Ask CENTRL: What 3 Questions Should Directors Ask Their Management Team Before Approving the Company’s Modern Slavery Act (Australia) Statement?

Successful marketing and public relations campaigns often adopt a concept known as the “power of three.” Decorators also tend to group things in threes because this arrangement is more visually appealing, memorable, and effective than even-numbered groupings. From children’s stories, such as Goldilocks and the Three Bears, to the familiar Olympic medals in gold, silver, and bronze, people tend to gravitate to the number three in conceptualizing, understanding and prioritizing things. Australia’s Modern Slavery Act (MSA) is another example of the power of three. The Australian government sent a powerful message to the marketplace in enacting the Modern Slavery Act in 2018. Those three words carry a powerful message to companies that they need to act to eradicate the global scourge of modern slavery and formally document their actions each year in a written statement submitted to and posted on a public registry maintained by the Australian Border Force (ABF).

Summary of Approval and Signature Requirements

Section 13 of the MSA requires the “principal governing body of the reporting entity” (“company”) to approve the company’s annual modern slavery statement. For purposes of the law, the “principal governing body of the reporting entity” is the body or group of members with primary responsibility for the governance of the entity. A “responsible member” of the company must sign the statement. If a reporting entity has a principal governing body, the responsible member will be a member of that body. The law does not permit the delegation of approval authority, including to an Executive Committee. These approval and signature requirements are in place to ensure that senior management of the company is actively involved in and accountable for the company’s response to modern slavery and that all statements submitted to the ABF have been approved for public access on the ABF’s registry.

The ABF has released a document entitled “Modern Slavery Act – Supplementary Guidance: Approval and Signature of Modern Slavery Statements” to clarify how companies should comply with the approval and signature requirements under the MSA. The ABF will not publish any statements that do not meet these basic requirements for approval and signature.

Strategies for Director Involvement

If you are a member of the principal governing body of company, you need to know certain information before you review and approve the company’s annual modern slavery statements. Although there are a myriad number of questions you will want to ask of your management team during each reporting year, there are three key questions that you should ask prior to your approval of the company’s first annual statement.

1. What has the company done to identify and address its modern slavery risks in its business operations and supply chains?

It is important for directors to understand what the company has done during its reporting year to identify, assess, and address the modern slavery risks in its own business operations and supply chain tiers and how the company intends to report on these actions and other key aspects of its modern slavery compliance and governance program in its annual modern slavery statement. It is also important for directors to affirm that the company’s program includes a dual focus on both operations and supply chain risks. Directors should understand whether the company has sufficient resources in place and has taken measurable actions to comply with the requirements under the MSA. These actions may range from the adoption of a written modern slavery policy to robust due diligence programs that include evaluations of unique modern slavery supply chain risks based on answers to detailed self-assessment questionnaires received back from all of the company’s suppliers. Directors should ensure that the modern slavery risks faced by the company have been and continue to be identified and oversee that appropriate controls and monitoring systems are in place to manage the impact of those risks.

Directors should ensure that the company’s statement includes all of the information required under the MSA without compromising any confidential information about the company’s business operations, employees, and suppliers. It is also important for directors to understand whether the annual statement covers one reporting entity in the corporate group or is being submitted as a joint statement with other reporting entities. If a joint statement has been prepared, directors should ensure that the statement reflects the modern slavery risks and program parameters of all relevant reporting entities and describes the consultation process among all of the entities in preparing the joint statement. The ABF has released a document entitled “Modern Slavery Act Supplementary Guidance: Describing Consultation” to help companies meet these consultation requirements.

Once the company’s statement is filed with the ABF and posted at the online registry, it may garner attention from the public, investors, shareholders, competitors, activist groups, media, and others. As such, directors should focus on certain key risk exposure areas in reviewing the company’s statements, including the following:

(1) Omission or understatement of material risks,

(2) Representations that may be exaggerated or untrue, and

(3) Aspirational goals that are unlikely to be met due to budgetary or other resource constraints.

2. How does our annual modern slavery statement compare to that of our competitors or to other companies subject to the annual reporting requirements?

As of March 8, 2021, 501 modern slavery statements were posted at the ABF’s online registry and a large number will likely be added to the registry after March 31, 2021, the extended reporting deadline for companies with an Australian Financial Year. This online registry is a valuable research tool to help companies compare the programs in place at other companies in the same or similar industries. It is important for directors to understand how the annual statement being presented to them for review and approval compares to the statements of other companies in the same industry or with similar annual revenue.

Directors should remember that the old saying that “imitation is the sincerest form of flattery” does not apply to annual modern slavery statements. The online registry provides insight into the modern slavery programs being implemented or in place at other companies. However, each company’s program will necessarily be unique. Copying text from some of the best statements filed at the ABF’s registry into your company’s statement may result in some of the risks highlighted above.

3. What kinds of reports can we expect to see from senior management going forward so we can stay informed on what the company is doing to manage and report on modern slavery risks and continuously improve the company’s modern slavery compliance program?

The annual mandatory reporting requirement is new for all companies and there is no “one size fits all approach” to meeting these new requirements. Modern slavery compliance is also not a “one and done” exercise. It is incumbent on directors to set key expectations now to ensure that senior management keeps them informed of the company’s program throughout the year. This will help to ensure that directors have the information they need to understand and monitor the company’s program throughout the year and to review and approve the company’s statements each year.

Moving to a Great Program

Many directors were asked in late 2019 or are currently being asked to review and approve their company’s first annual modern slavery statement. It is time for directors to move from recognizing that eradicating modern slavery is a good cause to taking affirmative action to ensure that their company implements and maintains a great modern slavery compliance and governance program. A great program will allow the company to meet three basic goals:

(1) Embed Data-driven Risk Analysis and Decision Making – Produce relevant information and granular data needed for the company to understand and manage its modern slavery risks,

(2) Minimize Risk of Harm to Humans – Focus on minimizing the risks of modern slavery practices in the company’s operations and supply chain, and

(3) Meet Annual Reporting Requirements – Ensure that the company can prepare a modern slavery statement each year that showcases the company’s current program and continuous improvement in eradicating modern slavery in its workplaces and in the workplaces of its suppliers.

Although there are currently no prescribed financial penalties for non-compliance, directors should not assume that any annual statement filed by the company does not create some risks or liabilities. The online registry includes easy to use search tools so companies cannot hide their noncompliant programs behind fancy graphics and colorful pictures. Inaccurate or misleading disclosures in a company’s modern slavery statements could lead to actions by the company’s regulators, customers, or shareholders. For example, if modern slavery practices are discovered in a company’s operations after the company has submitted a statement to the ABF in which such practices were not disclosed, shareholders could allege losses due to those undisclosed modern slavery risks.

The three questions and the three goals above are important. The most important thing any director can do, however, is set the tone at the top of the company. If directors and senior management of the company value and promote the goals of the MSA, that strong tone at the top should be reflected in each annual statement filed by the company. Directors should set that tone high now and, to borrow from the “concept of three,” plan to raise that tone over the next three years.