What directors need to know about their reporting requirements under the Modern Slavery Act.
Under the Modern Slavery Act 2018 (Cth), the boards of Australian companies are required to approve modern slavery statements signed by a director. While this approval is often straightforward for companies reporting on a standalone basis, in the context of larger corporate groups the complexity and risks for boards are significantly higher. But how can directors navigate the complexities when reporting for corporate groups and what are the best practices for reporting under the Act?
Who is required to report?
Under the Act, “Australian entities” and “entities carrying on business in Australia” with consolidated revenue of at least $100m are required to prepare and submit a modern slavery statement.
“Australian entities” is defined to include companies, trusts and corporate limited partnerships, which are resident in Australia for tax purposes, as well as other partnerships and entities (whether incorporated or not) that are formed in or centrally managed/controlled from Australia. This means the Act applies to a wide range of entity types, including companies, superannuation funds, not-for-profit entities and charities. The Act also allows entities that are not legally required to report to voluntarily prepare a statement.
The board’s responsibility
Under the Act, reporting entities are required to annually prepare and submit a modern slavery statement to the Minister for Home Affairs within six months of the end of their financial year. Where there is more than one reporting entity in a corporate group, the group may prepare one or more joint statements covering the relevant reporting entities.
The board has principal responsibility for modern slavery reporting under the Act, given its role in approving and signing modern slavery statements. With respect to individual statements, the board of the reporting entity must approve the statement and a director must sign it under the Act. With respect to joint statements, there are three ways under the Act for the statement to be approved and signed:
- By each reporting entity — with this approach, the board of each reporting entity would approve the statement and a director from each board would sign.
- By a “higher entity” (for example, the parent company’s board) — with this approach, the board of a reporting entity, which is in a position, directly or indirectly, to influence or control the other reporting entities would approve the statement on their behalf and have one of its directors sign.
- Where the above two approaches are impracticable, by any reporting entity covered by the statement — this approach would be unusual, but in such a circumstance the board of any of the reporting entities named in the statement could approve the statement on behalf of all the reporting entities and have one of its directors sign.
Who should sign the statement?
The entire board will typically approve the statement prior to it being signed, which reduces the significance of the person signing the statement from a risk perspective — as they will have the endorsement of the board in doing so. There are different organisational approaches to this.
Some want the chair to sign to signify the importance of the issue and the organisation’s commitment to preventing modern slavery. Others want the managing director to sign given he or she is accountable for implementation of the group’s modern slavery risk management program and overseeing the preparation of the statement.
Minimising potential areas of risk
Key risk exposures for companies and boards with respect to modern slavery statements include:
- Omission or understatement of material risk areas
- Statements that are untrue or exaggerated
- Aspirational commitments that are not delivered in practice.
In most cases, the risk of misleading disclosure can be managed by having an effective drafting process, correct framing of information and robust testing of information prior to disclosure.
Strong consultation across the group
Broad input from across the business will help mitigate key risk exposures for companies and boards by ensuring a more comprehensive consideration of the business’ operations and supply chains, as well as potential differences in risk profiles or risk management practices. It will also assist the company in satisfying the requirement for consultation under the Act, which necessitates:
- Consultation between reporting entities
- Consultation between each reporting entity and its owned or controlled entities, in relation to the statement, to ensure it appropriately captures the mandatory reporting criteria.
In the context of a centrally managed group structure, detail should be included on the consultation undertaken by the working groups preparing the statement and the review process undertaken by the management team, culminating in the relevant board approvals.
Questions to ask management before signing off
Determining reporting entities:
- Has analysis been undertaken to accurately identify all reporting entities within the corporate group?
- Will each reporting entity be preparing a standalone modern slavery statement, or will it be covered by one or more joint statements?
Ensuring accurate disclosure:
- If a joint statement is being prepared, does it accurately reflect the modern slavery risks and actions of all of the reporting entities?
- Are there differences in practice between business divisions or geographies that need to be reflected in the statement?
- If a business division has been recently acquired, has it been integrated into the corporate group? If not, does the modern slavery statement explain this?
Understanding operations and supply chain:
- Does the description of the reporting entities’ supply chains consider both direct suppliers of goods and suppliers of services, as well as deeper-level suppliers?
- Does the modern slavery statement adequately capture less obvious parts of the reporting entities’ operations (for example, financial lending and investments, non-operated joint ventures, leasing activities, research and development, and charitable activities)?
- If the reporting entities are involved in investing and financing activities, is the level of disclosure in the modern slavery statement appropriate in the circumstances? Does it take into account factors such as the significance and level of risk of those activities and the group’s level of ownership/control?
Considering joint ventures:
- Do joint ventures (JVs) included in the statement have any different modern slavery risks or risk management processes to the rest of the corporate group?
- Does it make sense to include JVs in the joint statement or should they individually report?
It is unclear if and when the NSW Modern Slavery Act 2018 (NSW Act) will commence. The NSW government has committed to harmonising the NSW Act with the Commonwealth Act — with the view the reporting threshold should be $50m consolidated revenue. It is uncertain whether the Commonwealth will have an appetite for adopting a lower reporting threshold or how long NSW-Commonwealth discussions will take.
Timothy Stutt is Australian lead for the ESG, Sustainability and Responsible Business at Herbert Smith Freehills and developed the AICD modern slavery reporting director tool.
Requirements of the Modern Slavery Act
The Act imposes an obligation on relevant reporting entities to prepare and submit a modern slavery statement, which must:
- Identify the reporting entity
- Describe the structure, operations and supply chains of the reporting entity
- Describe the risks of modern slavery practices in the operations and supply chains of the reporting entity (and any entities that the reporting entity owns or controls)
- Describe the actions taken by the reporting entity (and any entity that the reporting entity owns or controls), to assess and address those risks, including due diligence and remediation processes
- Describe how the reporting entity assesses the effectiveness of the actions it takes to assess and address its modern slavery risks
- Describe the process of consultation with any entities that the reporting entity owns or controls and, for joint statements, the entity giving the statement
- Include any other information that the reporting entity, or the entity giving the statement, considers relevant.
Getting it wrong
At present, there are no penalties for non-compliance with the Act. However, the consequences of inaccurate or misleading disclosure extend well beyond the Act and may include:
- Breach of directors’ duties (for example, failure to exercise skill, care and diligence by appropriately managing and disclosing modern slavery risks).
- Consumer claims (for example, Australian Competition and Consumer Commission complaints for misleading statements about ethical sourcing).
- Consumer class actions (for example, in the US, consumer class action claims have been brought against chocolate manufacturers over representations made regarding their supply chain practices).
- Requisitioned resolutions (for example, resolutions requisitioned at the company’s AGM, seeking a review of the company’s supply chain practices or greater union involvement).
- Shareholder class action (for example, a class action claiming breach of continuous disclosure laws following a share price drop precipitated by modern slavery issues impacting the business and its reputation).
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