Slavery law to protect supply chains backed by big companies – The Australian Financial Review

Andrew "Twiggy" Forrest recently donated $75 million towards removing "modern slavery from human history".

Extortion, blackmail, cash back scams and slavery are happening every day under our noses. It is also happening in the supply chains of businesses, either through labour hire companies, or suppliers.

Under new legislation to be proposed by the federal opposition on Monday, big business will be forced to clamp down on slavery in their supply chains by reporting publicly and annually all efforts to identify and stop slavery.

Slavery and underpayment of wages is a scourge on our nation.

According to the Global Slavery Index, there are more than 45 million slaves, with two thirds in the Asia-Pacific region and 4300 slaves in Australia through human trafficking, forced labour and servitude.

The ALP will announce a plan to implement an Australian Modern Slavery Act, which will be publicly available and include specific reporting requirements. It will also back the appointment of an Anti Slavery Commissioner to combat the growing scourge of slavery around the world.

It follows a decision in the UK in 2015 to introduce a Modern Slavery Act.

It also comes in the middle of an inquiry launched in Australia earlier this year into establishing a modern slavery act. The inquiry, chaired by Liberal senator David Fawcett, attracted 92 submissions.

The Business Council of Australia and the union movement have all thrown their weight behind the proposed new legislation.

Recently mining magnate Andrew Forrest donated $75 million towards removing "modern slavery from human history".

Indeed Wesfarmers lodged a submission to the inquiry which said "the breadth, depth and interconnectedness of our supply chain make it challenging to manage ethical sourcing risks including child labour, forced labour, right to freedom of association and underpayment."

It says it believes the vast majority of its supply chain operates ethically, however we have identified and acted on breaches by some of our suppliers, and it is clear from public reports that other companies have been challenged in this area." It backs a Modern Slavery Act.

Woolworths has also backed new laws that include uniform reporting "specifying the types of information and the level of detail to be disclosed would be helpful for organisations, and for consumers to be able to more readily compare the efforts of different companies".

Slave labour and systemic underpayment of wages is the dark underbelly of our labour market. It is egregious, unethical and undermines our humanity. It is why all sides of politics must come together to introduce legislation sooner rather than later.

The issue of wage fraud was raised in parliament last week in relation to companies including franchise giant Domino's.

"What I would say is that we have a number of lines of inquiry underway at the moment what enforcement outcomes might flow from this will depend on the culpability of all parties involved, and we need to assess Domino's' own possible involvement in what has gone on," Fair Work Ombudsman Natalie James told a Senate hearing last Tuesday.

James' confirmation that the regulator's investigation into wage fraud was ramping up and widening to Domino's head office no doubt sent chills through the pizza giant.

A day later, on May 31, Domino's quietly released an ASX statement that said its own investigations into wage underpayments had been delayed by up to six months. "The process is taking longer than anticipated," the statement said.

The statement was understated but it ignited investor fears. As one investor said:"A six-month delay is significant because it implies there is much more to look at than originally anticipated."

News in the same week that Domino's would buy the remaining 25 per cent of a business in Japan spooked investors, sparked a short selling frenzy and triggered a downgrade by two broking houses.

By the end of the week Domino's was one of the top 10 most shorted stocks and shares had fallen more than 7 per cent, with much of the turnover attributed to short selling.

Domino's is facing a series of headwinds. Concerns range from the extent of fraudulent activity within its franchise network, the success or otherwise of Domino's expansion overseas, particularly in France, the impact of the added cost burdens on franchisees from rising labour and food prices and the revitalisation of chief rival Pizza Hut under new ownership.

Its advertising fund also came under the spotlight in parliament last week following an investigation by the ACCC into breaches of its franchising code in relation to its multimillion-dollar advertising fund that receives contributions from store owners of between 4-6 per cent of sales to pay for advertising and marketing campaigns.

The ACCC's investigation culminated in fines of $18,000 but Greens Senator Lee Rhiannon wasn't convinced that the investigation or penalties were tough enough.

Senator Rhiannon asked ACCC chairman Rod Sims whether the investigation extended to some of the expenses being booked through the advertising fund.

She questioned whether some of the expenses were "legitimate" advertising fund expenses. "They include mystery shopping; chief executive Don Meij's personal website; legal fees regarding protecting their trademarks; and seminars at head office. Have you looked into this?"

Sims told her he didn't believe the investigation included an examination of the expenses but said: "I repeat again: Domino's is certainly on notice in terms of its behaviour in relation to the [franchising] code."

The various investigations into Domino's and political interest in the company has added to investor nervousness.

So too was the decision by Bain Capital to put its 25 per cent stake in a Japanese operator back to Domino's by August 28. The deal is expected to cost Domino's around $50 million but not everyone is convinced that Japan will be the growth story Domino's projects.

Morgans, a strong supporter of the company, has tempered its bullishness in the stock with a downgrade to "hold" from "add" and changed its target price range from $88.38 down to $65.62 after lowering its forecasts in key divisions.

Separately, Deutsche Bank, in its report "Pizza Profits should be shared," downgraded its recommendation to "sell".

At the heart of Deutsche bank analyst Michael Simotas' report is an analysis of the relationship between franchisees and Domino's and a comparison with the UK and the US.

Simotas contends that Domino's overall margins expanded around 50 per cent over the past five years at the expense of franchisees. "This has left Australian franchisees with inferior profits, margins and returns relative to their US and UK peers," he said.

It said Domino's own guidance implies it will need to take even more of the profit pool. "We don't think this is sustainable, and with around 90 per cent of rollout predicated on store splits, we see risk to store and/or margin targets."

Domino's argues that there is no correlation between profitability and franchisees underpaying workers. It says its business model is fair and franchisees do well out of it.

But until it gives more details of how many stores lose money, how many break even, how many make less than $100,000 EBITDA a year and so on, more reports and speculation like this one will remain.

Until the wage fraud scandal emerged earlier this year, Domino's has had a dream run. Its share price hit a record high of $80 on August 18, 2016 and short selling was minimal.

Fast forward to today and Domino's is one of the top 10 most shorted stocks on the ASX. According to shortman.com.au almost 12 per cent of shares in the company have now been short sold.

Short sellers are betting that Domino's share price will fall. They borrow stock from stock lenders in the hope that they will replace it at a later date when the shares fall lower.

Domino's releases its full-year results in August. It promises to be an interesting conference call, with investors and franchisees listening carefully to their answers.

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Slavery law to protect supply chains backed by big companies - The Australian Financial Review