Transparency was yesterday. Tomorrow is about vigilance. Four questions boards need to ask

Think Tank

4 min read

Mark Goyder is a senior advisor to the Board Intelligence Think Tank. He’s the founder of Tomorrow’s Company and co-author with Ong Boon Hwee of Entrusted: Stewardship for Responsible Wealth Creation, published by World Scientific in 2020.

16 years ago, Tomorrow’s Company published the conclusion of an inquiry into the global company of the future. The tone was positive and optimistic. In the Tomorrow’s Global Company report of 2007, the assumption was that NGOs and businesses would work ahead of government, setting and committing to ambitious goals. Leaders from 10 global companies and four NGOs could foresee the coming crises of climate, human rights and poverty but were ambitious about working together to tackle these crises. Together they would be a force for good, creating forms of soft law through codes of conduct and agreed statements of principle, thereby raising the standards of behaviour by which all global companies would have to operate.

Last week I attended a public seminar organised by Professor Nina Boeger and Dr Taskin Iqbal of the City University Law School which shook my optimism.

Ever since the first Tomorrow’s Company report of 1995, I have believed that society will push companies to improve their social and environmental performance. Companies would report on their progress; those who made little progress would be shown up and shamed. I called that process “the escalator of transparency”. Companies make commitments and cannot step off the moving staircase. They have to report on progress or lack of it. Transparency and investor and NGO pressure ensure that they move forward.

In one of the papers presented at the seminar, I learned from Dr Lauren McCarthy of the Centre for Responsible Enterprise at Bayes Business School about the harm done to people in the garment industry supply chain after Covid struck. Contracts were abandoned and people in Cambodia and elsewhere were cut adrift by large companies with little thought given to their wellbeing.

From Dr Iqbal, I learned that there are 10 million more people in modern slavery in 2021 than there were in 2016, and that the efforts by the UK and other governments to improve things by reporting and transparency alone had not been successful. Only 14% of 2018 statements under the UK’s Modern Slavery Act meet minimum requirements and the majority offer little information in the areas covered. Despite persistent non-compliance by 40% of companies, no injunctions or penalties have resulted.

All this may be changed by the new Corporate Sustainability Due Diligence Directive (CSDDD) which is now likely to emerge from the European Commission once negotiations are completed between the Parliament and the Council of Ministers.

Firms would be obliged to identify, and where necessary prevent, end or mitigate the negative impact of their activities, including that of their business partners, on human rights and the environment. This includes child labour, slavery, labour exploitation, pollution, environmental degradation, and biodiversity loss.

The onus is on the company to know what its impacts are. Professor Charlotte Villiers (University of Bristol Law School) confirmed that whilst the UK may have left the EU, the obligations will still apply to larger UK-based companies that operate in the EU.*

One major problem is the complexity of global supply chains. At the seminar, it was suggested that 15% of the global workforce is a hidden workforce.

The new EU legislation, if it survives efforts to dilute it, will create potential for derivative claims. The combination of double materiality with regard to the required disclosures under the new Corporate Sustainability Reporting Directive (CSRD) and increased due diligence obligations will still cause particular headaches to UK-based companies operating internationally.

The UK’s departure from the EU may make the problem more complicated. Boards of companies within the scope of the EU Directives will have to worry about both UK and EU requirements. Authentic and rigorous international standards will become more important as a common language between trading blocs. On the reporting side, efforts are being made in the EU to make sure that new reporting standards work with existing standards such as those developed by the Global Reporting Initiative and the International Sustainability Standards Board.

There may also be consequences for corporate form — in particular the relationship between holding companies and subsidiaries. Previously it may have made sense for the big companies to adopt structures of ownership and governance that give them some distance from the actions of their subsidiaries. Under a “duty of vigilance”, the opposite may become the case. No corporate structuring can be used to evade responsibility for knowing what is happening across the supply chain.

The “escalator of transparency” seems to be stuck. Name and shame hasn’t worked. Boards need to prepare for a new and more prescriptive era in which ignorance of impacts will be no defence. This may lead them to the following questions:

  1. What will the new CSDDD mean for our business?
  2. Do we need to have such long supply chains? Might we reduce our legal risk — and make ourselves more resilient — if we shortened them?
  3. How would we need to change the way we recruit and train our people if, in future, they are going to be entrusted with a duty of vigilance?
  4. What are the implications for our current corporate structures?

*The proposals apply to (i) UK companies with significant EU business, crossing above the net turnover threshold of €150 million, or €40 million if at least half its business operates in high-risk sectors, (ii) UK companies of whatever size in the value chain of a company covered by the requirements, and (iii) UK parent companies of an EU subsidiary within the scope of the proposed Directive.

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