Modern Slavery Bill

Written evidence submitted by Peter L Talibart, Managing Partner of Seyfarth Shaw (UK) LLP (MS 16)

1. Human Trafficking (Modern Slavery) is the most profitable, fastest growing crime in the world. It is a systematic denial of hope, dignity, law and fundamental human rights on a vast global industrial scale. It is universally condemned by mature legal jurisdictions, many of whom criminalised it a decade ago.

2. Despite an increase in domestic law criminal statutes (like the MSA), the international crime continues to prosper. There are more slaves in the world now than at any time in human history. The ILO estimates at least 21 million people are slaves, of which 18 million are in the legitimate business sectors, and therefore as a mathematical certainty, supply chains of British industry. Some claim the real figure is closer to 29 million.

3. Unless legal systems of the developed economies start to properly address this illegal practice, it will continue to grow. This creates an unprecedented threat to brand value of British companies. The domestic criminalisation approach has already failed. Domestic laws must recognise the international elements of the crime.

4. Government proposes to pass a "world class" law on modern slavery that entirely ignores this reality and advocates "talking to business" and a "voluntary approach" as its preferred response to bloodied supply chains. This is indefensible.

5. This memorandum analyses the issues and principle legislative options available to Parliament in relation to the inclusion of supply chain measures in the MSA.

Current Government Position

6. Government is clearly uncertain about the correct interpretation of relevant legislation and how to appropriately respond to the international dimension of modern slavery.

7. When challenged about the omission of supply chains from the Bill, the standard government response is "it is too early to say whether there is any merit in the claim that slavery is not properly reflected in human rights reporting".

8. Although Government usually makes this statement as a (nonsensical) justification for excluding supply chain integrity from the Bill, it raises a very good question that the committee should consider. It is very hard to see how slavery does not fit into a broader definition of "human rights" but if any clarity is needed Parliament can stipulate that modern slavery falls within the definition of "human rights" per the Companies Act, when it defines what "modern slavery" is in the MSA. This is not a difficult issue. However it has absolutely nothing to do with supply chains of a company.

9. The second question that is clearly troubling Government is whether the current reporting requirement in relation to "human rights" implicitly includes supply chains. There is evidence that Government is starting to recognise that there may be circumstances where such reporting may be in everybody’s interests.

10. Government states that "Companies have a social responsibility to ensure that those they do business with are not involved in the exploitation of others. If businesses take no action they risk both their reputation and profit. The Government wants to work collaboratively with the private sector to support business to eliminate forced labour in supply chain, in a way that does not place additional burdens on them".

11. This comment, from the Government response to the pre legislative Joint Committee, fails to consider that listed companies have much more than a "social responsibility" in this regard. Shareholders should have a legal right to know if a company they have invested in carries a significant value risk because of supply chain slavery which the company is or should be aware of. Some of these shareholders are funds that hold that lifelong pension savings of British citizens. The current wording of the Companies Act excludes any reference to supply chains. Disclosure of supply chain risks and policies can avoid brand catastrophe and make British companies safer and more stable investments. That in is everybody’s interest, including the businesses themselves. The best way to achieve the above stated objective (ref: paragraph 10) of Government is to use the legal framework that already exists, hence the recommendation in this memorandum to use the mechanism of the strategic report to protect shareholders by making a five word amendment to the Companies Act.

12. It is absurd for Government to assert that business can (ever) address the "social responsibility" ascribed to it by Government with no additional burden being imposed. Parliament can, however, balance the interests of both shareholder and director, to make this burden no more than a relatively minor one for boards of companies, whilst giving shareholders vital protection. The public interest clearly lies in ensuring that the largest British companies are on guard by law to not deliberately participate in the largest illegal crime in the world. None of them actually want to and by obliging directors to take a formal, public position in their reporting obligations, Parliament would actually be helping the good men and women who sit on the boards of our great companies to fight this terrible crime.

The Companies Act

13. Per amendment last autumn, under section 414C(7)(b)(iii), of the Companies Act 2006, quoted companies must, to the extent necessary for an understanding of the development, performance or position of the Company’s business (emphasis is mine), now include information about social, community and human rights issues, including information about any policies in relation to those matters and the effectiveness of those policies. Nobody knows if this language is intended to include supply chains or not.

14. Until a segment of the NGO community (including the Archbishop of Canterbury personally) started to agitate about this, there was no public evidence that Government had even made the connection between the MSA, the scale of the international supply chain crime or the meaning of "human rights" reporting in section 414 of the Companies Act. Nor was there any evidence that investor protection had been factored into Government analysis. This is demonstrated by the "talk to business" approach because this could never be a responsible course of action given the scale of these vital public interests and where millions of lives are at stake. It is possible that Government has only recently connected these dots and are now trying to determine how to reconcile what they have publicly said and done with now putting some kind of supply chain measure into the MSA. The changing view of Government on this issue is evidenced by 2 comments (ref: paragraphs 15 and 17).

15. In the section on supply chains in the Home Office response to the joint committee report, the Home Office state that "There is no specific requirement, rather, an expectation, that Companies report on supply chains (where necessary for an understanding of the business) under the current rules".

16. The best explanation for this statement is that the Home Office has realised that there are situations where disclosure of actual or potential supply chain issues absolutely should be made to shareholders. Otherwise, no "expectation" arises. This reasoning is somewhat supported by the (expressly) non-binding "guidance" on Directors reports by the Financial Reporting Council ("FRC"). That guidance is not law, and suggests Directors must determine what level of human rights abuse in supply chains is potentially "material" as to value and therefore should be reported. Furthermore, the current language of the Companies Act supports the argument that supply chain issues clearly fall outside the reporting requirements. A Judge interpreting the Companies Act would be entitled to assume that if Parliament intended there to be such an "expectation" it would have referred to supply chains or to other "guidance" in that Act. The FRC guidance is not part of the law. Nobody actually has to follow it but it could possibly be used in evidence to sue a director for breach of duty if a brand crashed because of a supply chain event. There is therefore no clear legal basis for the "expectation" desired by the Home Office. A slight amendment to the Companies Act would remove any doubt on the point. Business is requesting clarity on this issue.

17. In her response to Frank Field MP during the Parliamentary debate about the Bill last month, the Home Secretary took the position that reporting on supply chain issues is already included in the Companies Act. Mrs May: That is the sort of intervention that I had probably best pass over. We have already legislated to recognise the social responsibility of companies in relation to human rights in supply chains, even though this Bill does not contain a specific reference to supply chains.

18. The Home Secretary suggests the intention of Parliament in amending the Companies Act was that shareholders must be given adequate disclosure of supply chain issues. She is absolutely correct that they should. Because an ethical event in a supply chain can very quickly degrade market value of shares at any time, shareholders need as much advance visibility and comfort as is practicable on this issue before they decide to invest in a company. This sort of risk is exactly why companies currently must prepare annual (strategic) reports. Directors have fiduciary obligations of accuracy in their reports which best protect shareholder interests. These should obviously include supply chain issues of which they are aware, and how they are proposing to protect companies from such valuation risks. The only issues with the statement of the Home Secretary is that the words "supply chains" are not actually in the Companies Act so the legislation does not actually create that "recognition" at all. Nor does the non-binding FRC "guidance" put it into that Act. A simple clarification of the Companies Act would confirm the "expectation" desired by the Home Office in its public statements and support the clear intent of the Home Secretary that supply chain should be part of human rights reporting. Parliament should support her. She is right. There is no shame in amending the Act. It happens all the time. That is how our legal system is supposed to work. Laws evolve to stay fit for purpose. This is a good thing.

19. Taking all of the above, the Companies Act should be amended to read (the amendment wording is set out in bold):

"to the extent necessary for an understanding of the development, performance ir position of the Company’s business…, now include information about social, community and human rights issues (including in its supply chain), including information about any policies in relation to those matters and the effectiveness of those policies".

20. This would address the international nature of the crime, turn the MSA into a world class law, remove the obvious confusion and discomfort of Government, protect shareholders and directors, protect British citizens who invest in British business through their pension plans and finally is absolutely and utterly the right thing to do given recent events.

Companies Act amendment v California Transparency In Supply Chains ("TISC") model

21. Some argue that Parliament should draft a new, complex law based on the California TISC example. Parliament has already decided to put human rights reporting of companies into the Companies Act. It is counterproductive to ignore this completely and to create an entirely new law from scratch. The section of the Companies Act that creates this obligation (ref: paragraph 13) is very brief and there is little point having an amendment that is more complex than the section it is amending. The evidence suggests that the intention of Parliament was to include supply chains in human rights reporting to shareholders anyway, as such an obvious exclusion creates great risk.

22. TISC requires the state government to police company website disclosures and to enforce the law through legal injunction of companies. Enforcement actions have to be brought by the state attorney general. The UK would need to create the new infrastructure to deal with this if it adopted this model. Government has no wish to do so. Nor should it. There is no doubt that forcing large companies to consider the issue of supply chain integrity is a very positive development and California has led the way in this area. This does not mean that Britain must copy the Californian legal approach.

23. There is no evidence that any other American state (let alone another entirely different legal system) intends to copy the Californian model, probably because of the infrastructure issues that it creates and because it is so heavily consumer protection based. TISC is based on the theory that consciousness-raising with (1) large companies becoming more aware due to having to make supply chain disclosures on their websites and (2) consumers reading the disclosures, will encourage prevention of Human Trafficking by the private sector. The same objectives (albeit for shareholders instead of consumers) can be achieved via the much simpler Companies Act approach.

24. Critics of the Companies Act approach have said that there is not a level playing field created by a Companies Act amendment as only listed companies would be affected. This is not entirely correct. Any board that ever wanted to take a company from private to public ownership would have to deal with the issue of supply chains before it could do so. Private investors will see what protection that investors are given in public companies and will start to look for equivalent comfort in their investment decisions and advice. Parliament would be instituting a top down change, starting with the largest publicly traded companies and can legislate further in future if public interest demands it. The "levelling of the playing field" can come when the private companies with lesser resources can access shared experience of larger companies. The public interest is slightly less with private companies because there are not many people and institutions widely investing savings into them. This is why it is suggested that Parliament deals with that issue subsequently. One can argue about whether there should be formal reporting to consumers on supply chain issues (there is a lot of merit in this). However, there is much consumer law already in our legal system. It is much more difficult to say that supply chain related value destruction is something that shareholders and private investors do not require immediate protection from.

25. Business can easily manage this Companies Act proposal, involving audited reports that have to be made to shareholders anyway under current law. Websites are not audited. Business is used to dealing with global ethical issues like bribery, where law already requires global risk management. Business is also actually quite used to supply chain transparency as a concept. It has existed for some time in consumer products. Basic human rights integrity in supply chains is currently not recognised by British law, unlike product supply chain integrity in hardwood, tobacco and pharmaceuticals.

26. US Federal legislation that was proposed in 2011 by Congresswoman Carolyn Maloney (and which did not pass) has recently been reintroduced by her. It would require companies to include in their annual reports to the Securities and Exchange Commission (SEC) a disclosure describing any measures the company has taken during the year to identify and address conditions of forced labor, slavery, human trafficking, and the worst forms of child labor within the company’s supply chains. The Federal legislation would require ten categories of disclosures, including disclosures similar to California’s TISC Act regarding verifications, audits, certifications, internal accountability, and training. In addition to requiring the disclosures in an issuer’s annual report, the federal law would require a company to disclose the same information on the company’s website, accessible through a link on the company’s homepage. This Bill is considered to be unlikely to pass, largely because of the prescriptive nature of the required disclosure (and the American appetite for litigation) but it does show the evolution of thinking on this subject to a shareholder based disclosure. The answer for Britain lies in letting companies answer the disclosure requirement truthfully, but in their own way, as best practice evolves in the UK.

Other Reasons why thus Committee should support this five word amendment to the Companies Act

27. It would appear to clarify the original intention of Parliament in amending the Companies Act to include human rights in the first place. That amendment is not effective otherwise. Under the current Companies Act wording, there would be no clear legal obligation to disclose significant known human rights abuses in a major supplier to a publicly traded UK company. This cannot ever have been intended by Parliament. It is potentially catastrophic for shareholders. This point should not be left in doubt. The Companies Act does not use the word "material" like the FRC guidelines. Unfortunately the term "material" implies a level of abuse tolerance entirely improper in a human rights context. This must have been an accident of the drafting and cannot have been intended by anybody. The actual wording of the Companies Act (not only if "material" as per the FRC guidelines) is a much better standard to apply to directors.

28. Companies would only have to add about two to four paragraphs to their annual report, prepared by lawyers and accountant who also audit it for accuracy. Most who have reported voluntarily thus far have done so in under 200 words. There would be no direct control on the statements they would have to make. These could be suitably qualified by legal advisors if necessary. They would be guided only be the existing fiduciary obligation to not mislead shareholders and the knowledge that these statements are in the public domain. It is not unfriendly to business at all. In fact it guides Directors about how to address this crime and will ignite the engines of best practice if they all must do it. Most directors are actually very good people who want to help fight this global crime and you would be protecting them from criticism in doing so by making it a clear legal requirement to report. The scrutiny would come from shareholders not government. The ultimate owners of such companies are entitled to know if those companies are wilfully or negligently participating in one of earth’s largest criminal activities.

29. This proposal has maximum portability between international legal systems. In areas like governance and CSR Britain is admired and copied. Legal systems borrow each other’s good ideas. A common feature of all complex legal systems is the report to shareholders, shareholder activism, corporate ethics policies and obligations of directors to shareholders. Companies acts have been around in some cases for centuries. They form a cornerstone of most legal systems. Legal systems are also currently trying to raise levels of their corporate governance as they compete with each other. This is why the Companies Act approach also gives the best opportunity for international change. Other countries may very well follow the UK. The common law systems have a virtually identical model. All mature legal jurisdictions are struggling with this issue. The more complex the law the more rooted it is in the architecture of its own system, and the more difficult it is to transpose it into others. Britain can lead by a simple example that others could easily follow. It may have a cascade effect.

30. The Home Office response to the Joint Committee cites the possibility of work being done in the EU that may yield enhanced human rights reporting in 2016 as a good reason to do nothing about supply chains. Given current Brinkmanship about membership of the European Union, this is entirely speculative and contradictory. It is unclear exactly when Britain started to defer to EU jurisdictions in the area of proper corporate governance. This is a very weak excuse to allow the largest part of this mas crime to remain unlegislated for at least another 2 years (if ever).

Conclusion

31. This memorandum has not addressed the ethical implications of deliberately ignoring, or merely paying lip service to, the suffering of millions of people. That is a matter for the conscience of this committee and Parliament.

32. Britain cannot, whilst passing a modern slavery law it wishes to be "world class" ignore the risks to its own industry and the invisible country of people affected by this terrible crime. Business cannot guarantee the sanctity of supply chains, it simply does not have the visibility. The only thing Parliament can do in the circumstances is to legislate to make Modern Slavery in supply chains and public issue that all listed businesses must report on to the extent it is relevant. This will force a graduated, proportional response of the market. A complex TISC style law, drafted in haste may do more harm than good. By adding these five proposed words, Parliament will make a pioneering change in global corporate governance law and lead the fight against this crime in a manner that elegantly takes advantage of the existing architecture of the incredible British legal system. The alternative is to make a deliberate decision to allow this crime to flourish in order to avoid doing something that may inconvenience business. British law is currently more concerned about the sustainability of the wood in our furniture than the freedom and safety of the millions of men, women and children who made it. That position makes their illegal treatment profitable. That is not right. How Parliament reacts to this tragedy is a matter purely of political will.

August 2014

Prepared 2nd September 2014