Tackling modern slavery in global supply chains

How many slavesRoel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr)

The recent migrant crisis paired with shocking exposes of labour issues in global supply chains has heightened public attention to modern slavery, forced labour and human trafficking. Children working in cobalt mines for the Apple and Samsung supply chains, Syrian refugees working under terrible circumstances for garment supply chains in Turkey, Rohingya refuges working as slaves in the Thai fishing industry and North African migrants working in agriculture in Italy and Spain.

The International Labour Organization estimates that 21 million people are victims of forced labour, of which 44% are migrants. In total, forced labor generates an estimated $150 billion in illegal profits every year. A recent ETI survey found 71% of companies suspect the presence of modern slavery in their supply chains.

In response, a number of binding regulations regarding modern slavery in supply chains have been introduced. On an international level, the ILO has adopted the Forced Labor Protocol that requires States to take measures regarding forced labor. Domestically, the California Transparency in Supply Chains Act of 2010 is intended to ensure consumers are provided with information about the efforts to prevent and eradicate human trafficking and slavery from their supply chains. President Obama also launched a far reaching executive order to avoid human trafficking in federal contracts and passed a law allowing for stronger enforcement of the Tariff Act of 1930, which aims to block the import of products to the US produced using child labour.

Currently two lawsuits related to slave labour in supply chains of Thai shrimp are pending against well-known multinationals in US federal courts. Likewise earlier this year the US Supreme Court declined to hear an appeal for the dismissal of a lawsuit alleging that three large multinational enterprises aided and abetted child slave labor on cocoa plantations in Africa.

The recent UK Modern Slavery Act applies to all companies that do any part of their business in the UK if they have annual gross worldwide revenues of £36 million or more each year. These companies have to publish an annual slavery and human trafficking statement. The OECD Guidelines for Multinational Enterprises are referenced in the statutory guidance of the Act, noting that “whilst not specifically focused on modern slavery, they provide principles and standards for responsible business conduct in areas such as employment and industrial relations and human rights which may help organisations when seeking to respond to or prevent modern slavery.’’

The OECD Guidelines are recommendations to companies backed by 46 adhering governments and recommend that companies carry out supply chain due diligence to identify, prevent, mitigate and account for all adverse impacts that they cover, including child labour and forced labour. The OECD has developed more detailed guidance on how these expectations can be responded to in specific sectors. The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, the global standard on mineral supply chain responsibility, provides a 5 step framework for due diligence to manage risks in the minerals supply chain including forced and child labour in the context of artisanal mining. The FAO and OECD recently jointly developed a Due Diligence Guidance for Responsible Agricultural Supply Chains which also provides due diligence recommendations to manage risks related to forced labour and child labour in high risk agriculture sectors including palm oil and cocoa. Such approaches could be applied in the Thai shrimping industry as well. The OECD is also developing a Due Diligence Guidance on Responsible Garment and Footwear Supply Chains, which provides specific recommendations for addressing risks of forced and child labor. This Guidance will be launched later this year and will be relevant to migrant workers in textiles factories and cotton fields.

Although the OECD Guidelines are a non-binding mechanism they are accompanied by a unique grievance mechanism, the National Contact Points (NCPs). NCPs in the 46 countries that adhere to the Guidelines facilitate dialogue and mediation with companies who allegedly do not observe their recommendations. Several issues regarding forced or child labor in supply chains have been brought to the NCP mechanism and some have resulted in successful outcomes.

For example, in 2011 complaints were submitted to the NCP mechanism regarding sourcing of cotton from Uzbekistan cultivated using child labour. NCP mediation led to several agreements with companies involved in sourcing the products as well as heightened industry attention to this issue. In a follow up to the NCP processes several years later the European Center for Constitutional and Human Rights (ECCHR) concluded that the submission of the cases had encouraged traders to take steps to pressure the Uzbek government to end forced labour, although company commitment and media attention around the issue diminished over time. Nevertheless the report also noted that the NCP cases triggered investment banks to monitor forced labour issues in Uzbekistan in the context of their investments.

Other NCP cases, while not resulting in agreements between the parties have led to statements determining that certain companies were not observing the recommendations of the OECD Guidelines in the context of forced labour impacts, resulting in reputational harm to those enterprises (e.g. see DEVCOT) . Currently the Swiss National Contact Point is overseeing mediation between the Building and Wood Worker’s International (WWI) and FIFA regarding forced labor issues in Qatar. The results will have important implications for global sporting events and for managing risks of forced labour in large scale infrastructure projects.

Companies themselves have been proactive in addressing these issues. For example Nestlé, despite currently being subject to a lawsuit related to slave labour in its supply chain, participated in and released a report developed with the non-profit organization Verité which identified labour abuses in its supply chain with regard to Thai-sourced seafood.  Within the report the company outlined plans to tackle the problem, and notes that other companies that do business in this sector likely face the same risks.

Several MNEs also participate in the Shrimp Sustainable Supply Chain Task Force set up in 2014 by retailers such as Costco. This brings together manufacturers, retailers, governments and CSOs to conduct independent audits on Asian fishing vessels to ensure seafood supply chains are free from illegal and forced labour. The first round of audits is expected to be complete by July 2016.

In February this year, H&M asked all of its suppliers to sign an agreement prohibiting the use of cotton from Turkmenistan and Syria, on pain of termination in order to avoid sourcing of cotton from ISIS controlled territories, produced through forced labour. H&M also terminated a sourcing relationship with a Turkish supplier after discovering a Syrian migrant child working in its factory, responding to documented abuses against Syrian refugees in the Turkish textile industry.

Labour issues in global supply chains present a serious and pressing problem, therefore it is encouraging to see they are being taken seriously. In addition to regulatory approaches non-binding mechanisms such as the OECD Guidelines, accompanied by the NCP system, and industry initiatives have resulted in important progress and provide alternative models for managing forced labour risks throughout global supply chains. While litigating these issues can be a forceful tactic in bringing companies to account, non-judicial grievance mechanisms can provide a more affordable and more accessible platform for tackling forced labour issues.

In the context of modern slavery, all stakeholders must step up their efforts. Governments should promote due diligence in global supply chains among their companies as outlined in the OECD Guidelines and its related industry-specific instruments. Civil society can continue to be instrumental in reporting upon and exposing these issues and furthermore should rely on the NCP platform for reaching resolutions on supply chain issues with MNEs. Finally, as the current migrant crisis will last many years, companies should conduct heightened due diligence to ensure that they are not linked to forced labour throughout their supply chains, particularly in contexts with large migrant populations.

Useful links

Anti bribery ministerial

When businesses are bad, who you gonna call?

Carly Avery, Investment Division, OECD Directorate for Financial and Enterprise Affairs

Most businesses are good. They pay their taxes, they create employment, they abide by the laws, and they generally contribute to the societies in which they operate. But unfortunately, this isn’t always the case. And when businesses behave badly, the human consequences can be devastating: factories collapse killing thousands; workers, often children, are treated like slaves; rivers, lakes, and even seas are rendered lifeless, and entire species are threatened.

In order to deal with cases of bad business behaviour such as these, we would need a multilateral system where victims of this type of treatment could complain, and the person receiving the complaint would analyse it, see if it’s valid, alert all the parties involved, and sit down with them to help fix the situation. No, this isn’t some Disney film scenario with a dashing knight in shining armour swooping in to save the day. In fact, this is something that already exists: the National Contact Points (NCPs) for the OECD Guidelines for Multinational Enterprises.

The OECD Guidelines are the leading international standard for responsible business conduct for multinational enterprises wherever they operate in the world. They cover all areas of business ethics, including human rights, labour issues, environmental protection, anti-bribery, taxation, and science and technology. They operate on the expectation that businesses should not only do good, but that they should also do no harm. The Guidelines were first adopted in 1976 and today 46 governments have signed up.

With the Guidelines you can raise your hand and say “Hey, stop doing that to my fish!” and someone, an NCP, can do something about it. NCPs are the mechanism that reinforces how the Guidelines are applied. They are units that have been set up by every government adhering to the Guidelines and are there to help parties find a solution for issues arising from any alleged non-observance of the recommendations found in the Guidelines. This isn’t a legal process so NCPs focus on problem solving – they offer good offices and facilitate access to consensual and non-adversarial procedures (ex. conciliation or mediation).

So, everything is fine then, right? Well, not quite. Here’s a statistic for you: multinationals from countries that adhere to the Guidelines have $22.6 trillion invested around the world. The NCPs received 35 new cases in 2014. That means that there was one case for every $645 billion of foreign direct investment in 2014. That’s either a lot of very responsible multinationals or we’re missing something.

The natural conclusion is that not all instances of bad business conduct are being alerted to NCPs. Why? Simply put, NCPs aren’t visible enough. If President Obama can cite the Guidelines in terms of the US anticorruption agenda and yet “NCP” in the UK is better known as an acronym for UK National Car Parks, there’s a mismatch.

Governments need to up the stakes. If they gave more funding to this vital mechanism, NCPs could be more visible and live up to their potential.

G7 governments agree. In their 2015 statement they committed to strengthening “mechanisms for providing access to remedies, including the National Contact Points…” and encouraged the OECD “to promote peer reviews and peer learning on the functioning and performance of NCPs” while ensuring that their own NCPs “are effective and lead by example”.

Here are some of the problems increased funding could help fix:

  • Staffing issues: In 2014 only 15 of the 46 NCPs had an allocated budget and this impacts staffing. Few NCPs have staff solely devoted to the responsibilities of the NCP.
  • Communications deficit: currently only 57% of NCPs have or are working on developing a structured promotional plan.
  • Lack of transparency: NCPs are encouraged to report publicly on their activities but only 40% have put at least 1 annual report online over the past three years. [1]

With more staff, NCPs would be better equipped to handle the complaints they receive. With better communications they can promote Guidelines more widely, and with greater transparency they can build the vital element of trust.

If NCPs had more clout, companies would work even harder to protect and develop their reputations by pre-empting any complaints about the ways they operate. This in turn would contribute to growth that benefits individuals, and communities, as well as global aspirations such as the Sustainable Development Goals.

Countries-adhering-to-OECD-MNE-Guidelines

What’s the OECD doing in all of this? Since the most recent update of the Guidelines in 2011, the OECD has increased its work with NCPs to strengthen the grievance mechanism process to ensure that it delivers results. This includes peer-reviews and targeted communications support. The Chair of the OECD Working Party on Responsible Business Conduct has even launched a competition to find a better name for “NCPs”. If you have an idea, send me your suggestions by 30 September 2015.

As I said at the outset, bad business conduct exists, but we also have NCPs working hard to manage the complaints they receive, despite imperfections. And sometimes the NCPs get their Disney moment, like when the UK NCP provided mediation to help the WWF and Soco talk to each other and avoid drilling in Virunga National Park, a UNESCO world heritage site. Concrete change has to start somewhere, and the NCPs are part of the change for enforcing responsible business conduct happening around us right now.


Useful links

Read the brochure explaining the Guidelines

Find out more about the NCP specific instance process

Access the OECD Database of Specific Instances

[1] These three statistics are taken from the 2014 Annual Report on the Guidelines (OECD publishing, http://dx.doi.org/10.1787/mne-2014-en): Table 1.2, and pages 23 and 26.
Regarding NCP reporting: NCPs are required to report annually to the OECD Investment Committee and are encouraged to make their annual report public.

How to stop businesses behaving badly

"Safe and hygienic"? Rana Plaza, 24 April 2013
“Safe and hygienic”? Rana Plaza, 24 April 2013

Forty of the 100 largest economic entities in the world in 2012 were corporations, not countries, according to business consultants Global Trends. The sheer size of multinational enterprises (MNEs) leads many citizens to worry that they will abuse their economic power and political influence. This is not a new concern, and in fact was one of the reasons the OECD produced its Guidelines for Multinational Enterprises in 1976. The original Guidelines were published as an Annexe to a Declaration on International Investment and Multinational Enterprises. At the time, much of the pressure to create some kind of framework for MNE activities came from the firms themselves.

After the Second World War, government intervention in the economy was direct and widespread, through nationalisations and strategies designed to build strong national champions in key domains. At the same time, today’s highly integrated, globalised economy was starting to emerge, and companies at the forefront of the process wanted reassurances that their investments abroad would be safe and government regulation would not constrain them too much.

There were calls for new rules from other points of view too, for example trade unions, but also from developing countries. The OECD texts actually came two years after the UN’s Charter of Economic Rights and Duties of States.

Given the impenetrability of much official language, then as now, the Guidelines were remarkably clear and straightforward, saying in a few dozen pages what companies and governments could and could not do, and recognising that there are problems, not just “challenges”. Subsequent revisions have respected this approach, for example stating that enterprises should: “Contribute to the effective abolition of child labour”; or “Not discriminate against their employees… on such grounds as race, colour, sex, religion…”.

The big question of course is how useful the Guidelines are in making corporations behave responsibly and resolving conflicts between firms and the communities they operate in. The Guidelines are not legally binding and contain no means of punishing companies that don’t respect them. They operate through National Contact Points which are expected to help resolve issues concerning implementation of the Guidelines. points out, “In the specific instance mechanism, the Guidelines possess a unique feature that provides the means to actively attend to and potentially resolve conflicts between aggrieved communities and companies”.

The Guidelines act as a global benchmark of corporate social responsibility and a strong signal of a government’s attitude towards corporate behaviour. They can also inspire actions that will be pursued through other instances. However, their biggest impacts could be due to reasons the creators of the original text could not have foreseen.

At the time of the 2000 revision, NGO Corporate Watch published a particularly severe criticism of the Guidelines, saying they were little more than a PR handbook. This criticism was echoed elsewhere, since even if a National Contact Point made a strong recommendation, the means to verify its implementation were usually missing, or beyond the means of those bringing the case. That’s still true to some extent, particularly in non-democratic countries, but the sudden, massive expansion of modern means of communication and social media over the past few years has changed things.

This is altering the balance of power between those with something to hide and those seeking to expose it. When the Guidelines were created, few cases got much attention in national let alone international media. In August 2010, when trade unions in France and the USA announced they were going to bring a case under the Guidelines concerning labour practices in Colombia, the news was published in the Internet editions of major newspapers even before the unions had time to update their own websites.

The fact that workers in North America, South America and Europe can mobilise so easily around a common grievance, and see the Guidelines as the best tool for doing so, suggests that an Annexe published nearly 40 years ago can be a useful weapon in the fight to make the 21st century economy fairer. And as the Colombia case shows, the company doesn’t have to be operating in the OECD area, it only has to be registered in a country that has signed up to the Guidelines. That’s why the WWF were able to bring a case against UK oil company Soco under the Guidelines last year to stop them drilling in the Virunga World Heritage site in the DR Congo. Earlier this month, Soco announced it was ending its operations in Virunga.

But despite every big company now boasting about their ethics and efforts, there is still a large gap between what responsibility means in theory and how it is implemented on the ground. At the OECD’s Global Forum on Responsible Business Conduct this week, policy makers, businesses, trade unions, and civil society are debating how to bridge that gap. There are some fairly technical sessions on how the Guidelines work, but most of the Forum will be looking at controversial issues including the clothing industry after the Rana Plaza tragedy in Bangladesh; investing in Myanmar; due diligence in the extractive sector; agricultural supply chains; and responsible business conduct in the financial sector.

Useful links

OECD work on corporate governance

OECD Watch, an “international network of civil society organisations promoting corporate accountability and responsibility”

Getting Rid of “Responsible” from “Responsible Business Conduct”

Global Forum Business Conduct
Click to go to the Forum website

Today’s post is by Bhaskar Chakravorti Senior Associate Dean for International Business & Finance at The Fletcher School, Tufts University, and founding Executive Director of Fletcher’s Institute for Business in the Global Context. He is the author of “The Slow Pace of Fast Change.”

Today’s OECD Global Forum on Responsible Business Conduct comes not a minute too soon, with far too many recent examples of irresponsible – and, in many cases, criminal conduct – in international business. There is reason to worry that such problems will worsen as the center of gravity of the world’s economic activity moves towards the developing nations, since the necessary institutions and the context within which global business operates have not had the time to catch up with the rapid market changes. For this reason, business must take on a disproportionate share of responsibility to compensate for the missing institutions.

Of course, simply putting people together in a room will not resolve all issues. But we can make a start. I am particularly excited about the fact that I have the privilege of moderating a discussion with leaders representing multiple stakeholder groups during the opening plenary. We can help establish a tone for the Forum.

One of the themes I would like to explore is how to make the “responsible” adjective in the term “responsible business conduct” redundant. Responsibility is a rather loaded term. It suggests that decision-makers in the business world want to conduct themselves in one way, while responsible business conduct would require something quite different.

You cannot scold, regulate, punish and nag your way to responsible conduct. It has to become part and parcel of regular business practices. This means that everything that comes under the label of “responsibility” is compatible with the natural incentive systems that drive managerial conduct. I see four developments that might offer clues on how to make responsible conduct compatible with managerial incentives.

Environmental, Social and Governance Investing (ESG) Criteria and Shareholder Activism. To understand what drives business conduct, follow the money. What if money were not to follow you if you deviate from responsible conduct? ESG investing aims to do precisely that. Beginning with the churches in the 1920s that excluded “sin stocks”, ESG compliant portfolio managers screen companies that do not meet certain environmental, social and governance criteria. This can make a difference to the conduct of managers.

In addition, and perhaps even more significantly, such investors also engage in shareholder activism that has a significant impact on executive decisions. But this also requires a larger body of clients who demand such criteria from their portfolio managers.

At least $13.6 trillion of assets under management incorporate ESG concerns into their investment selection and management, according to the Global Sustainable Investment Review 2012, representing 21.8% of the total assets under management in the regions covered.  In addition to religious institutions, there are other major investors, such as state pension funds and corporations, who have an interest in growing this form of investing.

Creating Shared Value. This approach focuses on areas where responsible conduct can help in growing the pie rather than asking managers to consider a zero-sum situation between business interests and those of other stakeholders. Michael Porter of Harvard Business School argues that this can be accomplished by re-conceiving products and markets, reconfiguring value chains, enabling local cluster development. These notions take on a particularly crucial role in the emerging markets where many key institutions are missing or have not kept pace with market growth.

Tailored products and helping to fill gaps in the context can clearly contribute to longer-term value creation despite the near term costs, and provide incentives to managers who take a longer view. The challenge is that most managers have been schooled in Porter’s earlier framework of the Five Forces model, which places a high premium on playing in industries where managers can optimize on their negotiating power. This is based on a static concept of industries and markets and has more of a zero-sum connotation. So I am glad Professor Porter is taking the lead in dismantling a framework – ill-suited for dynamic market contexts – that he had originally created.

Rewards for Optimizing Needs of Multiple Stakeholders. Good managers inherently manage competing demands from several parties and take pride in setting priorities and making trade-offs. Many managers and executives often start out as entrepreneurs primarily motivated by a “purpose” that extends well beyond profit. These inherent traits of many managers tend to remain under-utilized and under-rewarded. Reminding managers of such inherently powerful motivators and reinforcing the mindset can prove to be a powerful incentive to look beyond the demands of shareholders or the analyst on Wall Street – and consider the needs of other stakeholders: employees, consumers, the environment, advocacy groups, the market ecosystem, etc.

It is extremely important to get enough of a community of peers to come together around such a notion to enhance managerial motivation. But most critically, such an initiative has to be led from the very top of the corporate hierarchy and must be consistently applied to the managerial rewards systems affecting decision-makers at every layer. It cannot work if the CEO says one thing in public and then goes back to the line management and simply rewards them for “making their quarterly numbers.”

CEOs can take comfort in the analysis by Raj Sisodia of Babson college that 18 such publicly traded companies out of the 28 he studied outperformed the S&P 500 index by a factor of 10.5 over 1996-2011. Sisodia and Whole Foods’ founder, John Mackey has now started encouraging a community of such peers to gather as “conscious capitalists”.

Legislating CSR. Finally, another way to align managerial incentives with responsible business conduct is by simply requiring it by law. India might become the first country to have mandatory CSR: a Bill in the Parliament requires companies above a certain size to ensure that they spend at least 2% of annual profits on CSR activities. It is hard to tell how productive such a measure might be, but it offers an opportunity for the wider international community to observe and learn from an experiment in taking a blunt instrument approach to the problem.

We are in effect coming to the realization that singling out responsible conduct can set it outside the realm of business-as-usual. Paradoxically, the way to ensure more responsible outcomes, may be to aspire to the day when we do away with the notion of responsible business conduct. For it to be a reality we must create mechanisms and incentives that produce a larger overlap between responsible business conduct and plain, unadorned business conduct.

Useful links

Inaugural Address by Her Excellency Dr. Dipu Moni, Foreign Minister of Bangladesh, at the OECD Global Forum on Responsible Business Conduct (pdf)

OECD Guidelines for Multinational Enterprises

OECD Policy Framework for Investment User’s Toolkit

Price fixing

His transfer price set a record

Queen Elizabeth sent her first email long before you did. I got that from one of those sites giving details of this day in history, according to which she sent it on March 26th 1976 from the Royal Signals and Radar Establishment. (The Ministry of War used real names in those days, whereas now RSRE is part of something that calls itself QinetiQ.) Anyway, I was looking to find some great OECD-related anniversary that I could write about (the first lip reading tournament held in America?) to justify not reporting on the Annual International Meeting on Transfer Pricing under the auspices of the Tax Treaty and Transfer Pricing Global Forum being held here today and tomorrow.

Transfer pricing is important and interesting, it’s just that, as Brian Atwood, chair of the OECD Development Assistance Committee noted in this post the other day, it’s one of those subjects that’s “founded on concepts that are both technically demanding and arduous to understand and implement”. In fact, delegates to the meeting will be working on how to simplify and streamline the process, since even the experts admit that the rules are complex.

So what is transfer pricing and why does it matter?

Around 60% of world trade actually takes place within multinational enterprises, for example the headquarters in the US paying a subsidiary in India to carry out research or manufacture components. This payment is a transfer price. Transfer prices are used to calculate how profits should be allocated among the different parts of the company in different countries, and are used to decide how much tax the MNE pays and to which tax administration.

They’re also useful to the company itself first, because they can avoid being taxed twice if the various countries they are active in have signed agreements with each other on how to tax MNEs. In most cases, these are based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

In many cases, they’re calculated using a technique with the deceptively simple name of “the arm’s-length principle”, although some countries, notably Brazil, use other methods.  The ALP states that operations should be priced by comparing them with similar operations carried out on a commercial basis at market prices, as if both parties were independent entities – at arm’s length from one another.

In practice, this can be extremely difficult, particularly in developing countries. For instance, the developing country subsidiary may be the only firm in its particular line of business, so there’s nobody to compare with. Likewise, transactions involving high value-added services or intangible assets like intellectual property may be unique. And in many countries, publicly available information that the tax authorities can use is limited.

Given that there is no simple method for calculating a transfer price, the final value is the result of a negotiation between the company and the tax authority. In an ideal world, this would be based on equal access to information, a shared objective and a “zero sum game” where being taxed in one jurisdiction is offset by an exemption in another.

Of course it doesn’t work like that. Companies want to pay as little tax as possible and governments need tax revenue. There’s a whole international business whose goal is to help companies “manage the level of taxes paid on a global basis at a competitive level” as PwC put it in their prospectus. These international consultancies have more people working on transfer pricing than any national tax authority. Writing in The Guardian, Prem Sikka of Essex Business School, co-author of a paper on The Dark Side of Transfer Pricing, claims that “Ernst & Young alone employs over 900 professionals to sell transfer pricing schemes. The US tax authorities employ about 500 full-time inspectors to pursue transfer pricing issues and Kenya can only afford between three and five tax investigators for the whole country.”

The meeting at the OECD coincides with an initiative from The International Tax Review to ask tax practitioners to vote for who they think are the leading forces in global transfer pricing development. Apart from PwC, there are NGOs like ActionAid, MNEs like GlaxoSmithKline, and multilateral agencies and international organisations, including the OECD. You can vote here.

Useful links

OECD work on transfer pricing

The OECD Observer has good articles explaining transfer pricing in more detail:

Transfer pricing: keeping it at arm’s length

Transfer pricing: a challenge for developing countries