Emily Nicholson
Partner, Mishcon Purpose
Okay welcome everyone to the latest Digital Session in our Disputes Nightmare scenario series where we look at a broad range of common robust scenarios and provide high level practical advice to address the nightmare. If you would like to ask any questions please just use the chat function at the bottom of your screen. My name is Emily Nicholson, I am a partner in Mishcon’s ESG business, Mishcon Purpose. Today we are looking at what happens if you discover child labour in your supply chain. To help us answer this very thorny question we have Giles Gibbons here who is the Founding Partner of Good Business. Good Business helps clients deliver transformational environmental and social change in a way which builds their business and their brand. Good Business and Mishcon Purpose are great friends and have been working closely together in providing advice on the new ESG Regulations and double materiality assessments. Welcome Giles. We also have Polly Green here who is a Lawyer in Mishcon’s white collar crime and investigations team with experience in high profile investigations including the Serious Fraud Office and the Department of Justice amongst many others. So thank you for joining us. Child labour in supply chains is a major global issue, 152 million children globally are involved in child labour of some description and very much including within complex global supply chains. The hidden nature of child labour in supply chains makes detection difficult but due diligence definitely increases the chances of uncovering these offences and therefore being prepared to deal with them. Obviously such an issue is incredibly relevant to any business, of course there are ethical and moral responsibilities relating to the way profit is made. There is also legal liability which needs thinking about carefully and there are of course the very significant reputational and commercial risks involved with being outed as an employer or user of child labour. Giles actually you’ve got a very good example of the risks of getting this wrong I think haven’t you?
Giles Gibbons
Founding Partner, Good Business
Absolutely, well absolutely yes. Thanks Emily. It actually was sort of almost at the dawn of corporate responsibility and sustainability the CEO and Founder of Nike was called by a journalist. Phil Knight was the, is the Founder of Nike and the journalist accused Phil of having his shoes made by children in a Chinese factory and Phil Knight replied, ‘that can’t be the case because he didn’t own any factories in China’. That was, ‘and it was not his problem’ and that was obviously the wrong answer and they ended up having reputational issues I would say for at least 10-15 years as a consequence of the way in which they have been set up and what response he gave so this is a problem and a very real one and much has changed since that time which we’ll talk about a bit more.
Emily Nicholson
Partner, Mishcon Purpose
Yeah I, yeah we will definitely address that a bit later on. First of all I just wanted to ask Polly, Polly is our investigations lawyer who is really experienced in dealing with these massive issues including where legal liability is a serious consideration. Do you want to just give us a quick practical run through of what a company wants to be doing in the immediate aftermath of this?
Polly Green
Lawyer, Mishcon de Reya
Yeah thanks Emily. So I am going to just talk about the considerations that you will want to make before you start an investigation I’ll briefly go through the steps of an investigation and I’ll round off with a couple of tips. So really the first thing you want to do is act quickly and decisively and engage the right team so it will be your internal and external teams. So internally thinking about your compliance team, people in HR, your legal Counsel if you’ve got any, the board and notifying relevant members of your C suite and then the external team you might want to think about engaging PR or comms consultants, any on the ground local consultants depending on what jurisdictions the allegations are coming from. Your auditors if they can help you through the due diligence process and importantly engaging external lawyers and you want to ensure that your approach is aligned between all of these different teams.
The reason why gaining legal advice so early on in the process is important is because lawyers obviously have experience in conducting investigations and they give it a kind of air of independency and legitimacy if it is going to be scrutinised later on down the line. They will also be able to advise you on your civil and criminal liability but most importantly they will be able to protect documents with the mechanism of legal professional privilege and I’ll come on to that. Other considerations that you want to make before you start your investigation is how to limit damage from unnecessary reputational and commercial risk and this normally comes from miscommunications or misinformation. So you want to have a really good communication strategy and think about what different stakeholders, so for example in this case, your customers, your shareholders, your insurers and your employers and think about what obligations and responsibilities you might have towards these different people and you really want to strike a balance between maintaining transparency in your communications and informing people of what you are doing but also confidentiality and any legal professional privilege obligations that you have. So your PR and comm teams can assist you with doing this.
So I spoke a bit about legal professional privilege and this is the mechanism which protects documents and communications which are made in the process of the investigation from disclosure later down the line to third parties and this is something that your lawyers can help you with and they invoke themselves so it’s important that your investigation is legally lead otherwise if legal professional privilege isn’t adequately maintained you can actually waive it and then potentially that leads to disclosure later down the line. So some tips for maintaining legal professional privilege, make sure your client group is a small number of people. Make sure that you mark any documents as legally professionally privileged. Make sure your lawyers actually explain how privilege works to the people conducting the investigation and try and copy your lawyers in to as many communications as possible. So with these investigations no two of them are going to be the same. There is a brief structure that a lot of investigations will run through but a lot of these steps I am going through might occur concurrently and this is something that your lawyers might be able to advise you on as well. The first thing you’re going to want to think about is gathering evidence, so this is evidence relevant to the allegation and the jurisdiction. So in this case I would be thinking about contracts, employment records, procurement records, audit reports and you want to make sure that you can adequately preserve this evidence throughout the process so the next pointe would be wanting to interview key people so this is people with facts on the ground and knowledge of what might have happened. So in this case it is probably supply chain managers, procurement managers, factory owners, those that might organise your labour arrangements and you will want to have advice from your lawyers on kind of what questions should be asked so that you can determine the key facts and issues here. You will then want to think about analysing this information, trying to figure out whether child labour has actually been uncovered, what the actual facts are, how connected you are as an organisation and whether any policies or local laws might have been breached and this is something that because supply chain liability is quite a nuance topic, your lawyers will again be able to help you with. And this will amalgamate as finding in an investigation report setting out the root course of any issues, what’s happened, any failures and then also next steps to consider. So your remediation strategy and what your future relationship looks like with your suppliers.
Emily Nicholson
Partner, Mishcon Purpose
Sorry Polly, just on that because I think people will be interested in that. In terms of that, what is the position with the supplier and question. Is it a good idea to just cancel the contract and cut all ties or is there a sort of social argument here around like supporting the relationship and working for better together? Giles I don’t know if you have a view on that?
Giles Gibbons
Founding Partner, Good Business
Absolutely I mean I think cancelling contracts is probably the worst thing to do unless it is a consistent breach that, you know, that you can prove over time. In a sense the key thing is that you need to understand what the long term reasons are behind child labour being uncovered and the only way you are going to be able to deal with those is by working with your suppliers in order to try and mediate those and therefore if that supplier can be brought with you then you are more likely to actually reduce child labour than if you cancel it and move on to another supplier that you don’t know. So absolutely we would say try and work with suppliers over time to reduce it rather than a short term solution.
Emily Nicholson
Partner, Mishcon Purpose
And this should be happening quite a lot, I mean people should be talking to their suppliers a lot about these issues because as I understand it, child labour like this is not some, some made up problem. Like child labour is a real issue and is involved in a lot of supply chains. Is that right?
Giles Gibbons
Founding Partner, Good Business
Absolutely, I mean I think the first thing to say here is that every single supply chain has child or forced labour in it in some way and I think it’s really important that companies in their broadest term accept that there is child labour in their supply chain because there is in every supply chain particularly the global ones that most larger companies are involved in and therefore what’s critical is that an organisation and I think this is the way to take the nightmare part out of this scenario, is that if you accept that there is and that your long term commitment is about reducing child labour to zero within your, within your supply chain and that you are doing a number of things to do that, then you can use that content to respond appropriately to the specific investigation or the specific challenge that has been put in front of you. So in terms that thinking about it like that you know, obviously it is critical to try and measure the potential child labour within your supply chain. We could spend half an hour talking just about measurement, it is incredibly difficult to do because you need to do it in partnership with your partner within the suppliers without, you know, there are such things as surprise audits but how surprised are they you know, so there’s lots of really important thinking around how you do continuous measurement within your supply chain, really important to do that. Doing with the sector or with your trade body or with, with partners, again making measurement part of the process of the contract I think is an incredibly important way to sort of integrate it into the discussion that you are having within your supply chain. The second thing is then about once you have those measurements is about engaging and I think the sort of the point is, is that your suppliers are not your enemy in this, they need to be your friends. You need to be helping with them, working with them to try and eradicate child labour from your supply chain but importantly their supply chain as well and actually the majority of child labour issues are not with your immediate supplier, they are with the suppliers that they are using in sort of what’s called level 2 and 3. And if you can find a way then to integrate some of that engagement into the contract over a period of time and provide incentives and sort of longer term support for those suppliers, then that is the way that you start to eradicate child labour within your supply chain. And then I suppose the third point and I think this is really key is, is that you actually have to make changes in order to reduce it you know, the reason why there is child labour is that families don’t have enough money in order to survive within these markets and therefore looking at things like living wage, trying to understand the support that there is for families around factories and around the supply chain is thinking through those things and, and actually proactively acting on them rather than waiting for the accusation to happen. So I suppose the key for me is not seeing this as a sort of ‘oh my God’ you know, ‘what are we going to do about it’ but that you’ve got a long term plan and organisations I suppose that I’ll just quickly talk about an organisation, Tony Chocolonely who I am sure many of you know, an ethical chocolate brand who I think is, is a really good example of where you’d expect them to say, ‘well we don’t have any child labour in our supply chain because we’re doing it ethically’ but that’s not what they do. They say, ‘we do, we accept that there is and we’re going to be very upfront about measuring it, engaging with our farms, the supply chain to eradicate it and look at strategic ways to solve that’. But what they are not trying to do is pretend that the world is perfect out there and I think that many companies could really learn from that. Let’s just get over the, the sort of pretending it doesn’t exist. It is in every supply chain and we need to start with acceptance and then find long term solutions to eradicate it where possible.
Emily Nicholson
Partner, Mishcon Purpose
Thanks Giles and Polly does that help on the investigation side. I mean I imagine if you’ve been having ongoing conversations with your suppliers and you know quite a lot about how your supply chain works and where the potential risks are, are you then in a better position when it comes to these kinds of allegations to be able to investigate quickly and effectively?
Polly Green
Lawyer, Mishcon de Reya
I think yes you have to think as we’ve been discussing about your short term solutions and that would be in the form of an investigation and understanding and then as Giles has been speaking about, your long term solutions and actually eradicating and tackling child labour. So it really depends on, on what you’ve, you’ve figured out and what the allegations are but the more that you are making efforts to mitigate child labour in your supply chain, the easier it will be to investigate and in particular if you’re, if you have a better relationship with your suppliers post investigation it makes the whole process a lot easier later down the line. But I just wanted to kind of echo what Giles was saying in terms of the fact that customers and other stakeholders are now demanding fair labour practices it’s actually a much more commercially sensible decision to be doing this kind of due diligence into your supply chain and also the fact that UK and EU legislation is going to be mandating it from more and more companies but yeah, the effects of, of not doing your due diligence properly has already been seen for example. Shein and the large fashion conglomerate their attempt to list on the New York stock exchange was completely derailed after they found instances of child labour in their supply chain because this is something that you know, investors, regulators, customers, all types of stakeholders now really care about so in the long term it is a really sensible thing to be doing these investigations whether they have been initiated from an external source or whether they are from your own due diligence and I guess what I am trying to say is you need to be proactive about it.
Emily Nicholson
Partner, Mishcon Purpose
Proactive and I think the, the sort of lesson I’m getting from what you and Giles have been saying is there needs to be a level of realism and acceptance there. You need to be pragmatic about this and you need to understand the world in which you’re working, understand your supply chain and the risks and then be as you say, proactively managing those, not putting your head in the sand. Giles you men… oh sorry go ahead.
Giles Gibbons
Founding Partner, Good Business
I just need to add to the Shein example because I think that’s such a good example, one where it is really affecting the business but I think the other thing about Shein is that consumers in particular don’t understand how a t-shirt can cost 50p and therefore the assumption is that the only way that that can be the case is that someone is being adversely affected as a consequence of you buying it for that price. I mean, how can it be so cheap and therefore the sort of when people then uncover or challenge them on child labour it sticks in a sense and so I think it, it really challenges businesses particularly at the value end is to be very proactive, not just about what they are doing but how they are communicating about it and really show and try and help people understand how they are able to deliver what they are at the price without you know, having to be you know, use child labour or forced labour in order to achieve that end and I think that’s where you know, organisations need just to be much more positive and proactive and to show what they are doing and how they’re doing it because otherwise people fill the gap with, with negativity and I think this is a really good example of where that happens.
Emily Nicholson
Partner, Mishcon Purpose
Yeah and I think the Shein example you are exactly right because if you are selling t-shirts for that little money and you’re not accepting at that point that someone is being taken advantage of somewhere in the supply chain and it then comes as a shock to you when these kind of allegations are made then potentially you’ve missed a trick there of looking sensibly at your supply chain throughout and being realistic about commercially what you can and can’t do and how that’s going to affect you reputationally so yeah I think that’s right. You mentioned earlier about trade bodies and potentially involving them in the issue. I would be concerned that you know you might be seen to be passing the buck if you say, ‘oh it’s a, it’s an industry issue I’m talking to my trade body about it’. I mean presumably you need to balance that line quite carefully and be taking responsibility and dealing with your own supply chain but also dealing with the wider issues with your trade body?
Giles Gibbons
Founding Partner, Good Business
Yeah so I think it’s a really good point and I think this is where it sort of, part of this conversation is when you are accused of something specific you need to deal with that in itself and you know investigations is a way of solving that. I think when you are talking about a more longer term management of trying to eradicate child labour I mean there were certain situations where sort of toy manufacturers were all using one or two or three factories, they were all doing their own audits, all slightly different and so there was a sort of continuous audit going on but they weren’t sharing the information and therefore coming together through a trade body that then provides a sort of central place which means that those audits are done and then provided to each of the companies that are contracting with that organisation sort of makes sense from an effective perspective but also from an economic perspective and allows the supplier you know, to sort of be part of it rather than just feeling like they’ve been relentlessly audited from all of these different parties so I think when it is in an ongoing basis, I think it can make sense. The, the challenge that all, as I was talking about earlier, all measurement has is in a sense the more known it is that it’s coming can suppliers then ensure that they won’t find any is, is, are the organisations paying to get a clean audit. Is that part of the problem you know, there are just lots of issues around that whole measurement piece but doing it in collaboration does make sense when you are talking about an ongoing strategy.
Emily Nicholson
Partner, Mishcon Purpose
Thanks Giles. Just to say we are quite close to wrapping up now. We’ve got a couple of questions from the audience. I am just going to do one of them now. If you’ve asked a question and we are not answering on this, we will answer you offline. The question is, how can we integrate mitigation of child labour contractually? Polly is this something you wanted to…
Polly Green
Lawyer, Mishcon de Reya
Yeah there’s a couple of things that you can incorporate into your contracts. For example, auditing and monitoring clauses about when and how often you can audit or how you are going to monitor the way that factories are conducted or who they have supply relationships with. You can try and integrate independent verification standards from third parties such as NGO’s and charities who work to combat child labour. You can explicitly ban it in your contracts as well and also include targets but one thing that we were discussing briefly last time was actually incorporating this idea of having the living wage into your contracts and so thinking about what the local living wage is in the jurisdiction and ensuring that those being paid, those employed by factories and suppliers are being paid, paid that.
Emily Nicholson
Partner, Mishcon Purpose
Thanks Polly. Giles did you have anything to add?
Giles Gibbons
Founding Partner, Good Business
I think the only thing and again this sort of sounds like I am saying the nice stuff and Polly is having to ban things but you know, you know, providing some sort of funding or pot of money for community outreach just to engage, to try and understand what some of the issues are with families within that area and, and is it lack of schools, is it lack of you know, places for children to be looked after whilst factories are open etcetera, the sort of the more you can try and understand what the issues are in and around the supply chain and particularly level 2 and 3 sort of beyond the factory, the better you can then work with them to try and solve those and take any likelihood of child labour out of the factory.
Emily Nicholson
Partner, Mishcon Purpose
Fantastic. Well thank you both so much. Can I push you, can we finish on a top tip? Just a quick, Polly have you got top tips on invesigations?
Polly Green
Lawyer, Mishcon de Reya
My top tip would really be just document everything and have a really good audit trail of what you’ve done. This will probably be useful later down the line if anything is scrutinised and yeah, just balancing your communications between being transparent whilst also maintaining enough confidentiality.
Emily Nicholson
Partner, Mishcon Purpose
Thanks Polly. Giles, any last words?
Giles Gibbons
Founding Partner, Good Business
Yes, I think make sure that you have publicly accepted somewhere in communications or on your website or through your sustainability report that you accept that child labour is a fact of life in supply chains and that you are working to eradicate it so you’ve already got a statement out in the public so that when the accusations come you can use that to support the work that you’ve done in the past.
Emily Nicholson
Partner, Mishcon Purpose
Well that is fantastic thank you both so much and thank you to everyone online for joining us and I personally found that really interesting and thank you to both the guests for all your knowledge and wisdom on this.
Giles Gibbons
Founding Partner, Good Business
Thanks Emily.
Emily Nicholson
Partner, Mishcon Purpose
Thank you all, bye.