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Norway pushes for mandatory human rights due diligence

Nowegian flag, Norway human rights

Norway has become the latest country to push for mandatory human rights due diligence, with large companies having to check their supply chains and face new reporting obligations on their actions to prevent human rights abuses.

It becomes the latest in a short list of countries to take action, increasing the pressure on multinational corporations to take responsibility for human rights in their operations, whether directly or indirectly.

A report from the Ethics Information Committee of the Norwegian government, published at the end of November and now available in translation, said the act, still in draft form, aims to provide a “right to information” about the impact companies may have on fundamental human rights. It also aims to advance the cause of “respect” for human rights among companies and their supply chains.

The Norwegian government seeks to enable “consumers to make informed choices and question responsible business conduct”.

Perhaps most significantly, the report suggested the government has lost confidence in voluntary measures for business to improve human rights.

It said that while many companies have adopted principles from the UN, OECD and the International Labour Organisation, further action is necessary. “Experience nevertheless shows that voluntary compliance is not sufficient to raise corporate accountability to the required level: mandatory legislation is necessary,” the report said.

Legal innovation

Norway is not the first country to take action on human rights due diligence. It follows the introduction of the Modern Slavery Act in the UK and France’s Devoir de Vigilance. The Netherlands this year introduced the Child Labour Due Diligence Act.

The European Commission is under pressure from a coalition of campaign groups to mandate human rights due diligence across its member states.

Meanwhile, earlier this year the UN began discussions on a new binding treaty for business and human rights.

Norway’s draft law imposes a duty for companies to know the “salient risks” to human rights in their direct operations and in their supply chains. However, in a legal innovation, the law will create a new right for “any person” to access “information about how an enterprise conducts itself” in relation to human rights.

The key clauses say large companies should undertake due diligence “in order to identify, prevent and mitigate any possible adverse impact on fundamental human rights and decent work and account for how they address any adverse impacts”.

Companies face new reporting demands too, including the publication of the results of due diligence, including actions to taken to “limit serious risk or injury”.

Observers welcome the draft law, given the reach of Norwegian companies globally and growing pressure to impose responsibilities on companies in relation to human rights. Johannes Blankenbach, a researcher with the Business & Human Rights Resource Centre, said the reform flags that attitudes are changing.

“It’s a sign of Europe rapidly changing visions of companies’ social and environmental responsibilities,” he said. “Enlightened companies, investors and policy makers, along with civil society, are demanding binding rules and many European governments are responding to this.”

Some observers see the measures as part of a trend. According to Leo Martin, director of specialist consultancy GoodCorporation, Norway has a history of “taking principled business seriously”. The task of human rights due diligence should not be underestimated. It is complicated. But, said Martin, it’s a step toward shining a light on “murky parts” of the supply chain.

“For corporates around the world, it is clear that the demands for a transparent supply chain are on the increase, not only from governments but also from shareholders,” said Martin.

“While this is challenging for businesses, increasingly companies are acknowledging that they need to take more proactive steps to minimise the risk that their activities may be linked to human rights abuses.”

Changing attitudes

For the authors of the report it was “crucial” for Norway to adapt to changing attitudes towards regulation on human rights.

Mark Taylor, a researcher with the Fafo Institute for Labour and Social Research in Norway, and a member of the ethics committee behind the draft legislation, hailed its flexibility in the way it applies to large, medium and small companies.

But he also noted that other countries will need to examine the law’s creation of a new right to information. Though he conceded some questions remain to be answered.

“Other jurisdictions are going to want to look at the proposed law’s use of an innovative mechanism—a citizen’s right to ask companies about conditions in their supply chains, which is combined with a corporate duty to know, based on due diligence,” said Taylor.

“A key question remains how to enforce this right, for example under existing consumer protection regulatory oversight.”

Not everyone agrees that companies should be responsible for supply chain human rights. Indeed, some think such obligations could be counterproductive.

That issue aside, Norway’s move brings human rights due diligence back into the headlines and its innovations will offer serious food for thought among policymakers elsewhere. Boards need to take note.

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Board performance evaluation: ticking a box or making a difference?

box ticking, board performance evaluation

A new lens is being applied to board performance. The demands and expectations on board members are changing dramatically with a clear focus on how boards are making decisions and responding to issues such as technology disruption, climate change and delivering a contribution to wider society.

But are board performance evaluations keeping pace with these changes in focus and how robust are they? The 2018 UK Corporate Governance Code retained the 2016 Code requirement for FTSE 350 companies to undertake an externally facilitated board evaluation once every three years. The FRC Guidance on Board Effectiveness states that external facilitation can “add value by introducing a fresh perspective and new ways of thinking, and a critical eye to board composition, dynamics and effectiveness”. This is true, but only if they are undertaken in the right spirit.

The demands and expectations on board members are changing dramatically

In 2018, Deloitte undertook an analysis of the 2017 annual reports of the FTSE 250 to build up a picture of the board performance evaluation practices in those companies. The results showed that, as expected with a three-year rotation requirement, approximately one third of companies disclosed that they had undertaken an externally facilitated evaluation during the year.

While the number of disclosed external evaluations was not surprising what did surprise us was the lack of clarity and transparency around the nature of these external evaluations. We found that just over half of those companies disclosing that they had undertaken an externally facilitated review had either provided no detail in relation to the nature of that review or had just undertaken an online board survey facilitated by an external body.

A positive change

Moving to the disclosures in the 2018 annual reports, we undertook a survey across a sample of 100 companies across the entire listed company population and once again the results showed that around one third of that sample had disclosed that they had undertaken an externally facilitated review. This time we observed that around one quarter of the companies disclosing that they had undertaken an external review failed to explain the nature of the review. However of those companies providing a description, it was clear that the incidence of survey only reviews had decreased dramatically with the majority reporting a combination of board interviews, observation and survey.

It is positive to see such a change between 2017 and 2018 and we hope that the situation on transparency will improve again in 2019 with the new code requirement for the nomination committee’s report to disclose the nature and extent of the external evaluator’s contact with the board. It is clear that if companies are to realise the benefit from an externally facilitated board review then the reviewer needs to have interaction with the board members and to use their experience and expertise to provide insights to drive continuous improvement in board performance.

Less than a fifth of companies surveyed had provided clarity on the impact of the board evaluation process

The next area for nomination committees to focus their disclosures on is in relation to how the board performance evaluation has or will influence board composition (as required by the 2018 code). In our survey of a sample of 2018 annual reports we observed that less than a fifth of companies surveyed had provided clarity on the impact of the board evaluation process. If a board is unable to demonstrate that a performance evaluation has made a positive difference—where the board and/or governance arrangements have really been challenged on whether they are fit for purpose to meet the future expectations of investors and wider society—then does this suggest that the board evaluation process is treated as little more than a box-ticking exercise? As noted above, the board performance evaluation process should provide an opportunity to drive continuous improvement in the board. A box-ticking exercise does not benefit anyone—shareholders, stakeholders or the board members themselves.

Rigour and transparency

This issue was highlighted by the Department for Business, Energy and Industrial Strategy in a feedback statement on its Insolvency and Corporate Governance consultation paper. The paper noted that “whilst many companies are embracing best practice in dealing with issues identified in evaluations, some do not” and that “the standards or thoroughness of these evaluations can vary significantly”. In response the government asked The Chartered Governance Institute to convene a group including representatives from the investment community and companies to identify further ways of improving the quality and effectiveness of board evaluations including the development of a code of practice for external board evaluations.

Earlier this year The Chartered Governance Institute launched a consultation on the effectiveness of independent board evaluation in the UK listed sector, which put forward the following three matters for consideration:

  • a code of practice for the providers of board evaluation services, and formal arrangements for implementing and monitoring such a code;
  • voluntary principles to be applied by listed companies when engaging external reviewers to undertake board evaluations; and
  • guidance for listed companies on disclosure of the conduct and outcomes of their board evaluation, in accordance with the 2018 UK Corporate Governance Code.

We are yet to see the outcome of this consultation, but the Deloitte response supported the conclusions set out in the BEIS Insolvency and Corporate Governance paper and agreed that there would be benefit derived from greater rigour and transparency around the board evaluation process from sourcing the provider, delivery of the review through to reporting on the outcomes.

We believe boards and evaluators should be given the opportunity to apply the code and principles suggested by The Chartered Governance Institute on a voluntary basis and that the FRC, or its successor body, should provide access to a list of signatories. Self-certification by the providers of board reviews, transparency in the assessment of that self-certification plus periodic inspections by the FRC, or its successor body, should provide sufficient incentive for meeting the standards set out in the code of practice. This, coupled with a robust and transparent tendering process by the listed company, should drive the desired behaviours and enhance the impact of this key element of our governance eco-system.

Tracy Gordon is director at the Deloitte UK Centre for Corporate Governance.

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