The social and ethics committee and the protection of non-shareholder constituencies: Teething problems or no teeth at all?

• Author: Nanyemba, T.
• DOI: https://doi.org/10.47348/SLR/2022/i3a2
• Published date: 27 October 2022
• Date: 27 October 2022
• Citation: (2022) 33 Stell LR 376
• Pages: 376-395

376

https://doi.org /10.47348/ SLR/2 022/i3 a2

THE SOCIAL AND ETHICS COMMITTEE AND

THE PROTECTION OF NON-SHAREHOLDER

CONSTITUENCIES: TEETHING PROBLEMS OR

NO TEETH AT ALL?

Tangeni Nanyemba

LLB LLM

Candidate Attorney*

Mikovhe Maphiri

LLB LLM

Lecturer and doctoral candidate, UCT, Attorney of the High Court

Abstract

Traditionally, shareholders have been the only stakeholders to hold

priviledged positions in the governance of companies because they are

the exclusive beneciaries of the director’s duciary duties. However, the

requirement for certain companies to appoint social and ethics committees in

terms of section 72(4) of the Companies Act 71 of 2008, read with regulation

43 of the Companies Regulations, arguably disrupts the traditional focus on

exclusive shareholder protection by offering non-shareholder constituencies

limited legal recognition. These provisions require certain companies to

report on how the operations of a company impact a broad range of non-

shareholder constituencies, which include the employees, the environment,

consumers, suppliers, and communities. The social and ethics committee thus

presents itself as an ideal conduit for sensitisation of the board of directors

of a particular company to issues of national priority in South Africa, such as

job creation, adequate housing, anti-corruption, climate change and access to

healthcare. However, the ability of the social and ethics committee to deliver

on its mandate and to address the concomitant issues affecting non-stakeholder

constituencies under company law is curtailed by a plethora of uncertainties

and ambiguities. The Companies Act and the Companies Regulations contain

many contradictions as they include generic terms of reference regarding

the committee’s role and they do not provide clarity about the committee’s

powers, functions, objectives and purpose. This article considers whether

section 72(4) of the Companies Act read with regulation 43 of the Companies

Regulations is a viable mechanism that can be enforced to protect non-

shareholder constituencies. The committee’s shortcomings are analysed to

determine whether the committee has teething problems or is simply ineffective

* Parts of thi s article are ta ken from a chapter in T Nanyemba Th e Structur e of the Social and E thics

Committee in S outh Africa and t he Protection of No n-Sharehold er Constitue ncies LLM thesis Un iversity

of Cape Town (2020)

(2022) 33 Stell LR 376

© Juta and Company (Pty) Ltd

https://doi.org /10.47348/ SLR/2 022/i3 a2

as a committee that can protect non-shareholder constituencies in the South

African context.

Keyword s: S ocial a nd ethic s com mittee; non- shareholder constituencies;

directors; companies; shareholders

1 Introduction

Directors1 are vested with the authority to manage the affairs of a company2

and they were traditionally expected to do so in a manner that maximised

shareholder wealth.3 According to classical company law, shareholders have

been the only stakeholders4 to hold privileged positions in the governance of

companies in that they enjoyed the exclusive right to enforce the directors’

duciary duties5 by instituting derivative action suits.6 Therefore, the interests

of other stakeholders, namely non-shareholder constituencies, have been

largely irrelevant in corporate law.7 However, since the 1930s, there has

been a movement towards the recognition and protection of non-shareholder

constituencies.8

The South African legislature plausibly took cognisance of this paradigm shift

by enacting section 72(4) of the Companies Act 71 of 2008, read in conjunction

with regulation 43 of the Companies Regulations, 20119 (the “Companies

Regulations”). Section 72(4) of the Companies Act requires certain categories

of companies to appoint a social and ethics committee and is considered to be

a remarkable stride towards the recognition and protection of non-shareholder

1 In terms of s 1 of th e Companies Act 71 of 2008, “dire ctor means a member of the b oard of a company,

as contemplate d in section 66, or an alt ernate direct or of a company and includes a ny person occupying

the position of a di rector or alter nate director, by wh atever name design ated” The phrase “oc cupying the

position of a dire ctor” implies that, fo r the purposes of the Act , a person who is not formally a ppointed

as a directo r may be deemed to be a directo r if he occupies the position of a dir ector A nd the phrase

“by whatever na me designated” i mplies that cer tain pers ons are regard ed as directo rs even though

they may have a dif ferent title This means that t he name or description is no t the most relevant factor

for determi ning whether a person is a d irector – it is the substa nce of that person’s activities tha t will

determi ne whether the pers on is a director

2 S 66(1) of the Companies Act

3 Hutton v West Cork Rai lway Co (1883) 23 Ch D 654

4 Despite the abs ence of a universally ac cepted definitio n of the term “stakeholde rs”, it can be defined as

individua ls and constit uents that can re asonably be expe cted to be signi ficantly affe cted by the opera tions

of the company It has been sugges ted that corporate con stituents who can show cause t hat they have

contribut ed to the assets of a compa ny via the means of one fac tor of production or anot her such as land,

labour or capit al should be able to bene fit from the pro tection which cor porate law has to offer See

JJ du Plessis, J McConv ille & M Bagaric Principles of Contemporary Corporate Governance (2005) 24

Also see L Roach “ The Paradox of the Tradition al Justifications fo r Exclusive Shareholder Govern ance

Protection : Expanding the Plur alist Approach” (2001) 22 The Company Lawyer 9 9-10

5 The introd uction of the statutor y derivative actio n contained in s 165 of the Compan ies Act conceivably

gives employees (thr ough a trade un ion representati ve or another represe ntative) locus standi to institu te

derivative ac tion proceedings Fur thermore, s 218 of the Act gives non- shareholder constit uencies some

right of recou rse against err ant directors fo r any loss or damage suf fered as a result of a cont ravention of

the Act

6 D Million “Ra dical Shareholder P rimacy” (2014) 10 U St Thomas LJ 1013 101 3

7 I Esser & JJ du Plessis “ The Stakeholder Debat e and Director’s Fiduciar y Duties” (2007) 19 SA Merc L J

346 350

8 350

9 GN R 351 in GG 34239 of 26-04-2011, as amended by GN R 619 in GG 36759 of 20-08-2013 and GN R 82

in GG 37299 of 05-02-2014 (the “Companie s Regulations”)

THE SOCIAL AND ETHICS COMMITTEE AND THE

PROTECTION OF NON-SHAREHOLDER CONSTITUENCIES 377

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