Directors must exercise reasonable care, skill and diligence, and uphold ethical standards in the organisation they direct. Ensuring that the organisation’s managers are behaving ethically and sustainably is not only the right and legal thing to do, it is part of your responsibilities as a director.
You must ensure your organisation’s work practices create a fair environment and make it harder for others to get away with unfair work practices. Unethical and unsustainable practices can hurt your reputation as a director, and impact on investor and consumer confidence in your organisation and brand.
If your organisation has a reputation as an ethical and sustainable employer, it will be more attractive to talented workers. For example, offering the living wage, or more, will help your organisation stand out in the job market and attract more skilled and talented workers.
What you can do
One of the most common ways for an organisation to show sustainable value in relation to fair treatment of workers, is through Corporate Social Responsibility (CSR) or Sustainability reporting. This can be in the form of environmental, social and governance (ESG) reporting. There is no standardised approach to ESG reporting but there are a number of certifications that apply strong reporting standards around the impacts of an entity, such as:
- ISO 26000 (external link)
- Global Reporting Initiative (GRI) (external link) (you may need to create a free account to browse this site)
- Integrated Reporting (external link)
- B-Corp Certification (external link)
However, the necessary sustainability reporting and proof requirements to obtain any of these certifications can be quite substantial and time consuming, so this may not be the best place to start if your organisation does not currently produce any such reporting.
Regardless, if it is currently mandatory for your organisation to produce a sustainability report or a modern slavery statement, it is in the best interests of your organisation to consider whether the work practices of your business are legal, ethical and sustainable in respect of fair treatment of workers.
You can start by checking if your organisation has ethical and sustainable work practices by examining what your vision, mission and values statements say about how your organisation values and treats workers.
These statements set the scene for everything that happens in your organisation, so it is important that they are very clear.
You can then follow up by asking these 5 questions. If you don’t already know the answers, you should ask the organisation’s management team or the Human Resources department, if you have one.
Questions to ask
Do we have a code of conduct or policy outlining our expectations of how workers should be treated (including human and labour rights, and compliance with employment law and standards)?
Answer: The answer should include details of your organisation’s code or policy about how workers are treated. Ask for the most recent examples of these documents.
Find out what could be included in a code of conduct policy:
Does everyone in our organisation know our code of conduct? Have we shared our policy with important contacts, like suppliers and partners?
Answer: The answer should include who you have told, when and how (including where they can find the information), and how you share policies with new workers and suppliers. There are also some simple ways to educate your managers and workers.
Do we regularly report on the social area of sustainability including fair treatment of workers?
Answer: The response should explain what you report, when and how. Ask for the most recent example of the report.
Which areas in our operations and supply chain are most at risk of unethical and unsustainable work practices, such as breaching employment standards for New Zealand employees?
Answer: The answer should include information that you have identified in a map of your supply chain or in a risk table. (A risk table identifies how likely risks are with how severe their consequences could be. By clarifying the risk levels, risk tables help you make better decisions.)
See some examples of risk factors to consider:
Do we have any systems and processes in place to identify and mitigate non-compliance?
The response should identify and manage risk, and how you regularly review systems and processes. Compare to the end-to-end assurance systems in order to identify potential gaps in the systems and processes.
End-to-end assurance systems and processes
The answers to these questions should be readily available from the organisation’s management team. You could monitor these by requiring regular reporting to the Board directly and/or in the Annual Report.
You should also consider where the organisation wants to position itself as an attractive organisation to work for and one able to hire and keep new talented staff. For example, by giving workers more than minimum standards mandated by law, (for example, living wage and implementing good employer/best practice elements).
There is a suite of resources available, which provide steps that can be taken to identify and minimise labour rights risks and issues of non-compliance in your business.
Why you should start now
Increasing stakeholder expectations
Increasingly organisations are expected by shareholders and society to create long-term sustainable value. This means that reporting on more than just financial performance is becoming essential for all businesses. Every action that your business undertakes has consequences and produces an impact.
In addition to financial performance, investors and lenders increasingly want to know that organisations are considering their social impact. This includes identifying risks and opportunities, and implementing strategies to mitigate those risks. These considerations are an indication of the long-term resilience and viability of your business, and affect its investing and lending decisions.
Customers, employees and potential employees also have a growing interest in the social impact of the brands they choose to engage with, either through employment opportunities or purchasing power. A director’s actions can be directly linked to the long-term sustainable value of a business and its brand’s reputation. Negative actions can influence people’s perception of your brand and whether they will choose to be associated with it or not.
The Global Director Survey Report 2018 by the Global Network of Directors supported this view, reporting that “Social issues and risks are increasingly on boards’ agendas. Boards are giving increasing emphasis to environmental and social considerations, non-financial information and their relationship to long-term performance and value-creation. Underpinning this is understanding and responding to the evolving expectations of investors, consumers, staff and other stakeholders.”
In terms of key insights, the report stated, “Ethical behaviour in organisations had the highest relevance at 72%.”
"Unethical behaviour ultimately damages organisations and their personnel. Lost customers, employees and sales, and the loss of a hard-won reputation can take years to rebuild. Some organisations may never recover. Conversely, running a company with consistent integrity and high ethical values is simply good business.”
In addition, section 137 of the Companies Act outlines that:
“A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation,—
(a) the nature of the company; and
(b) the nature of the decision; and
(c) the position of the director and the nature of the responsibilities undertaken by him or her.”
In conjunction with the Institute of Directors, the Financial Markets Authority has published information on the legal requirements, ethical considerations and best practice areas for directors to consider, to be effective in their role.
The Australian Modern Slavery Act and New Zealand organisations
If your organisation supplies to a large Australian business, or has operations in Australia with revenues over $100 million AUD, then you may be affected by the Australian Modern Slavery Act (2018) (the Act) reporting requirement.
The Act requires large organisations operating in Australia to publish annual Modern Slavery Statements (statements) explaining what the business is doing to identify, assess and address the risks of modern slavery practices in their global and domestic operations and supply chain. If your entity is required by the Act to report, you or another director on the board will need to sign the anti-modern slavery statement as a responsible member of the company.
The reporting requirement is focused on large businesses and other entities that have the capacity and leverage to drive change throughout their supply chains. So while your entity may not be required by the Act to report, if your business supplies to an organisation that is required to report, that organisation will require you to make a similar declaration.
One way to prepare for this is by developing a set of frequently asked questions (FAQs) and responses. Mekong Club has guidance on developing FAQs, including a set of sample questions.
Under Section 142W of the Employment Relations Act 2000, you can be personally liable for company breaches of employment standards. Individuals, including business directors, senior managers and legal or business advisors can also be held personally responsible, if they are connected to a business that breaches minimum employment standards.
Since 2016 the Labour Inspectorate has taken a number of cases to the Employment Relations Authority (ERA) or the Employment Court that resulted in company directors being found personally liable for employment law breaches and an having to pay fines, penalties and other costs as an individual.