Nathan: Hi, I’m Nathan Kanter, and this is the Blakes Sound Business podcast.
Today, my colleague Jordan Virtue and I sit down with Blakes lawyers Scott Clarke, Holly Reid and Kate McGilvray from the Corporate Governance group to discuss an important topic — the Modern Slavery Act.
We discuss various aspects of the act and how it’s meant to combat forced labour. You’ll also hear about the implications for companies and the steps that they’ll need to take to comply with this new legislation.
Jordan: Scott, from what I understand, modern slavery is part of an increasing focus on environmental, social and governance, or ESG, considerations. Can you tell us what modern slavery is?
Scott: Simply put, modern slavery is the recruitment, movement or harbouring of children, women or men through the use of force, coercion, deception or other means for the purposes of exploitation. Obviously, the high-profile subjects are things like human trafficking, including the sex trade, and the use of child soldiers. Clearly, these are not activities that would impact many Canadian companies.
What is particularly relevant is forced labour. And forced labour is any work or services people are forced to do against their will under the threat of punishment. This includes both adults and children.
This is very much an international supply chain issue. Industries likely to employ forced labour include construction, mining, manufacturing, processing and packaging. Many Canadian companies have foreign industries supplying raw materials and other imports into their operations.
The Canadian government is looking to pass legislation known as an Act to enact the Fight Against Forced Labour and Child Labour in Supply Chains Act and amend the customs tariff, which is Bill S-211. The bill has passed its second reading in the House of Commons on June 1st of this year and is in consideration at committee.
Jordan: How would modern slavery apply to a typical Canadian company that doesn’t have foreign operations in countries with bad human rights records?
Scott: Forced labour has very broad implications for Canadian companies, both legislative and commercial. We’ll talk a bit about the commercial considerations later when we discuss a real-life example.
On the legislative front, the reporting requirements of Bill S-211 would apply where a business produces or sells goods in Canada or elsewhere, or imports goods into Canada and the business meets certain criteria.
First of all, any Canadian public company, a company listed on a stock exchange, will be subject to the legislation.
With respect to private non-public companies, they, too, will be subject to the legislation if they meet two out of three criteria: (1) they have at least C$20-million of assets in Canada, (2) they have generated at least C$40-million in revenue, and (3) they employ an average of at least 250 employees over the last two prior years.
Nathan: Holly, with the Canadian government increasing its focus on modern slavery, what obligations do companies have to comply?
Holly: While there have been some prior legislative initiatives in Canada, it looks like the legislation that Scott introduced to us is going to come into force in short order.
The legislation, as currently drafted, requires certain businesses to report on the measures taken to prevent and reduce the risk that forced or child labour is used either by the business itself or within its supply chain. And the legislation currently states that the report must include certain specific information, including:
Information regarding the businesses structure, activities and supply chains
Its policies and its due diligence processes in relation to forced labour and child labour
The parts of the business and supply chains that carry a risk of forced labour or child labour being used and the steps the business has taken to assess and manage that risk
Any measures taken to remediate any forced labour or child labour
The training provided to employees on these issues, and
How the business assesses its effectiveness in ensuring that forced and child labour are not being used in its business and supply chains
And in preparing the report, businesses will, obviously, need to take into account the statutory definitions of forced labour and child labour, which are defined quite broadly.
Nathan: What are the consequences if they don’t comply?
Holly: The legislation establishes an inspection regime providing the government with very wide powers to compel a business to provide certain information or documentation to ensure compliance and to otherwise investigate non-compliance. The legislation provides those enforcing the act with broad search and seizure powers.
The act also provides the government with wide powers to issue orders requiring the business to take any measures it considers necessary to ensure compliance with the legislation.
Finally, if a business fails to comply with the reporting and other requirements of the legislation, the business may be found guilty of an offence punishable on summary conviction and liable to a fine of not more than C$250,000.
Of particular note for listeners who may be directors or officers, the legislation provides that directors and officers may also be liable for non-compliance in certain circumstances.
Obviously, beyond these statutory consequences, there are clearly also business operation and other reputational issues associated with non-compliance, which Scott has touched on before.
Nathan: Scott, continuing with the topic of compliance, is there a real-life example you can share with us that demonstrates the commercial, non-legislative consequences for not complying?
Scott: Take the case of a Canadian-based renewable energy company operating in both Canada and the U.S.
From an overall ESG perspective, producers of renewable energy are generally ESG darlings. But assume that the company builds solar farms. A large percentage of solar panels installed in Canada and the U.S. originate in foreign jurisdictions. There are two things that the builders of power plants generally require: (1) an offtake agreement by which they sell their electricity that they produce, and (2) construction financing to support the build of the project.
Regardless of legislative requirements, a growing number of power producers and lenders, particularly in the U.S., have formal policies that prohibit them from doing business with power producers unless those producers proactively adopt policies and procedures in order to confirm that there are no modern slavery components in anything they’re doing.
Jordan: Kate, turning our attention now to best practices, what advice would you give to a board from a governance perspective?
Kate: Thank you. It’s a great question. I mean, I think what I would tell a board to do, which is what we tell boards all the time to do, is to assess the risk and see where it is in their business.
A number of industries will be impacted by this because of the global nature of so many of us. And so, really, you need to look at your supply chain and try and determine where this is going to be a risk in your organization?
Interestingly, I’ve been asked two or three times in the past two weeks about ESG specifically with respect to modern slavery. So, it’s coming up a lot from industries, as I say, different than just the ones you would typically anticipate, and it’s coming up, I think, as well because boards are very focused on ESG issues. And for those that do think that there is a modern slavery risk, to design a modern slavery risk management framework, and then, of course, if there is an issue or there are gaps in the situation, you need to address those.
I also think what’s good for a board, and this is good for all boards in terms of every issue, is to do regular internal reporting in advance of the annual report and proactively respond to and mitigate issues. We have seen cases where, especially in the U.S., people have brought claims to larger institutions about, you know, have you been in breach of modern slavery. And so, really important for a board to get ahead of the issue and make sure that they are addressing it properly.
Jordan: Are there any practical boots-on-the-ground actions the board can require management to undertake?
Kate: Absolutely. I mean, I think that, again, given how the importance of ESG and the importance of this issue on companies now, is that you’ll want to make sure that management is looking to ensure that none of the companies’ suppliers is on a lenders’ or other counterparties’ prohibited-supplier list. There are aggregators through which people can look for these companies that have been identified, but also to look at, you know, if you think this is a high-risk environment, is management doing sufficient due diligence to ensure that their suppliers are in compliance with this legislation.
Another thing to ask management to do is to ensure that there are the proper reps and warranties in the supply contracts with respect to compliance with law. In some industries, it might be appropriate to specifically call out modern slavery if it is an industry that you think is a high risk.
And the last thing to do is to engage a third-party auditor. As I mentioned earlier, this is a hot topic. A lot of professional service firms are looking at these issues, and so, if you think that there’s a concern, I would encourage the hiring of a third-party auditor.
Nathan: Scott, Holly and Kate, thank you for taking the time to join Jordan and me and to share your knowledge on this important topic.
Listeners, for more information on our Corporate Governance group and our podcast, please visit blakes.com.
Until next time, keep well.