Why companies should be paying attention to their corporate governance structures to address modern slavery challenges in their supply chains

Global Governance FTSE 100 league table

The inaugural Global Governance FTSE  100 league table has been created. The League table measures compliance, conformance and good practice with section  54 of the Modern Slavery Act (‘MSA’). The use of the wording  ‘Global Governance’ is perhaps noteworthy, as it establishes  the issue of addressing modern slavery as part of the corporate governance framework

The corresponding report to the league table highlights that they have honed in on companies that form part of the Financial Times Stock Exchange (FTSE100) and the Real Estate (100) as they represent the largest publicly traded companies in the UK.

167 organisations were included in the analysis.  The assessment was based on each organisation’s legal compliance, disclosure conformance and reported anti-slavery/ anti human trafficking good practice.

The combined net turnover of £1.7 trillion in 2017 and ownership of 30 000 subsidiaries worldwide by the group of companies surveyed means that their potential  impact to address modern slavery in their supply chains and organisations is especially high.

Top of the league table are Marks and Spencer, British American Tobacco and Tesco.

The companies that form the top of the league table should be commended. The real challenge is addressing those companies that pay lip service to meeting the requirements of the MSA, particularly as we are three years down the line since the MSA was enacted. Perhaps the proposed reforms to the UK corporate governance structure will have a greater impact on companies meeting their disclosure responsibilities and addressing potential liability risk arising from modern slavery  their organisations or supply chains.

What is clear from this latest benchmark is that companies  performance in addressing modern slavery risk and meeting the requirements of legislation is not set to diminish. Know the Chain is a NGO that annually provides benchmark reports for companies and investors to understand and address forced labour in their supply chains. There are many other NGOs doing the same thing.

Good Corporate Governance is critical aspect of every well-run company. What we mean by ‘corporate governance’ is a system by which companies are directed and controlled. The board of directors are responsible for the governance of their companies.

What is good governance?

Good governance ensures that a company has operational processes and policies in place that are responsible and robust. Boards of directors are also responsible for the effective management of social and environmental risks. This is part of their fiduciary responsibility.

In recognition of the growing importance of good governance, the UK has been in the process of reforming its Corporate Governance Code.  There is also a growing recognition of the importance of how a company manages its environmental and social impacts. Whilst mandatory disclosure legislation (such as sect 54 of the MSA) is growing, strengthening the ‘section 172 ‘duty on directors has been seen as a key as part of the governance reform. Section 172 of the UK Companies Act 2006 places a duty on a director to promote the success of the company taking into account the impact of the company’s operations on the community and the environment.

Section 172

Directors can be found to be personally liable for breach of section 172.  Directors that are implementing good governance structures should be ensuring that they are fulfilling their duty under section 172, which arguably will include ensuring that they are considering the requirements of the MSA and developing suitable processes and policies to underpin any public statement.  New legislation now also requires that directors publish a statement on their website stating that they are complying with section 172- another legal transparency requirement.

Whilst there is currently no risk of criminal liability for directors under section 54 of the MSA (even though they can still be liable under their fiduciary duties -see my previous blog on this) one would hope that the focus on good global governance will highlight the need for directors to take steps to identify key modern slavery risks in their organisation and supply chains and develop appropriate structures, with adequate resources to meet their legal requirements whilst ‘doing the right thing’.  Perhaps we will then start to see an increase in the number of companies that comply with section 54 and develop best practice procedures.

For help with addressing your  social and environmental corporate governance framework or meeting the requirements of the MSA, contact me colleen.theron@ardeainternational.com