should also deal with the action plans to correct any deviations going forward. In this way the SEC remains fully informed of the issues and challenges faced by management. They are also better able to assess the reasonableness of the proposed action plans.
Deal in-depth with activities falling within the theme of a meeting
It was proposed that every meeting of the SEC should focus on a different theme based on each of the five areas to be reported on. This does not mean that the report from management should ignore the other reporting areas.
Far from it.
Each report to the SEC should comprehensively deal with all activities relating to either the social responsibility or ethical focus of the enterprise. However, the presentation to the SEC and the focus of management during the meeting would be driven by the particular theme of such meeting.
Prepare the report on the basis that the company has a good story to tell
The structure and tone of the report should ideally reflect a story-telling approach. Every business enterprise has a good story to tell as regards some, if not all of its social endeavours and drive to inculcate an ethical culture amongst its employees, suppliers and service providers, however small and inconsequential at this stage.
The role and function of the SEC is to guide management on the one hand, and to report to the shareholders on progress made, on the other.
I do not believe the SEC really expects to be presented with a report that reflects top-notch performance on all fronts. Even large groups who have been reporting to their boards on the social and ethical aspects of their operations long before it became obligatory to do so, still indicate areas where they could improve their performance.
What is of importance is for management to be open and frank about areas of weakness in corporate performance, and to communicate a clear plan on how they intend to correct the situation.
BRAGGING RIGHTS AND MARKETING EFFORTS
Daily newspapers and electronic media sources flight reports on the financial results of companies. We are yet to see any of them publishing the details of their social and ethics endeavours.
The reason is because they are not legally obliged to do so.
Circulating report in-house
All levels of management and staff should contribute to the compilation of the periodic management reports, which should add an element of validity and openness to assessing and reporting on the enterprise’s endeavours.
In our view the report as submitted to the SEC, should be circulated to all members of management and staff, either as a circular or covered in full in the monthly in-house magazine. The information, statistics and forward-looking analysis will be informative and interesting to many of them. In larger, diversified enterprises most people are generally not aware of developments, focus areas and endeavours in non-financial and non-operational areas of doing business.
Access to previous SEC reports also enables divisional and departmental management & staff to identify and focus on eliminating weaknesses. In some cases their work may overlap with that of other divisions or departments and it might not always be possible to perfectly co-ordinate efforts in this regard. An ongoing disconnect between departments will soon enough require the intervention of the CEO or other members of Exco.
Circulating report externally
We consider the flow of SEC-related information from an enterprise to its major stakeholders – suppliers, clients, communities and shareholders – as an important communications tool. It represents one of the best methods of communicating with these stakeholder groups, but the frank and honest assessment in each SEC report of the enterprise’s efforts will be key.
We believe that a few companies should begin to take the lead in publishing their good stories in the media. This can be done at little or no additional cost using the electronic media.
Company Website
Without doubt the report to the SEC should be dealt with in full on the enterprise’s website. Do this after the SEC meeting and enable readers to download a full copy of the report.
Social media
We strongly recommend that the enterprise also details the availability of the report on its Twitter, LinkedIn and Facebook sites. Be prepared to handle enquiries from others on the approaches followed, the effort required and the successes had. Also deal with the difficulties and challenges experienced.
Ask one or more of the SEC members to independently write about their experiences and their views on the successes the enterprise had. Do not avoid acknowledging the difficulties, failures and past errors. No-one expects to only hear good, positive stories.