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South Africa: Directors’ duties (3 of 8) – employee ethics

13 May 2024
– 7 Minute Read

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Overview

  • The King IV Code emphasises the board’s obligation to set the direction of a company’s ethics and to approve policies designed to regulate ethical behaviour.
  • The best way for the board to protect the company from both reputational and regulatory harm is to have a set of ethical principles that govern the conduct of the employees.
  • These principles should be incorporated into codes and policies, supported by grievance and whistleblowing policies that allow employees to raise breaches of ethical standards without fear of retaliation.

This is the third in a series of articles on the duties of directors in relation to employment, employment law and employee benefits. Senior consultant Graham Damant, has discussed these issues at length with Bowmans’ partner Chris Todd in two ‘Value of Knowing’ podcasts. The first (on our website here) covers what boards in South Africa need to know about employment, employment law and employee benefits to meet their fiduciary duties avoid liability. The second (on our website here here) highlights the obligations and duties of boards in South Africa in relation to CEOs. Subscribe to’ The value of Knowing’ podcast on Apple Podcasts or Spotify.

In the first article we identified six themes where the King IV Code on Corporate Governance deals with what directors need to know about employment law and employment generally. We pointed out that the Code has placed considerable emphasis on the issue of ethics.  It requires the board to set the ethical direction of the company and then to approve codes and policies that support the ethical direction.

The emphasis on ethics is no doubt warranted by the increasing number of scandals involving corporate South Africa. It may be influenced by a number of corporate scandals that have impacted overseas companies. It is the unethical behaviour of employees that usually results in the company making headlines for all the wrong reasons. This may be conduct by executives towards fellow employees such as sexual harassment, racist behaviour or bullying in the workplace.  It may be conduct impacting customers where a customer is bribed to place an order and pays more for the product or service. It may impact society as a whole, such as the behaviour of companies involved in the State Capture project. What is clear is that the unethical conduct of employees can have serious reputational and regulatory consequences for a company. 

It can also result in investigations by various regulatory bodies and action being brought against the company by regulatory authorities resulting in considerable legal costs and risk. If harm is caused to others by employee conduct, it can result in material claims brought against the company. If the company fails as a consequence, creditors may look to the directors. In other instances, the law may impose personal liability. In the worst cases it can lead to the failure of the business.

The ethical direction of a company and the codes and policies that the board adopts can go a long way to ensuring that employees conduct themselves in a manner that mitigates the risk of harm to the company. For the policies to be operational, it is necessary for the company to ensure that employees are made aware of the codes and policies and to ensure compliance with the codes. The board should ensure that employees are able to raise issues of non-compliance without fear of retaliation. The company should take appropriate action against any employee who breaches the codes.

The first question then is what constitutes the ethical direction of a company. Ethics is a very broad description and attitudes to ethical behaviour can vary considerably. At its broadest level it would entail that the company acts in accordance with the law, acts honestly in its dealings with customers, suppliers and employees, does not discriminate on any listed grounds and does not act in a manner that is harmful to any of the company’s stakeholders or the environment in which the company operates. The stakeholders that could be impacted by unethical behaviour could be employees, suppliers, customers and the public at large. By setting the ethical direction the board would adopt a broad set of principles that governs employee behaviour to the various groups of stakeholders.

These broad principles would then be further detailed in codes and policies that are made appliable to employees. The executives are responsible for the design of such codes and policies.

The codes and policies should regulate employee behaviour to outside persons who deal with the company. This includes both suppliers and customers. Codes that govern ethical behaviour towards outside stakeholders would usually include a conflict-of-interest policy, a disclosure of outside interests policy and policies governing receipt of gifts. A procurement policy should be put in place to ensure that there are no corrupt relationships with suppliers. It is now standard practice to have policies dealing with what constitutes anti-competitive behaviour and to train employees in this regard given the serious consequences of non-compliance with the Competition legislation.

These policies would be supported by provisions in the disciplinary code and policies that would regulate issues such as the solicitation of bribes, failure to disclose conflicts of interest and the like.

Codes that govern how employees should behave to one another would include a sexual harassment policy. Sexual harassment has proved to be a problem in the workplace with the result that many employers have introduced specific policies and procedures to regulate the behaviour supported by training. It is now a requirement that an employer introduces a policy that regulates bullying and harassment in the workplace generally. Health and safety policies should be introduced to ensure that employees do not harm one another. These codes should be supported by a grievance policy that allows employees to raise issues and a disciplinary policy which penalises behaviour that breaches the policies.

The board needs to ensure that employees are trained in these policies. The only way that the board could ensure training would be to delegate responsibility to ensure training to the CEO. Executives would be required to ensure that all new employees are properly inducted into the company’s policies, that the policies are readily available and that refresher courses are conducted on a fairly regular basis. The board would require that it receives reports on compliance training on a regular basis.

In order to monitor compliance, the company should introduce a whistleblowing policy and procedure. In terms of the policy, employees who report serious misconduct on the part of other employees will be protected from any form of retaliation. The subject of a protected disclosure is fairly broadly defined in the Protected Disclosures Act but includes any form of criminal conduct (including theft, fraud or corruption), conduct that endangers the health and safety of employees, conduct that is likely to result in damage to the environment or conduct that amounts to unfair discrimination.

Employees should be able to make a whistleblowing complaint to a person who they trust not to either conceal the complaint or retaliate. This could be an external service provider, an internal auditor, or the board itself. The complaint can be made anonymously if need be. The board should be made aware of all whistleblowing complaints and should be advised of the action that the company intends to take to investigate the complaint as well as the outcome.

In conclusion, the best way for the board to protect the company from both reputational and regulatory harm is to have a set of ethical principles that govern the conduct of the employees in relation to their dealings with outside stakeholders, one another, the environment and the law. These principles should be incorporated into codes and policies. The codes and policies should be supported by grievance and whistleblowing policies that allow employees to raise breaches of the ethical standards without fear of retaliation. Steps should be taken to ensure that employees are familiarised with the policies and that they are readily accessible.

All articles in the series: