Australia has long been complicit in modern slavery. It’s time boards addressed these risks

As many boards have recently signed off on their second modern slavery statement, it’s prudent to ask if their statements are much different from those submitted in the previous financial year.

Modern slavery is a real thing. According to the Australian Border Force, 1567 victims of modern slavery were reported in Australia from 2015 to 2017, while globally, the Walk Free Foundation estimates 40.3 million people are victims of these insidious practices.

Australian companies may be significantly exposed to modern slavery practices in their operations and supply chains both at home and abroad, the most common of which are forced labour, child labour and debt bondage.

Whether hosting modern slavery practices on our shores or importing suspect products and components produced as a result of modern slavery, Australia has historically been complicit in this problem. 

In 2018, the government issued the Modern Slavery Act that requires organisations with consolidated annual revenue of at least $100 million to prepare a Modern Slavery Statement on modern slavery risks in their operations and supply chains.

The Australian law provides a clear and prescriptive guidance to reporting entities. 

However, as research by the Monash Centre for Financial Studies (MCFS) reveals, legislation has not ensured universally high compliance standards. In fact, using the Modern Slavery Disclosure score, more than a third of the statements did not receive a pass mark. This is alarming, and indicates that companies don’t fully understand their exposure to modern slavery risks in their operations and supply chains.

Time for companies to look deeper into modern slavery

Among the lowest rated companies, some have claimed to be constrained by limited visibility over their supply chains, while others have argued that the risks of modern slavery in their operations and supply chains are inherently low due to the nature of their businesses. 

This is simply not acceptable. It is time Australian companies look deeper into their supply chains to understand their risks and boards should be held accountable to ensure that is happening.

With companies shifting their focus from maximising shareholder value to enterprise value creation for all stakeholders, it’s the board’s responsibility to ensure good corporate governance of environmental and social (E & S) risks, as a part of sustainable business practices.

The World Economic Forum’s “Davos Manifesto” states that “the purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders but all its stakeholders — employees, customers, suppliers, local communities and society at large. The best way to understand and harmonise the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.”

Investors increasingly expect companies to manage ESG risks well, which requires ESG expertise at both board and management levels. Among ASX300 companies, only 62% reported having a dedicated team on human rights or modern slavery risks and 29% used an external consultant.

A company’s board is responsible for approving and overseeing the implementation of strategy and ESG policies, as well as routinely reviewing ESG performance. Without abdicating accountability, the board may delegate this responsibility to a sustainability committee, which is present at many companies among the ASX100. 

The guidance document of the act emphasises the need for organisations to develop tools and policies to monitor areas of risk in their operations, identify high-risk suppliers and mitigate associated risks. It also recommends that organisations regularly review and improve policies and processes and ensure such changes are communicated well to relevant stakeholders.

Companies across our ASX300 sample group cited a wide range of internal policies relevant to managing their modern slavery risks. Among the more common examples were codes of conduct, supplier codes of conduct, ethical sourcing, responsible procurement, human rights, and training. 

Boards should also be ultimately responsible for the effectiveness of the actions the company has taken to assess and address modern slavery risks. While it seems obvious that companies should have a clear set of measurable targets or key performance indicators (KPIs), MCFS found that only 18% of ASX300 companies disclosed specific KPIs in their modern slavery statement.

There are many questions boards should ask when exercising oversight of the company’s management and disclosure of modern slavery risks chief among them; if the board has sustainability expertise, if the board and management are committed to consider E & S factors in decision making and whether or not the board reviews the quality of non-financial disclosures such as the modern slavery statement, to ensure regulatory compliance.

Addressing and disclosing modern slavery risks presented significant challenges for many entities on their first attempt in their 2020 financial year statements, but the good news is that Australian companies are willing to learn. In future reporting cycles, we will hopefully see evolution and improvement in compliance levels and the quality of disclosure, because it’s just good business.