One of the more interesting 21st century corporate disclosure developments has been the increased expectation by legislators and regulators that companies should examine their supply chains in order to determine whether chain participants are engaged in illegal or improper activities, and then report on their examination to investors and to regulators. One U.S. example of these kinds of disclosure developments is the Dodd-Frank Act conflicts minerals disclosure requirements. At the beginning of this year another example of supply chain disclosure requirements went into effect in Australia, with the effectiveness on January 1, 2019 of the Australian law regarding modern slavery. As discussed in the following guest post from Francis Kean, the U.K.’s modern slavery disclosure law his been in effect for four years. In his guest post, Francis takes a look at the U.K. experience under this law. Francis is Executive Director FINEX Willis Towers Watson. A version of this article was previously published on the Willis Towers Watson website. I would like to thank Francis for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.
Four years after the introduction in the UK of the Modern Slavery Act, a recently published independent review makes sobering reading for directors of large UK based companies.
A ground-breaking centrepiece of the 2015 Act was the Section 54 requirement on commercial organisations with an annual turnover of more than £36 million to report annually on the steps taken to ensure modern slavery was not taking place in their organisation and supply chains. The disclosure requirement also affected companies incorporated overseas which carry on business or which supply goods and services in the UK. The review is highly critical of the degree of compliance with these disclosure requirements.
Some worrying modern slavery facts
The report contains some startling statistics including the following:
- 17 separate forms of slavery have been identified ranging from labour, sexual and criminal exploitation to domestic servitude.
- The number of live police operations into modern slavery in the UK has increased from 188 in December 2016 to over 1,370 today
- UK nationals now represent by far the highest proportion (nearly a quarter) of potential victims identified and many of these are children. (In 2015 UK nationals were only the fifth most represented nationality behind Albania, Vietnam, Nigeria and Romania).
- In the year to September 2018, 4,270 offences of Modern Slavery were recorded by police. This is a 51% increase compared with the previous year (2,824 offences).
Shining the light of disclosure
The review examines the effectiveness of the requirement on large companies to disclose their approach to eradicating Modern Slavery. On the plus side the authors of the report conclude that the legislation “has contributed to greater awareness of modern slavery in companies’ supply chains”. Less positively, they state that “…a number of companies are approaching their obligations as a mere tick-box exercise…” and that “… it is estimated around 40 per cent of eligible companies are not complying with the legislation at all.”
One of the challenges in the original disclosure obligations related to the interpretation of the concept of supply chain. The Act contained no definition, but the relevant guidance stated that the phrase should be given its everyday meaning. This could include ancillary suppliers such as cleaning and catering services which would considerably expand its scope.
Another challenge related to the question as to whether the obligation extended to foreign based subsidiaries operating independently of the UK based parent. The guidance encouraged voluntary reporting in these cases. (Indeed, this approach seems consistent with The Supreme Court’s recent focus on parent company responsibilities for subsidiaries.)
To make matters worse, the report highlights that, even among those companies which seek to comply with the disclosure obligations by at least saying something on this topic, a significant number simply state (as they are permitted to under the Act) that they have taken no steps to implement appropriate policies. The authors of the report recommend that this loophole in the Act be closed.
The risk of non-compliance
Even before the review was published, the UK government understood that there was a compliance issue so far as the disclosure obligations were concerned. To try to combat inertia and inactivity, the Home Office wrote earlier this year to CEOs of approximately 17,000 non-compliant UK organisations warning them of the risk that their companies could be named and shamed for non-compliance.
The report highlights the problem of non-compliance. The authors note that although the Act makes provision for the Secretary of State to seek an injunction against non-compliant companies, this power has never been used and there have been no penalties to date for non-compliant organisations.
It is too easy to assume, based on a lack of enforcement to date, that reporting and disclosure obligations are little more than a box ticking exercise. The recent appointment of a new Independent Anti-slavery Commissioner together with the recent Dear CEO letters referred to above and the report itself may signal a change in approach. Given the importance of brand and reputation to large companies and the significant toxicity associated with modern slavery, companies need to address this issue. That said, detailed research and careful thought is required given the risk that over-optimistic pronouncements may later be seized upon by claimants as false and misleading.