Unions and super funds up ante on human rights abuses

A report into human rights risks in the operations and supply chains of 23 listed companies in the extractives, agricultural and medical equipment sectors rates BHP Billiton as the highest scoring company in Australia and globally, with agriculture performing poorly.

BHP received a score of 77 out of 100, with Newcrest and Rio Tinto ranking second with a score of 66.6 per cent, compared with a sector average of 36.6 per cent.

Companies including Wesfarmers and Woolworths scored 19.4 per cent and 16.6 per cent respectively, while Graincorp 5.6 per cent and chose not to participate in the engagement process.

It is worth noting that for the purposes of this report Wesfarmers and Woolworths were classified in the "agricultural industry" sector when they are far more diverse than that and don't directly own agricultural land. Both have done a lot to improve ethical sourcing in the apparel industry, which isn't accounted for in the methodology and Wesfarmers is a member of the United Nations Global Compact.

The report, released by the Australasian Centre for Corporate Responsibility (ACCR), was timed to coincide with annual general meetings season at a time when human rights issues are a hot topic politically and among investors.

It is part of a bigger picture of shareholder activism sweeping the market that will ramp up this AGM season as retail and super funds increasingly use their muscle to pressure companies to be more ethical.

Controversially, ACCR has teamed up with a union - the National Union of Workers - and the $5.6 billion super fund LUCRF Super - to file shareholder resolutions ahead of their AGMs next month.

Woolworths agreed to file the resolutions and leave it to a shareholder vote, while Wesfarmers rejected them.

The first resolution calls for an amendment to the Wesfarmers and Woolworths constitutions to allow member resolutions at AGMs. It will be interesting to see if institutional investors have much appetite for this as they see themselves as already having good access to boards, and companies would argue that such an amendment could open the floodgates to anyone filing a resolution, which could become messy and time-consuming.

The second resolution is on human rights as it applies to the retailer's operations and supply chains. It requests disclosure of a number of human rights details, including the nature and extent of consultation with relevant stakeholders (including trade unions) in connection with the human rights assessments and commit to devoting resources to examining supply chains.

Wesfarmers and Woolworths would argue they are already doing a lot in this area. They would also have a valid argument that their businesses are far more diverse than selling fruit and vegetables.

The success or otherwise of the resolutions will largely depend on the proxy advisers and groups like the Australian Council of Superannuation Investors (ACSI), which engages with listed companies on environmental, social and governance issues on behalf of its 37 members which collectively manage more than $1.6 trillion in assets.

According to ACSI's Ed John, labour and human rights in retail supply chains has been a major focus of ACSI's research and engagement with Australian company boards.

"Reputational risk and the potential for supply chain disruption extends beyond direct employees or direct contracts. We look for companies to go well beyond 'tick the box' legal compliance," he said.

Hot issues

Human rights, including slavery and wage fraud, is a hot issue. Some funds have been divesting shares, some are excluding shares from funds, while others are working with boards to try and prosecute change.

NUW wants to work with boards. On October 5, the NUW national secretary Tim Kennedy wrote to Wesfarmers chairman Michael Chaney saying "As you are aware the NUW is a co-filer of the resolutions with the Australasian Centre for Corporate Responsibility regarding the assessment, reporting and remediation of adverse human rights-related risks throughout the Wesfarmers operations and supply chain."

Kennedy said he was notified by Wesfarmers on September 19 that the resolutions would not be listed on the basis it didn't qualify, based on the definition of a "member". He said this called into question the voting status of shares held by Wesfarmers' employees.

He requested relevant Wesfarmers representatives meet with the NUW and the ACCR to discuss Wesfarmers' voluntary adoption of the human rights due diligence and disclosure standards contained in the resolutions filed.

A spokesman for Wesfarmers said for the notice to be valid under the Corporations Act it must be given by 100 "members" entitled to vote at a general meeting of Wesfarmers. He said ACCR failed to meet the threshold. The proposed resolutions could not therefore be included in the Wesfarmers 2017 Notice of Annual General Meeting under section 249.

He said Wesfarmers has various employee share plans and those shares were held initially in a trust arrangement until they are free from restriction. At that point, employees become entitled to own them directly and can transfer them to their own names when they will be a "member". "It is wrong to say that employees do not have voting rights while the shares are in trust, as the employee has the right to direct the trustee how to vote on their behalf on any resolutions at general meetings," he said.

It is a technical issue, which is yet to play out.

But what made the letter all the more interesting is Kennedy is also chairman of LUCRF Super, which represents more than 162,000 members and more than 20,000 participating employers and holds shares in Woolworths and Wesfarmers.

There is concern in some quarters that this is a conflict of interest given the NUW's interest in exposing exploited migrant fruit picking workers, some of whom are contracted by labour hire firms and who have been told not to join unions or they would be denied future employment.

But Kennedy argues there is no conflict because as a super trustee it is incumbent on him and any trustee to make sure companies are doing the right thing because wrongdoing can result in reputational damage and investment risk, as evidenced by the wage fraud scandals at Domino's and 7-Eleven.

It isn't the first time unions and super funds have started to take an interest in the behaviour of companies. A few months ago First Super, which is co-chaired by Michael O'Connor, who is also the national secretary of the CFMEU, put the private equity industry on notice with a decision to review its $100 million private equity portfolio over a series of wage fraud concerns.

Human rights is a big agenda item for investors, companies and politicians. In terms of ACCR's report, the methodology was developed by the Corporate Human Rights Benchmark, which evaluates large, listed Australian companies against internationally accepted human rights indicators as well as other relevant norms and initiatives, depending on the sector.

Some companies like BHP scored well, others poorly. Like all methodologies, this one isn't perfect.

It will make for an interesting AGM season, which will see far more activism and the likely result of more transparency and accountability from companies, which can't be a bad thing.

The story Unions and super funds up ante on human rights abuses first appeared on The Sydney Morning Herald.

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