Ardent Partners’ analyst team attended the 100th annual Institute for Supply Management (ISM) conference in Phoenix a couple of weeks ago. Risk, in many of its forms, was a regular topic throughout the event – from Dr. Robert Gates’ opening keynote on global instability, to discussions about conflict minerals compliance, food risk, contract risk, and sustainability issues over the course of the event. As students of risk (new ones seem to pop up every year), we sat in on many of these presentations and thought that an interesting way to highlight them would be to present a series of discussions on the speakers and how each contributed to the conversation about global supply risk.

Today’s discussion is on the state of conflict minerals compliance, yesterday, today, and tomorrow. Here’s how enterprises fared last year with respect to compliance, and how current and future regulatory changes at home and abroad will impact them.

Conflict Minerals Compliance: Yesterday, Today, and Tomorrow

Following the keynote address on Sunday, Kent Sharp, Quality and Governmental Systems Compliance Officer, Rolls-Royce North America, delivered a presentation on the state of conflict minerals regulation and compliance, and what Chief Procurement Officers (CPOs) and other supply management leaders need to consider with respect to their research and reporting requirements in 2015 and beyond. [Click here for our past coverage of the Conflict Mineral Provision (Section 1502) of the 2010 Wall Street Reform and Consumer Protection Act, commonly known as the Dodd-Frank Act].

As a refresher, this provision of the Act, passed in 2010, requires all publicly-traded companies in the U.S. – large and small – to investigate their supply chains and determine whether or not they source tantalum, tin, tungsten, or gold (the so-called 3TG minerals) from the Democratic Republic of Congo and nine surrounding countries (i.e., covered countries). From there, such companies must report their findings to the SEC. This year’s deadline is June 1. Affected enterprises do not have to change buying or sourcing behaviors – they simply have to review and disclose them.

The law impacts roughly 6,000 enterprises of all sizes in the U.S. – mostly from the electronics and manufacturing industries. Small businesses received an extra two years to report their findings (“small business” is defined by the SEC – not the Small Business Association – as a business with under $75 million in public equity float; or under $50 million if it is unknown).

Last year, of the roughly 6,000 enterprises covered under the Act, 4700 did not file a report to the SEC. Of the roughly 1300 that did, 982 enterprises included a conflict minerals disclosure, two thirds did not include even a basic description of the extent to which their products contain 3TG minerals because thousands of products were potentially affected. Twenty-eight percent (28%) had a basic description, while only 9% of enterprises included product categories.

Consumer electronics companies claimed varying levels of compliance, Sharp said. However, even the largest manufacturing companies may never confirm with absolute clarity the origin of minerals in their supply chains and products.

What’s Past is Prologue

Perhaps the most important part of Sharp’s presentation covered the past, present, and future changes to the regulation and what they will mean for enterprises of all sizes, in the U.S. and abroad.

  • Last year, a U.S. Appellate Court ruled that covered enterprises do not have to publicly disclose their findings (other than to the SEC and shareholders), that this “compelled speech” was unconstitutional, but otherwise upheld the law (see National Association of Manufacturers et al v. SEC).
  • Also, the third determination – country of origin undetermined – will not be accepted in 2015, prompting a change to the SEC declaration form.
  • Lastly, enterprises will need to have their due diligence program and results audited by an independent (third-party) firm, such as an accounting or consulting firm.

Sharp went on to say that he believes that the U.S. Congress is either unwilling or unlikely to overturn Dodd-Frank and with it the Conflict Minerals Provision. Meanwhile, lawsuits challenging the constitutionality of the law “are not a guarantee of relief,” as evidenced by the fact that a U.S. Appellate court ultimately upheld the law when it was challenged. Also, the European Union (EU) is in the process of passing its own form of conflict minerals regulation (more on that later), which will likely require at least some U.S.-based enterprises to gain some visibility into their supply chains for conflict minerals.

Lastly, there is a growing potential for negative press and reputational risk for enterprises on the issue of conflict minerals. Non-governmental organizations (NGOs) and greater consumer awareness have already turned it into a matter of conscience and corporate social responsibility (CSR) for enterprises, particularly those in the electronics and manufacturing industries. Some NGOs, such as Enough and Global Witness, are also requesting compliance data from companies.

But back to the EU. Currently, there is draft legislation before the EU that would implement a sweeping, but voluntary provision for enterprises to investigate and report on whether they source conflict minerals. Like Dodd-Frank, the draft EU bill would cover 3TG minerals from the DRC and nine adjacent countries, including mines, smelters, and refiners. But it would expand coverage to other conflict zones, such as Ukraine, Syria, Iraq, Libya, Afghanistan, and any other potential conflict zone. Compliance would involve enterprises conducting a three-year assessment period. Passage of the measure was supposed to have happened in 2014 after EU members were to have issued a list of responsible smelters, but continues to be debated and amended.

Why “Uncovered” Enterprises Should Consider Complying

Although the Conflict Minerals Provision is unpopular among many enterprises in the U.S. (it is costly and time consuming), it appears to be here to stay, said Sharp. Also, even if enterprises are not covered by SEC but they are global, it does not make sense for them to ignore the issue as the EU, Canada, and other nations are getting engaged on it, as well as other enterprises that are covered by it. Even if one company does not have a legal responsibility to report, its trading partners may, and would appreciate reciprocity on the issue, said Sharp.

Just as more consumers are seeking out brands and products that align with their social conscience, B2B partners may have to follow suit out of sheer necessity. Sourcing from a supplier that has declared themselves conflict minerals free can save an enterprise significant time and money rather than sourcing from a supplier with murky ties to smelters, mines, and middlemen. It’s not just good for humanity, it’s good for the bottom line.

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