Recommendation 6

HM Government Not Addressed

The Department for Business, Energy and Industrial Strategy has worked with the Home Office to support the further development of the section 54 (Transparency in Supply Chains) provisions in the Modern Slavery Act 2015. This includes strengthening the monitoring and enforcement of the obligations on large UK businesses to publish modern slavery statements. The Government has reflected on the suggestion to review the Company Directors Disqualification Act to further incentivise compliance with section 54, but it is not convinced of the case to pursue this approach at this time. In considering the right course of action, the Government has weighed how the Modern Slavery Act’s transparency provisions compare to the wider framework of corporate governance and reporting. Whilst disqualifications of company directors are considered for some breaches of company law, we must consider the proportionality of such a penalty for failure to publish a modern slavery statement. Director disqualification orders for failures to file documents required under Companies Act legislation are only capable of being made by the court where a person has been in persistent default of the filing obligations. This means being found guilty, in a court of law, of repeated offences or occurs where a number of “default orders” are made against him or her (e.g. a court order requiring late accounts to be filed). Introducing a disqualification penalty for this type of failure to publish information would also risk dilution of the “unitary principle” of company board responsibility and actions. This lies at the heart of the UK system of corporate governance. The Government is clear that company boards should focus strongly and collectively on the critical importance of protecting human rights and preventing abuses across operations and supply arrangements. They should do the same for compliance with their transparency obligations under the Modern Slavery Act. The Government would be wary of any approach that singled out individual directors as solely responsible for the company’s transparency statement. This could have the unintended consequence of reducing senior engagement, not improving accountability, and undermining the collective responsibility of the unitary board structure. To address modern slavery risks effectively, organisations need to ensure sustained engagement across several business functions. The existing requirement in the Modern Slavery Act for statements to be approved at board-level and signed by a director was designed with this mind as the board should have collective responsibility for modern slavery transparency. More broadly, the Government has followed through on its commitment to strengthen corporate governance and accountability. The Government published on 18 March 2021, for consultation, a White Paper “Restoring trust in audit and corporate governance”, which sets out ambitious plans to strengthen the UK’s audit, company reporting and corporate governance framework. This consultation runs until 8 July 2021. The White Paper incorporates proposals to act on recommendations from Sir Donald Brydon’s review of audit quality, including through a new audit and assurance framework in which public interest entities would be required to describe their approach to assuring company reporting beyond the statutory audit of the financial statements. Public interest entities currently consist largely of publicly listed companies and credit and insurance firms – the White Paper is also inviting views whether the definition of public interest entities should be widened to include very large private companies. This new approach would augment the existing statutory requirements covering non-financial corporate reporting on material risks, including in relation to human rights and supply chains, and it should foster further, stronger scrutiny. Where relevant to understanding the company and its performance, non-financial information statements by companies in their annual reports should include information on human rights. The required disclosures include company policies, any due diligence performed in respect of those policies, and risks to the business, including where those risks may arise from business relationships in the supply chain. These statutory requirements are underscored by the Corporate Governance Code, which sets out the expectation that company boards should carry out robust assessments of emerging and principal risks and confirm how these are addressed in the annual report. Boards should be reporting, in this context, what they are doing about any significant risks of human rights abuses which arise in their supply chains.