Thou shalt be ethical

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. These draft regulations should be opposed on both a superficial and a more fundamental level.

Although there are certain exemptions, the draft regulations effectively mean that public companies need to create new structures to monitor and report on issues that are already highly regulated. Essentially, the social and ethics committee will 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.

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. Fundamentally, I believe this approach is flawed. 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 completely the wrong way to try and achieve this.  In practice there will probably be a long list of companies applying for exemption, arguing – correctly – that compliance, socio-economic development, environmental, health and safety, labour issues, etc. are already adequately addressed within 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 within 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, as more innovation will result and customisation will allow more effective approaches at the individual company level.  On the other side, 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 is not an either/or debate, however, but rather it is more about striking the right balance between the two.  Whilst 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.  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.

By Daniel Malan, head of the Unit for Corporate Governance in Africa at the University of Stellenbosch Business School (USB) - 2 March 2010