In a very short period of time the electronics industry has moved from grudging acceptance of the so-called U.S. “conflict minerals” rule to a leadership position in compliance, research concludes. Moreover, companies that have embraced the measure to boycott materials mined in certain regions of the world are driving positive change throughout the supply chain.
A portion of the Dodd-Frank Act of 2010 requires that publicly traded companies disclose the presence of minerals mined from the Democratic Republic of Congo (DRC) and several other regions that are embroiled in civil war. Rebel forces that control mines yielding tin, tantalum, tungsten and gold (3TG) are exploiting mine workers and funding terror campaigns through mineral sales. These materials are used extensively in electronics manufacturing.
Quite a number of electronics companies aren’t simply focused on compliance, according to Dr. Chris Bayer of Development International, who conducted the Conflict Mineral Benchmarking Study RY2015. “They ‘own’ the due diligence process. These companies want to know for themselves if they are possibly funding armed groups. They not only want to know themselves but they feel they owe it to their employees and their shareholders.” In short, many public companies are embracing the spirit of Dodd-Frank in an effort to “do the right thing,” and for them conflict mineral due diligence has become a standard operating procedure (SOP).
The top 13 compliance leaders – companies that met all compliance criteria outlined by the U.S. Securities and Exchange Commission (SEC) and the Organization for Economic Co-operation and Development’s (OECD) – were Qualcomm, Intel, MSC Industrial Direct, China Mobile, Curtiss Wright, Chicago Bridge Iron, Hughes Satellite Systems, Internet Initiative Japan, Aptargroup, Key Technology, Hasbro, Cree and Nvidia.
High scores for component makers
Overall, component companies did particularly well, according to Assent Compliance Inc. Program Manager Jonathan Nauth. Assent, which sat on the advisory board of the study, provides compliance software and services to business and industry.
“This is not just an opinion—there is data that reflects overall these companies are passionate about conflict mineral compliance. Many of these companies have been at the ground level—even involved in documentaries about the exploitation of mine workers—they care about this program,” Nauth said. Among the top 25 compliance leaders of 2015 –with combined SEC/OECD scores above 96 percent — were component makers Qualcomm, Intel, Cree, Nvidia, Microchip and QuickLogic.
There are, of course, business advantages: companies that embrace corporate social responsibility (CSR) efforts are viewed favorably by conscientious consumers and investors. Research also finds that millennials, who are becoming an economic force, want to work for and buy from socially-conscious businesses. And overall, purchasing decisions—whether they are b2b or b2c—are increasingly based on more than just an item’s price and availability.
There are also positive risk-management aspects to compliance, Bayer said. Although there are no punitive damages attached to SEC non-compliance at this time, companies are effectively staking their reputations on being DRC conflict-free. “These companies can say ‘we are effectively managing our risk and we can be recognized by our stakeholders that we are doing our part.’ These companies are applying sensible policies [toward CSR] to make sure they are not doing more harm than good.”
The 2015 study not only measured compliance to the U.S. SEC requirements but also conformity to the OECD 5-step Due Diligence framework. The OECD is an international organization that counts the U.S. among its members. The research found:
Among companies filing SEC disclosure (SD) or conflict minerals reports (CMR):
- 10 percent of Form SD & CMR filers were found to be 100 percent SEC Rule compliant
- 67 percent were at or above the 75 percent compliance threshold
- In all, SD & CMR filers averaged a compliance score of 79 percent, a generally high degree of compliance
- Country of origin data reporting improved in 2 percent of CMR filers, and the smelter or refiner (SOR) data reporting improved by 15 percent among CMR filers — progress in keeping with the continuous improvement mantra
Among companies reporting OECD DD guidance:
- 13 companies earned a perfect score on both SEC compliance and OECD conformance — the ultimate winners
- 116 companies – 11.5 percent of all CMR filers – earned at least a 75 percent on both scores
Manufacturing companies represented 77 percent of the 1,216 companies that filed compliance documentation in 2015 and were the largest segment in terms of revenue. Semiconductor and related device businesses made up the biggest portion of manufacturers. Among manufacturing companies filing SEC compliance documents, 89.1 percent of computer and communications companies were compliant and 83.6 percent of semiconductor and related device manufacturers were. Other industries, including media, automotive, broadcast and medical were all above 78 percent compliance.
The 2015 report paid special attention to gaps in the reporting in an effort to help companies improve compliance. Benchmarking studies have been done for three consecutive years since Dodd-Frank took effect; 2015 was the second consecutive year Development International conducted the study. Some companies still misunderstand the basic guidelines and filing procedures, the research found. And, although many companies declared themselves conflict-minerals free, not all companies verified that status through an independent audit (or IPSA).
Regarding the SEC rule:
- 12 companies that stated a product containing 3TG (or suggested their company, due to a misunderstanding) was “DRC conflict free” did not furnish an IPSA, thus stand in contravention of the SEC Statement of April 29, 2014
- The majority of all CMR filers (62 percent) reported, either explicitly or implicitly, that their products were “DRC conflict undeterminable”
- With respect to the CMR filers, the largest shortcoming – with 65 percent of filers not reporting these data – concerned the origin of tin, tantalum and tungsten and gold (3TG), followed by the listing of SOR facilities, data which 43 percent of filers did not report
- There was a basic misunderstanding between the terms “DRC conflict free” — which would require an IPSA — and “verified conflict free” (e.g. by the CFSI) among some filers
Regarding the OECD DD Guidance:
- The findings show that while some filers reported applying the OECD due diligence guidance this year, others did not
- CMR filers reported the most due diligence actions relevant to OECD Step 1
- In all, 13 percent of SEC CMR filers had an OECD conformance score of 75 percent or higher
Assent Compliance also noted data it deemed as “interesting:”
- There was a high reliance on the Conflict-Free Sourcing Initiative (CFSI) reporting template and SOR assurance/verification
- There were possible violations of U.S. trade embargo revealed
- There are 12 companies that claim they are “DRC conflict free” — but don’t have an IPSA
Among companies that filed as “DRC conflict free” and that filed an IPSA are AMD, Arrow Electronics, AVX, Canon, China Mobile, Intel, Kemet, Philips NV, M/A-COM, Siliconware Precision, Skyworks, Smart Technologies and Texas Instruments.
Impact of legal challenges and the EU
Perhaps the most significant finding of the study was that many companies have accepted that conflict minerals compliance is now standard operating procedure (SOP) for public companies. Moreover, the EU will be joining the U.S. in its efforts and is likely to exceed the parameters of the U.S. rule.
Bayer and others maintain that even in the face of a U.S. Appeals Court ruling that Dodd-Frank requirements violate the First Amendment right of freedom of speech, the bulk of the SEC rule still stands. “[The suit] did complicate matters,” said Bayer, “but it did not comprehensively undermine the rule. There are a series of things a company must do to demonstrate compliance. The ruling did do away with the requirement that companies publicly disclose the conflict status of the 3TG in their necessary products. But all other elements of the SEC rule are in effect.” Moreover, the EU will be joining the U.S. in its efforts to hold companies accountable on conflict minerals. “I think the EU [proposal] is a confirmation that this isn’t going anywhere,” said Bayer. “The sense is that conflict minerals due diligence is here to stay.”
The benchmarking studies also establish that it is possible to be compliant with the conflict minerals rule, Bayer argues, and there is very little reason why companies should not comply. “The technology is there – there are sophisticated IT and logistics systems that can compile and track anything. Companies are putting their cards on the table with their SEC filings. And the best-in-class performers among them need to be recognized. In essence these companies are saying they can’t turn a blind eye to these armed groups. Now there is more than anecdotal evidence that establishes the link [of rebel activities] to 3TG. The problem is real, and it is time to achieve critical momentum.”
In fact, the study notes that compliance leaders can positively influence their supply chains. Based on a company’s purchasing power and its due diligence performance, the study found Apple, General Motors, Honda Motor, HP, China Mobile, Cardinal Health and Microsoft exercised the most influence in 2015.
“Once issuers have performed due diligence on their supply chain and ensured that they are only consuming clean 3TG while not boycotting the region, at that point you’re done,” Bayer stated. “That is all a reasonable stakeholder can ask them to do, and anything more than that is above and beyond.”