Corporate Transparency: A Lasting Trend

Any company that thought California’s passage of the Transparency in Supply Chains Act (SB 657) would prove to be inconsequential better think again. Since 2010, lawmakers globally have been learning from California’s pioneering legislation. Quietly and subtly the concept of legislating a response to human…

divider
February 11, 2015
LinkedIn

Any company that thought California’s passage of the Transparency in Supply Chains Act (SB 657) would prove to be inconsequential better think again. Since 2010, lawmakers globally have been learning from California’s pioneering legislation. Quietly and subtly the concept of legislating a response to human trafficking has spread from California and continued east. Washington D.C. felt the effect when President Obama announced Executive Order 13627. The trend crossed the Atlantic with the European Union passing Directive (Directive 2013/34/EU), and most recently the British Parliament included a transparency requirement in the latest version of the Modern Day Slavery Bill.

These new developments will require companies to go deeper and broader into their supply chain. They will expand the types of considerations necessary for companies to take and potentially increase the pool of affected companies from thousands to possibly hundreds of thousands.

The final rule for U.S Executive Order 13627 (EO), introduced by President Obama in 2012, were announced earlier this month. Any company that secures a government contract of over $500,000 for goods or services outside the United States will need to adhere to the specific policies set out in the amended Federal Acquisition Regulation (FAR). This is unlike SB 657, which favored disclosure over mandating specific actions.

The potential influence of this EO is significant. With an estimated 300,000 suppliers of goods and services, the U.S. federal government is the largest single purchaser in the world. Any large global player has the potential to dramatically influence supply chain dynamics.

A significant amount of companies supplying to the federal government are business-to-business companies, which rarely interact directly with consumers. As demonstrated by companies subject to SB 657, these companies are less likely to have developed responsible or sustainable business practices. When the EO is finally implemented, a large percentage of affected suppliers will need to adopt new policies and responsibility initiatives.

In 2014 the European Parliament, without much fanfare, passed a directive that expands the concept of transparency reporting beyond social issues. This new directive, which was ratified in September 2014, will require that companies publically traded on an EU member stock exchange, disclose information concerning their management of social, environmental, and governance issues (ESG).

Without much guidance, EU member states must determine how to best implement this new directive, which is estimated to impact nearly 6,000 companies. The EU directive is similar to SB 657, in that it does not require specific actions but instead mandates the declaration of measures taken. The reporting timeline and process aligns well with the financial disclosure required of any publically traded company.

The convenience of releasing one report that includes financial and social indicators is likely to increase the amount of companies considering Integrated Reporting, a concept beginning to gain traction among some sustainability and corporate social responsibility networks. Integrated Reporting is the process by which a company submits one report to its board of directors that includes financial and sustainability indicators. Companies that adopt Integrated Reporting make a profound statement to their board that addressing ESG is just as important as financial reporting.

The Modern Day Slavery Bill is working its way through the UK government. It would also require that companies disclose what steps they are taking to address slavery. However, unlike SB 657, the UK law will apply to companies that supply both goods and services. One major critique of SB 657 has been that it does not cover the service industry. With additional focus on the service industry, the Modern Slavery Bill shines a spotlight on a sector that has, at times, had significant issues with human trafficking.

Although the threshold has yet to be set for the UK bill it will likely near £60 million and impact an estimated 10,000 or more companies. While not significantly differing in substance from SB 657, the enforcement of the Modern Day Slavery Bill may contrast substantially. However, that will remain unclear until the law is implemented.

With these efforts coming to a head in 2015, we’ve clearly entered a new age of corporate transparency. Businesses need to proactively take action to address human rights risks in their supply chains. While its too early to know the exact impact of each new initiative, it’s evident that any private sector actor would be misguided to dismiss their influence.

If transparency was yet to be on the corporate agenda, it is now.