Week 4 - Governance, diversity & human rights Flashcards
Human rights issues in the supply chain (of major companies) - Rana Plaza collapse in 2013 that operated garment production in Bangladesh
3 reasons why companies might be worried about such incidents
- huge REPUTATIONAL DAMAGE
- huge RISKS TO INVESTORS; cannot attract green investments
- in local areas, factories might be closed down, lose license to operate, subject to fines, pay compensation
Human rights issues - the extent of modern slavery
Forced labour is highest in low income countries, followed by high income countries
How does ‘Responsibilities in the Supply Chain’ work in countries with dictatorships/poor human rights records?
Myanmar military regime but have many garment factories. Should companies stay or go?
Business and Human Rights in Challenging Contexts: Considerations for Remaining and Exiting (UN Human Rights, 2023)
Stay
1. generate shareholder wealth
2. UNHR said don’t just leave to avoid difficult situation bc might cause more suffering for the ppl employed by the suppliers/co. subsidiaries
3. also lose chance to protect workers
Go
1. REPUTATION CRISIS, avoid reputational damage
2. RISK MANAGEMENT ISSUE if human rights violated, poor judicial structure etc.
» ASSETS are at risk, don’t know if co’s plant might just get shut down
» rmb that the purpose of ESG is for investors to mitigate risk
Modern slavery disclosures
*Overall, there are increasing disclosures, increasingly mandated, increasing focus on assurance (but from a very low base)
Overall, increasing interest in human rights disclosures.
UK Modern Slavery Act
- org.s that meet certain criteria are LEGALLY REQUIRED to publish an annual modern slavery statement
US
1. only California is required to disclose about Human rights
2. Dodd Frank Act requires human rights disclosure on Conflict minerals
EU
1. proposal for banning goods produced using forced labour
Points discussed from Boohoo’s breach of MS requirements (‘slavery’ working conditions at factories in Leicester)
- Not only difficult for CEO to recover reputationally,
investors would think that if a co. is possible of breaching HR issue, what else might they be breaching?
» investors would see it as a massive RED FLAG - Boohoo shareholders criticised it for paying “very low” prices to factories making its clothing -> thus motivating suppliers to pay very low wages to workers
- The chief executive John Lyttle was still paid a generous bonus despite missing targets
eg. the brown M&Ms and the metal band. If the co. cannot follow simple instructions such as removing brown M&Ms, it suggests that they didn’t read the rest of the contract properly -> RED FLAG
FRC report on Modern slavery (2022) - 4 points
Sidenote: think about whether MS stt.s are credible; why it might be challenging for companies to manage their supply chains
- Overall, the research found that reporting on MS in both MS statements and annual reports lacked the NECESSARY INFORMATION for shareholders and wider stakeholders to make INFORMED DECISIONS
- 1 in 10 companies did not provide a MS statement at all
- Where companies did comply, only 1/3 of MS statements were considered CLEAR & EASY TO READ
- majority of stt.s were fragmented, lacking a clear focus and narrative, or were unduly complicated - More importantly, vast majority of MS statements were wholly BACKWARD-LOOKING
- only a minority was clearly identifying emerging issues or a long-term strategy
Weak enforcement of MS statement
- NO FINES for non-compliance, only the risk of commercial & reputational damage
- may be viewed as a “TICK BOX EXERCISE”
- limited deeper engagement by org.s in eradicating MS in the supply chain - attempts made to improve enforcement by introducing significant fines have been unsuccessful, eg. the Modern Slavery (Amendment) Bill 2021
- Will mandating disclosures change corporate behaviour?
- 3 proposals
(Underman et al., 2018)
- Mandating is NOT ENOUGH, need to make engaging in bad corporate behaviour a CRIMINAL ACTIVITY before companies will really stop
- But mandating is STILL GOOD as co.s will have to be TRANSPARENT and consider the issues…
- …but NO GUARANTEE of companies changing their behaviour
3 proposals
1. CHANGE regulation/laws so that current acct. requirements will better capture environmental and social issues & corporate behaviours will therefore change, reducing negative externalities
- changes in regulation/laws eg. environmental, will ultimately drive the internalisation of externalities
2. Develop NEW RULES to enhance TRANSPARENCY & “SHAME” companies who produce -ve externalities into changing their behaviours
4. CONTEXTUAL INFORMATION needed to help users INTERPRET & UNDERSTAND externality reporting
Tax as a social issue - What are the RISKS?
- GRI standards include tax; Few companies disclose details of their tax
- mainly, RISKS of not paying enough tax to REDISTRIBUTE PROFITS, in order to minimise tax liability
eg. Apple moving profits to Ireland (low-tax jurisdictions)
» activists believe there are ETHICAL ISSUES concerning TAX AVOIDANCE
» & risky behaviour for co. if it suddenly finds a huge tax bill due -> bad for investors + reputation concerns - whether paying tax to military dictatorships is risky
Should a company pay taxes in a jurisdiction with a poor human rights record?
ie. pay or withhold taxes (ref. to Myanmar stay vs go)
Business and Human Rights in Challenging Contexts: Considerations for Remaining and Exiting (UN Human Rights, 2023)
UNHR believes that companies paying taxes in such circumstances {are not engaging in unethical behaviour} are NOT “involved with” the VIOLATIONS of a GOVERNMENT REGIME, even an illegitimate one…
…apart from exceptional circumstances where a business is a VERY SIGNIFICANT TAX CONTRIBUTOR to a govt that is involved in GROSS VIOLATIONS of human rights.
Corporate governance {in simple terms}
*ESG analysts care about co.s being able to demonstrate that they are LOW RISK! eg. co.s that don’t file their MS stt.s are a red flag
essentially = ensuring that a co. is run effectively and risks are identified
^investors are interested in the co’s decision-making, risk management and risk oversight.
The UK corporate governance code & sustainability + link to corporate purpose (week 1)
- To succeed in the long-term, directors and the co.s they lead need to BUILD and MAINTAIN successful relationships with a wide range of STAKEHOLDERS
- A co’s culture should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders
Linking to corporate purpose,
co.s need to take into account STAKEHOLDERS ONLY b/c they are relevant to ensuring the ongoing success of the company; essentially for the benefit of SHAREHOLDERS
Boards of directors
- Boards have a lot of POWER and can fire the CEO as the ultimate sanction
- Board WEAKNESSES can have serious consequences - biz skills vs technical/industry skills
eg. Boeing 737 Max airplane crashed 5 months apart, share price tumbled, bad for investors - board members had strong finance backgrounds but limited aeronautical expertise
- Executive directors - employed in a mgmt role (CEO and sometimes CFO)
-
Non-executive directors (NEDs)
- supervisory role, not employed by co. although paid a FEE
- chosen for their INDEPENDENCE & SKILLS; will challenge the executives and check that the board is calm to make right decisions
- problematic: only come into the co. ~7 times per year, so difficult to know all specific details about how the co. is run - All directors have the same legal duties, responsibilities and potential liabilities
ie. even NEDs are liable to the same wrongdoing as the CEO
Controversial definitions
1. Board INDEPENDENCE
87% of boards are conventionally independent but only 62% are conventionally and SOCIALLY independent
ie. majority don’t have financial or familial ties to the CEO or to the firm, but they are FRIENDS (went to same uni etc.) -> so won’t provide robust challenge in the board
Takeaway: conventionally & socially independent boards PERFORM BETTER
Controversial definitions
2. Board EFFECTIVENESS
High quality decision-making is not always due to a board with an appropriate composition + good skills,
usually the people who get their way/win an argument are NOT those with the best argument, but those who are most assertive, most confident, can command a group etc.
Takeaway from the seminar role play:
Board decision-making can be dysfunctional and not involving much robust debate.
