Environmental Considerations
Section 76(3) of the Companies Act No. 71 of 2008 (the “Companies Act”) places an obligation on directors to exercise their functions in the best interests of the company and with the requisite degree of care, skill and diligence. Although these are general director duties, if a director fails to ensure that a company complies with the specific environmental law obligations set out below, the director may be held liable for a breach of these general director duties.
The National Environment Management Act 107 of 1998 (the “NEMA”) sets out general environmental governance and decision-making principles applicable to various types of activities that may affect the environment. Section 24(N) of NEMA provides that directors of a company are jointly and severally liable for any negative impact on the environment, whether advertently or inadvertently caused by the company which they represent, including damage, degradation or pollution. Section 34(7) of NEMA provides that a person who was a director of a company at the time an offence under NEMA was committed shall be guilty of that offence and shall be liable on conviction to a fine or to imprisonment, if the said offence was a result of the director’s failure to take all reasonable steps which were necessary under the circumstances in order to prevent the offence from being committed. Directors should therefore be cautious of undertaking any business activities that can cause damage to the environment. Should such damage be caused, the national or provincial department of environmental affairs must be made aware of the damage as soon as possible.
The Institute of Directors in South Africa (IODSA) develops and publishes the King Code on Corporate Governance (the “King”), which prescribes general standards of corporate governance which South African courts often consider when interpreting the duties of directors. Principle 3(14) of the King IV Report on Corporate Governance states that the governing body (i.e. the board of directors) should oversee and monitor, on an ongoing basis, how the consequences of an organisation’s activities and outputs affect its status as a responsible corporate citizen. This oversight and monitoring should be performed against measures and targets agreed with management in the following areas:
- Environment (including responsibilities in respect of pollution and waste disposal, and protection of biodiversity)
- Society (including public health and safety; consumer protection; community development; and protection of human rights)
- Economy (including economic transformation; prevention, detection and response to fraud and corruption; and responsible and transparent tax policy)
- Workplace (including employment equity; fair remuneration; and employee health and safety).
Compliance with King IV is mandatory for entities listed on the Johannesburg Securities Exchange (JSE).
Social Considerations
Section 72 of the Companies Act requires state-owned companies, listed companies and every other company that has had a public interest score of at least 500 points in the past 2 years to appoint a social and ethics committee. A social interest score is calculated based on the number of employees a company has, its revenues, the company’s third party liabilities and the number of securities holders in the company.
The social and ethics committee may comprise no less than three members who may be directors or prescribed officers of the company. In terms of regulation 43 of the Companies Regulations of 2011 (the “Companies Regulations”) a social and ethics committee monitors a company’s activities with regard to:
- Social and economic development
- Good corporate citizenship
- The environment, health and public safety
- Consumer relations
- Labour and employment matters.
When monitoring and reporting on social and economic development, the Companies Regulations require the social and ethics committee to monitor compliance with the Broad-Based Black Economic Empowerment Act of 2003 (the “BBBEE Act”) and the Employment Equity Act of 1998 which are pieces of legislation aimed at improving the social and economic standing of black South Africans, addressing inequalities which are a result of past racially discriminatory Apartheid laws. Complying with the BBBEE Act is not mandatory, and companies in the private sector who elect not to comply with the BBBEE Act do not face any legal consequence (unless compliance is required in terms of the licensing requirements applicable to the sector in which that company operates). Companies listed on the JSE are required to report to the public on the level of black ownership and other aspects of BBBEE.
The social and ethics committee also monitors compliance with recommendations from the Organisation for Economic Co-operation and Development (OECD) regarding corruption, the United Nations Global Compact Principles and the International Labour Organisation Protocol on decent work and working conditions.
Governance Considerations
The corporate governance practices which are expected of directors are set out in the Companies Act and King IV. Duties and responsibilities of directors are derived from both the Companies Act and common law. Good corporate governance dictates that directors act in the utmost good faith and in the best interests of their companies, including the need to exercise care, skill and diligence in the performance of their duties
King IV sets out 16 principles that an organisation should apply in order to prove that is practising good corporate governance. King IV provides that a board of directors should, among other things:
- Lead ethically and effectively
- Govern ethics and establish an ethical culture
- Ensure responsible corporate citizenship
- Serve as the focal point and custodian of corporate governance.
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