Recent legislation in the United Kingdom — the Modern Slavery Act (MSA) — requires every company doing business there and with a global revenue of at least £36 million (roughly 54 million in US dollars) to publish a slavery and human trafficking statement on its website. While that statement may permissibly say that the company has no policy at all, the premise is that the MSA will create a race to the top with corporations ashamed to face public scorn for the absence of such a policy.
This mandated social reporting encourages covered-corporations to detail steps taken to ensure there is no slavery and human trafficking in any aspect of its supply chain: i.e., to convert its supply chain (even if not covered by this law). Indeed, the legislation itemizes multiple factors for each company to consider (including formulating “key performance indicators” for measuring how contractors comply with the established policy).
The MSA is not alone. It is paralleled by the California Transparency in Supply Chains Act which likewise focuses solely on human trafficking and slavery. Both will soon be eclipsed by the Non-Financial Reporting Directive in the European Union, imposing the same approach to human rights issues (including slavery/human trafficking); environmental issues; social and employee-related matters (including diversity); and anti-corruption efforts.
There are, however, many issues that companies will need to carefully consider.
Could a statement be released to satisfy the MSA that just covers the U.K. subsidiary?
Technically yes, but there will be reputations and brand issues to consider. In any event, companies will need to be aware that often parents and subsidiaries form part of an internal supply chain.
Will companies need supply chain monitoring divisions? Will such divisions be required to travel and verify each step of a supply chain to report back to the Board of Directors before a statement is made?
No, and no. Such an approach would be far too cumbersome, impractical and expensive. This will be an iterative process: year 2 will improve on year 1, year 3 will improve on year 2, etc. Technical compliance is easy; it is the compliance perception that is more difficult.
Companies will want to consider using some or all of the following methods:
- Focus initially on first tier contractors (and with a dollar size threshold). This is precisely what is recommended in the American Bar Association “Model Business and Supplier Policies on Labor Trafficking and Child Labor.”
- Contract terms compelling first tier contractors to impose requirements on second tier contractors (like the standard Executive Order 11246 contract clause) is far more manageable than monitoring all second and third tier contractors.
- Termination rights in the event of serious breach or failure to meet such standards. Sponsors have similar “morals clauses” in endorsement contracts with athletes that permit cancellation and other remedies for misconduct such as Lance Armstrong’s doping.
Are there minefields to avoid in executing MSA compliance plans?
Most definitely. It is necessary to consider the collateral consequences of each step.
- NGOs have advocated using “step-in clauses” (allowing the company to micromanage completion of the contract) and training contractors’ staff. Yet, either (and especially both together) create a serious risk of being found a joint employer with the offending contractor: a result that must be avoided.
- Policies promising reparation payments to victims are also being advocated. This too is dangerous because it invites litigation: i.e., your policy may become an implied promise to third party beneficiaries. There are better ways to handle this.
- Ignoring other laws in executing MSA compliance is neither economical nor prudent. Even though California law, UK law, and EU law are not exact duplicates, all mandate corporate social responsibility reporting and all require controlling the supply chain. Thus, a consolidated approach is essential.
What is the deadline for being compliant?
There are different timelines for each law.
- California: January 1, 2012
- MSA: Within 6 months of financial year-end from March 31, 2016
- EU Non-Financial Reporting Directive: Directive must be implemented in EU countries by December 6, 2016.
Corporate social reporting responsibility is plainly here to stay; indeed, it is likely to expand. Quite plainly, there are issues (including slavery) that invite such comprehensive solutions. The impetus was well-captured by William Cowper – an 18th century English poet, evangelist, and anti-slavery advocate: “We have no slaves at home – Then why abroad?”
Such goals are unassailable: no one can (or should) argue for slavery. There are, however, more and less effective means of endorsing those goals and complying with these new mandates. The key will be to develop commercially – as well as socially – responsible approaches to compliance.