What directors need to know about signing off on modern slavery statements

Many directors are for the first time faced with the unfamiliar task of reviewing and approving their organisation’s modern slavery statement. To provide directors with clear guidance on what they need to know, the AICD has worked with law firm Herbert Smith Freehills to produce a guide to modern slavery reporting.

Many directors are for the first time faced with the unfamiliar task of reviewing and approving their organisation’s modern slavery statement. The first wave of modern slavery statements are now publicly available, with many others due to be lodged in the next six months. To assist directors, the AICD has worked with law firm Herbert Smith Freehills to produce a guide  to modern slavery reporting, particularly for larger complex corporate groups.

The purpose of the guide is to provide directors with clear guidance on what they need to know to sign off their modern slavery statements. The learnings are based on the first tranche of Australian modern slavery reporting during 2020 as well as the UK modern slavery regime.

Australia’s modern slavery laws

Modern slavery can occur in every sector and industry and, like many human rights violations, is often hidden in plain sight. To address this global human rights issue, the Commonwealth Government passed the Modern Slavery Act 2018 (Cth) (the Act) which applies to organisations that have annual consolidated revenue of at least A$100 million.

The Act applies to a wide range of entity types, including companies, superannuation funds, not-for-profit entities and charities, and allows entities that are not legally required to report to prepare a statement voluntarily.

In October 2019, the AICD published a tool for its members on modern slavery risk oversight, summarising the legislative framework for directors and providing practical guidance to assist directors in their oversight role of modern slavery risks in their operations and supply chains. Importantly, the board has principal responsibility for modern slavery reporting under the Act, given its role in approving and signing modern slavery statements.

Reporting for corporate groups

Under the Act, reporting entities are required to annually prepare and submit a 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.

Boards need to ensure that analysis has been undertaken to identify all reporting entities within their corporate group. If a joint statement is being prepared, they must also ensure that it reflects the modern slavery risks and actions of all reporting entities.

Careful thought also needs to be given to the inclusion of joint ventures (JVs) in the scope of joint modern slavery statements. Where a JV is an ‘operated’ JV with identical risks and risk management processes to the broader group, then including it in the group’s modern slavery statement may make sense. Where that is not the case, it may be preferable for the JV to self-report.

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 which are untrue / exaggerated; and
• aspirational commitments which are unlikely to be delivered in practice.

In most cases, the risk of misleading disclosure can be managed by having broad input from across the group, an effective drafting process and team working on the statement, correct framing of information and the robust ‘testing’ of information prior to disclosure.

It is not necessarily expected that companies will get formal audit sign off or third-party assurance given the nature of the process. However, internal verification (such as internal audit) can be a useful risk mitigation tool.

Better practice

The modern slavery statement is focused on modern slavery risks within entities’ operations and supply chains. However, better practice is for the company to consider modern slavery risks beyond its operations that may give rise to reputational risk.

This may take the form of the business disclosing its processes for identifying and escalating modern slavery concerns in its customer base, or considering the extent to which the group could be linked to modern slavery practices through its business partnerships and affiliations.

While some businesses may regard modern slavery compliance as a procurement issue, the requirement to report on risk under the Act, along with the technical nature of the disclosures, means that a cross-functional approach is preferable.

Directors should make sure that a broad range of organisational functions contribute to preparing the modern slavery statement. These may include Finance, Procurement, Risk, Sustainability, Company Secretariat, Human Resources, Legal and Corporate Affairs.

Who should sign the statement?

To date, organisations have taken different approaches to responsibility for signing the statement: some want the chairperson to sign to signify the importance of the issue and the organisation’s commitment to preventing modern slavery; others want the managing director given they are accountable for implementation of the group’s modern slavery risk management program and overseeing the preparation of the statement.

In practice, in many organisations the entire board will approve or endorse the statement prior to it being signed by the chairperson or managing director.

What is the status of the NSW Modern Slavery Act?

The NSW Modern Slavery Act 2018 (NSW Act) is currently on hold. However, the NSW Government has committed to harmonising the NSW Act with the Commonwealth Act, though with the NSW Government expressing the view that the reporting threshold should be $50m consolidated revenue (rather than the $100m requirement under the Act).

The NSW Government has also stated that the NSW Act should commence on or before 1 January 2021. It is unclear whether the Commonwealth will have appetite for adopting a lower threshold for reporting, and how long the NSW-Commonwealth discussions are likely to take. At this stage, it is still unclear if and when the NSW Act will commence.