Honourable Michael Wood
International Labour Policy
Workplace Relations & Safety Policy
Ministry of Business, Innovation & Employment
PO Box 1473
Wellington, New Zealand
6140
Via email : modernslavery@mbie.govt.nz
7 June 2022
Dear Minister Wood,
Re: Legislative Response to Modern Slavery and Worker Exploitation Towards Freedom, Fairness and Dignity in Operations and Supply Chains
The International Corporate Governance Network (ICGN) welcomes the New Zealand Government’s consultation and request for comment on how business can help prevent modern slavery and worker exploitation.
Led by investors responsible for assets under management of around US$70 trillion, ICGN is a leading authority on global standards of corporate governance and investor stewardship. Headquartered in London, our membership is based in more than 45 countries and includes institutional investors, companies, advisors, and other corporate stakeholders. ICGN offers an important international investor perspective on corporate governance and investor stewardship to help inform public policy development and the encouragement of good practices by capital market participants. For more information on the ICGN, please visit www.icgn.org.
ICGN’s Global Governance Principles1 (GGP) and Global Stewardship Principles2 (GSP) set out best practices in relation to corporate governance and investor stewardship obligations. These documents represent the foundation of ICGN’s policy framework. They embody ICGN’s mission to advance the highest standards of corporate governance and investor stewardship worldwide in pursuit of long-term value creation, contributing to healthy and sustainable economies, society, and the environment. Many ICGN Members refer to the GGP and GSS as bellwethers for their corporate governance assessments, proxy voting policies and company engagements. The GGP also inform governments and regulatory agencies on internationally accepted standards to help inspire the evolution of national corporate governance codes.
Under the GPP, ICGN has called for directors to consider the wider risks pertaining to current and emerging sustainability-related challenges. We advance the view that directors have a legal duty to act on an informed basis, with good faith, care, and loyalty to promote the long-term best interests of the company to preserve and enhance sustainable value creation. Implicit in this concept is the need to generate economic risk-adjusted returns on capital for shareholders, while having regard to relevant stakeholders, and wider economic, societal, and environmental interests.3
We are pleased to provide our comments on the proposed legislation in New Zealand. We observe that other jurisdictions have implemented anti-modern slavery measures or are in the process of doing so. We examine New Zealand’s efforts with great interest, noting your country’s leadership on numerous global environmental and social challenges. We will provide submissions on modern slavery in other jurisdictions as consultation opportunities arise.
Human rights and modern slavery are among many sustainability-related issues that feature prominently in the GGP. Principle 4.7, Human Rights, states:
The Board should ensure that it is sufficiently informed of how human rights and modern slavery issues may present material business and reputational risks or might compromise a company’s own values and standards of behaviour. The Board should establish appropriate due diligence processes, strategy, disclosure, engagement, accountability, and other measures to deal with human rights issues which may materialise in connection with the company’s workforce.4
Human rights and modern slavery challenges have become more prominent for investors in recent years as the concept of “double materiality” has become recognised. Double materiality establishes the critical importance of acknowledging and reporting on the company’s external impacts on society and the environment, as well as how issues related to society and the environment may impact the company’s own financial performance. ICGN first breached this notion in a 2015 Viewpoint entitled, “Human rights through a corporate governance lens”, when we acknowledged: “…ethical and risk dimensions are in many ways intertwined, insofar as ethical lapses or inattention to human rights practices by companies may not only breach the human rights of those affected by corporate behaviour but may also have material commercial consequences for the company itself.”5
We are in broad agreement with the main rationale, structure and content of the New Zealand discussion document and will describe our reasoning in the pages to follow. We will not comment on every question posed but focus on the requirements set out for large companies operating with international supply chains as these entities are the most likely to appear in the investment portfolios of our members.
We understand that criminal practices associated with modern slavery, such as human trafficking, are already covered under New Zealand law as highlighted by the Matamata6 case. We agree with the broad approach the Government of New Zealand is advancing and the need for cultural change to address modern slavery in all its forms. The goal is to solve the problem not, in every instance, to sanction those companies or criminally prosecute directors of officers of the company who, due to the complexity of today’s globalised business practices, have discovered instances of modern slavery in their supply chains. We do not wish to create situations where potential directors decline opportunities to serve on boards for fear of personal liability or where companies are incentivised to hide problems, thus leaving slavery conditions unaddressed. We emphasise that cultural change is required around the globe and is far from unique to New Zealand.
Consistent with this approach we emphasise our view that the proposed regulatory regime should focus on fostering fiduciary responsibilities, such as transparently reporting incidences, requiring deep learning/disclosure by board members and management of global operations and supply chains and urgently applying remediation while enforcing existing laws designed to deter criminal and civil acts. As part of ICGN’s wholistic approach, investors, too, should ensure that their own policies reflect responsible investment practices and robust due diligence reviews to support long-term value creation for their beneficiaries.7
Policy Objectives
As an investor body, ICGN recognises the profoundly unethical dimensions of modern slavery. We believe that companies seeking to build long term sustainable value cannot advance business models that tolerate modern slavery. We also believe that, if it becomes known that a company has failed to address modern slavery practices in their direct operations or supply chain, their financial prospects are likely to be severely impaired. In addition to the moral duty we all owe to each other, company officers and directors must examine and respond to the set of challenges associated with modern slavery in order to fulfil their fiduciary duty to the corporation.
ICGN believes the primary objective of the proposed legislation is “to reduce exploitation and ensure that people are treated fairly and with dignity”. We share the definition of modern slavery as exploitative situations that a person cannot leave due to threats, violence, coercion, deception and/or abuse of power. As noted in the consultation, modern slavery includes forced labour, debt bondage, forced marriage, slavery and slavery-like practices and human trafficking. Labour exploitation in these cases causes or increases the risk of material harm to the economic, social, physical or emotional well-being of an individual.8
We support the ‘whole-of-government’ approach that New Zealand is adopting and appreciate that the focus on business represents just one aspect of New Zealand’s efforts to tackle modern slavery. Within the context of this proposal, we believe that cultural change can and should occur within businesses across the value chain and among the investment institutions providing equity and debt capital.9 We note that, due to Covid, Russia’s war against Ukraine and degenerating US-China relations, the global economy is entering a period of structural evolution that may facilitate the needed cultural change.
For more than three decades, offshoring practices and the development of global supply chains have been driven by the motivation of finding least cost suppliers with least cost labour. But the drive for lower prices every day has a very real human cost in the form of worker exploitation and, at its extremes, forced labour and modern slavery. With the focus on the externalised costs of globalisation now coming into question, the conversation should include human rights organisations, suppliers, buyers, investors, retailers, employees, and consumers. The conversation must recognise the explicit link between our demand for efficiency and low prices with severely adverse if not illegal working conditions. The question to be asked and answered is whether the drive for cheap and readily disposable goods is compatible with ending modern slavery and worker exploitation.
The Need for Action
Slavery has long been recognised as a grave transgression of human rights and there is a long list of international instruments adopted to combat and end slavery. These include the Slavery Convention, the Supplementary Convention on the Abolition of the Slavery, the Slavery Trade, and Institutions and Practices Similar to Slavery and the Universal Declaration of Human Rights.10 Additionally, the United Nation’s Sustainable Development Goal 8.7 calls on all parties to take immediate action to eradicate forced labour, end modern slavery and human trafficking.11
Yet evidence indicates that modern slavery remains a global problem. As noted in the consultation, the International Labour Organisation (ILO) reports that as many as 40 million people worldwide, including 25 million people working in forced labour, live in conditions of modern slavery. Of the people trapped in forced labour, 16 million people are exploited in the private sector.12 The Global Slavery Index claims that G20 countries import US$354 billion worth of at-risk products annually.13 The consultation also rightly points to high profile labour scandals identifying modern slavery conditions at Rana Plaza14, on fishing fleets, among migrant agricultural workers in the Global North. For these reasons ICGN believes that more action on modern slavery is required globally.
ICGN believes New Zealand’s proposed legislation, along with legislation in other countries should be advanced to better address modern slavery and worker exploitation across operations and supply chains. Indeed, ICGN supports the actions that are underway or contemplated in multiple jurisdictions around the world including the UK, Australia, Canada, European Union, Switzerland, Belgium, France, Germany, Netherlands, Norway, and the State of California.
Recommended Approach
The consultation describes three broad approaches to new supply chain legislation: disclosure-based, due diligence based, or a graduated approach incorporating both disclosure and broader due diligence (proposed).
The general trend today appears to be away from the general disclosure approach adopted by the UK in 2015 and towards mandatory due diligence. This is because experience to date demonstrates that the general disclosure approach has generally been ineffective. In April 2022, the UK Finance Reporting Council and the Independent Anti-Slavery Commissioner released an assessment of the impact of UK Modern Slavery Act of 2015. Section 54 of the Act requires companies with a turnover greater than £36 million to write an annual statement setting out steps they are taking to address the risk of slavery in their operations and supply chains. Statutory guidance recommends but does not require that companies report policies, structures, due diligence, risk assessment, training and effectiveness. The study randomly sampled the disclosures of 100 companies comprising the FTSE 100, FTSE 250 and Small Caps. It confirms that around one in ten companies did not provide a modern slavery statement at all. Where companies did comply, only one-third of the statements were considered clear and easy to read. “The majority of statements…” the report found “…were fragmented, lacking a clear focus and narrative, or were unduly complicated.” The longer disclosures “often contained boilerplate reporting or were a sign of a poorly structured statement.” Performance measurement was a particularly poor area of disclosure.15
Under many, if not most conditions relating to corporate governance, ICGN supports disclosure on a comply or explain basis, as opposed to prescriptive hard law legislations. This disclosure-based approach provides companies the flexibility from adhering to particular provisions without legal or regulatory sanction. It also allows companies to develop procedures that fit their business models and culture, enabling innovative approaches to managing key risks. But this approach carries the obligation for companies to clearly explain the reasoning why disclosures may deviate from best practices. It also relies on investment institutions, stakeholders or other interested parties to monitor compliance, engage with companies and advance remedies when either the disclosure or the due diligence procedures described are inadequate. Comply or explain is often applied to soft law situations, most notably, when it comes to adherence to corporate governance codes where there is recognition that aspects of a code may not be relevant for all companies in all markets.
ICGN believes that these conditions do not apply to the situation of modern slavery at this time. By way of example and as noted above, the UK experience does not appear to have been entirely effective. The consultation document also draws this same conclusion noting earlier evidence from the UK’s experience with a disclosure-based model for combatting modern slavery which, among other things, found that 40% of eligible companies were not complying with the legislation at all.16 The evidence seems clear: voluntary corporate disclosures in this area are generally inadequate, particularly given the reprehensible nature of modern slavery and its impact on society.
For these reasons, ICGN supports, with some qualifications, the due diligence and disclosure approach as proposed. This would require large companies to undertake and disclose annually due diligence procedures that would enable the company to:
- Identify and assess the risks of modern slavery in their international operations and supply chains and worker exploitation in their domestic operations and supply chains;
- Consider measures to address and manage any identified risks and assess whether the measures are reasonable in the circumstances and proportionate to the risk;
- Implement measures that are reasonable and proportionate to the risk;
- Implement systems to periodically evaluate what measures could be taken to address or manage the risks, the effectiveness of the measures they have taken and whether those measures are reasonable in the circumstances.
These measures are broadly consistent with the due diligence procedures provided in the United Nations Global Principles for Business and Human Rights (UNGPs) which, since 2011, have been included in the OECD Guidelines for Multinational Corporations. While much work remains to be done to advance the UNGPs, a global consensus has been established and companies around the world are now familiar with at least the main contours of a human rights due diligence program.17 In our view the question of proportionality means that this form of due diligence compliance should not bring undue costs and administrative burdens and should be regarded as part of a robust enterprise risk management system.
We caution, however, that the onus must be on companies embracing their duty to develop and implement due diligence procedures and remedies. Companies should not be incentivised to declare their supply chains are ‘slavery-free’ as such a claim would be nearly impossible to maintain at all times and in all places. Supply chains are complex and dynamic, and companies can be tempted to ‘greenwash’ the results of their reviews in an effort to be known as good corporate citizens.18 All investors and stakeholders involved in this process should be clear that the emphasis should be on robust due diligence procedures, full disclosure of all findings and the follow through with effective remedies. Perfection will be challenging in the extreme and may not be attainable; learning, disclosure and improvement will be perpetual and expected.
We also concur that systems should be created and implemented, and disclosures should specify employee training programs. Staff must also be empowered to make use of existing whistleblowing programs. Companies should evaluate the effectiveness of these programs and ensure they are fit for purpose for addressing modern slavery. The board in particular should ensure that the company has in place an independent, confidential mechanism whereby a worker, supplier, shareholder or relevant stakeholder can (without fear of retribution) raise issues of particular concern with regard to potential or suspected breaches of a company’s code of ethics, responsible supplier policy (or similar policy) or local law.
If infractions do occur, potential remediation measures are key and would include, but not be limited to: working with suppliers to eradicate the practices that are leading to modern slavery practices, establishing arrangements to ensure harmful activities cannot re-occur and, potentially, where direct liability can be established, compensation to victims. ICGN supports this approach and acknowledges the extensive guidance on due diligence, risk identification and remediation practices now available.19
Enforcement, Anti-Slavery Commission and Central Registry
As noted, ICGN believes that in the corporate context enforcement measures should focus on remediation of adverse practices and events. The overall effort should be to incentivise progressive improvements rather than relying on the addition of further criminal offences, many of which would be extremely difficult to enforce outside New Zealand. Also, naming and shaming, fines, civil liability and criminal liability should be considered only after companies have had an opportunity to phase in new due diligence and disclosure procedures and only following sustained non-compliance. We believe that the effectiveness of this approach should be evaluated in 2029 (assuming the legislation is introduced in 2023 and reporting begins in 2024), providing ample opportunity for companies to adapt due diligence procedures, publish reports and implement remediation practices.
We also recommend that great care be taken in establishing public reporting practices. The reporting of infractions must be established though credible investigations and careful documentation. In an age of 24-7 social media availability, inflammatory and false claims can be made every minute. To address the challenges of reporting on modern slavery, New Zealand must help create a credible civic space to raise issues, debate responses and establish solutions with companies.
To this end, and as noted in the consultation, we encourage New Zealand to consider establishing an independent body to support modern slavery legislation, modelled on anti-slavery commissions established in Australia and the UK. Ideally, the commission would be led by an eminent person with expertise and profile in the human rights arena and would be supported by an expert group of advisors. The commissioner’s office would have a broad mandate to encourage best practice in prevention, detection and remediation of slavery practices. It would serve as a knowledge hub for best practice and maintain the proposed central registry of company reports on their compliance with the legislation. The central registry would be publicly available to enable transparency and monitoring and, if necessary in the future, the disclosure of names as an enforcement mechanism.
The office would not have investigative authority but would refer potentially criminal acts to relevant police authorities. In other instances, under defined circumstances, the commissioner would refer persistent cases to the UN Special Rapporteur on Contemporary Forms of Slavery or encourage complaints to New Zealand’s National Contact Point for promoting the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises.20 The office would establish national priorities annually and report to parliament. It would also work with other government entities to ensure a ‘whole of government’ approach. One example might be to ensure that New Zealand’s anti-money laundering regime recognises the links between modern slavery (particularly human trafficking) and the financial system and is able to respond effectively. Finally, acknowledging that modern slavery is a global problem, the commission would work with similar national anti-slavery commissions and human rights experts around the world to further construct best practices, share national priorities and establish international goals.21 The objective, again, is to encourage transparency, learning, mitigation, and remediation across companies and throughout the supply chain, providing investors and consumers with vital information.
Role of the Board of Directors
The consultation asks for comment on best board practice as these relate to the proposed legislation. We understand that New Zealand is now in the process of revising its corporate governance code. We would be pleased to provide comment on this important endeavour if required but will also provide comments below as to the role boards must play in addressing modern slavery.
Board Duties
In the introduction to this letter, we express our view that boards have a legal duty to act on an informed basis, with good faith, care, and loyalty to promote the long-term best interests of the company to preserve and enhance sustainable value creation. We also state our belief that the board should ensure that it is sufficiently informed of how human rights and modern slavery issues may present material business and reputational risks or might compromise a company’s own values and standards of behaviour. Further, we state that the board should establish appropriate due diligence processes, strategy, disclosure, engagement, accountability, and other measures to deal with human rights issues which may materialise in connection with the company’s workforce.22
This is fully consistent with the main parameters of the proposed legislation. We note, however, that board effectiveness is often impaired by a lack of knowledge on wider corporate risks (beyond financial risks) associated with environmental and social issues. Numerous surveys show that many boards have little in the way of environmental or social expertise and do not recognise the need to pay attention to material sustainability issues. Evidence suggests that human rights expertise is particularly negligible.23
For this reason, ICGN recommends the government or proposed commissioner, develops plans to encourage boards to enhance director education on the risks inherent to the company as these relate to supply chains, human rights, forced labour and modern slavery. We also encourage efforts to encourage companies to select new board candidates that represent diversity and inclusion and have a background on sustainability issues that are material for the company. We recommend, as well, that boards seek outside experts and consultants to provide recommendations on how to assess risks that neither management nor the board have the expertise to consider. Overall, such measures would enhance the level of confidence that investors and relevant stakeholders have in the company’s commitment to address these kinds of risks.
ICGN also believes that companies should disclose the processes and frequency by which the board and/or board committees discuss sustainability risks. Some boards have already adopted an annual review of material and non-material sustainability issues, while other boards have a more frequent review on an as needed basis. Yet, research shows that there are too many boards that have not placed these issues on the agenda, thereby, negating any oversight of the CEO and senior management’s plan to address material risks like human rights, forced labour and modern slavery. The need for boards to retain flexibility in setting their own agendas and handling the business of the board is well respected. However, if the data show that too many boards are not yet involved in these discussions, it leaves investors exposed to heightened risk.24
A requirement that a board places general sustainability risks (including human rights, forces labour and modern slavery) on its agenda and discloses the process by which they discuss risks, is merited given the severe challenges identified. Left unaddressed, for many companies these risks have potential to create substantial operational or reputational risks for companies, that can become financially material.
Disclosure of Reporting Structure and Board Processes
ICGN recommends that companies disclose the means by which boards and/or board committees consider sustainability risks as well as the organisational structures and responsibilities of senior executive officers that suits their needs. ICGN prefers to allow companies to decide which executive officer (or officers) have the primary responsibility to oversee sustainability risks. Some companies may decide to place that responsibility with the Chief Financial Officer or within the realm of General Counsel. Other companies have pursued the creation of new titles, such as Chief Sustainability Officer. ICGN does not have a preference which title is selected. It is the experience behind the title that is essential.25
Investors and relevant stakeholders are seeking dialogue and engagement with the most knowledgeable company representative charged with sustainability issues. It should not be complicated for investors to contact the company and engage in appropriate discussions. From a company’s perspective, it should not be challenging to reach out to investors and discuss the company’s plan for addressing material sustainability risks or other shareholder concerns. Both companies and investors have one overarching goal: the long-term viability of the company and its ability to create long term sustainable value for shareholders and relevant stakeholders.
Executive Compensation
For several years, ICGN has called for companies to link executive compensation to key performance metrics related to material sustainability targets. We believe performance measures in incentive-based plans should integrate risk considerations so that there are no rewards for taking inappropriate risks at the expense of the company, shareholders, and relevant stakeholders. Metrics should be rigorous and measured over timescales, and with methodologies, which help ensure that performance pay is directly correlated with sustained value creation and preservation. In addition to financial performance metrics, quantifiable indicators that are material to the company’s sustainable value creation and preservation, such as human capital and natural capital should be considered. Metrics guiding performance grants should be based on audited financial data, and, where possible, assured sustainability indicators.26
ICGN believes that the inclusion of metrics in the consideration of setting executive pay and any additional compensation should not create perverse incentives. Any achievement reached by an executive with respect to sustainability goals should be evaluated against actions taken that support the long-term success and value creation of the company. ICGN has noted that, “Often a sustainability related omission or controversy hits the reputation of a company before it may impact its bottom line. Compensation clawbacks can be a measure in place that punishes sustainability-related wrongdoing after the fact while malus gives a negative bonus for poor performance – thereby incentivising focus on meeting and surpassing targets.”27 For those companies highly exposed to the risks of modern slavery, companies may wish to structure pay to ensure that these risks are managed lawfully and rigorously.
Conclusion
ICGN appreciates the opportunity to comment on the proposed legislation. In closing, we note that the financial sector can serve as a powerful ally for government efforts to address modern slavery in New Zealand and around the world. Monitoring corporate practices, mounting stewardship campaigns, fighting human trafficking by improving anti-money laundering practices, providing financial services to reduce precarious economic conditions suffered by vulnerable groups and fighting climate change to reduce the numbers of climate refugees: these are all functions that many of our members are striving to fill. As the Government of New Zealand continues its efforts to combat modern slavery, we encourage you to continue to look to ICGN and our members for support and effective strategic relationships.
We hope you have found our comments useful. Should you wish to discuss further please contact George Dallas (george.dallas@icgn.org), ICGN’s Policy Director, Robert Walker (rwalker@icgn.org), ICGN’s Sustainability Policy Manager, or myself (kerrie.waring@icgn.org).
Yours faithfully,
Kerrie Waring
Chief Executive Officer, ICGN
Cc Michela Gregory, Co-Chair ICGN Human Capital Committee
Cc Karin Halliday, Co-Chair ICGN Human Capital Committee
