Grades are in on the first round of conflict minerals reports, and many companies are getting an incomplete.
After months of controversy and legal challenges, the June 2 deadline for public companies to file conflict minerals reports with the Securities and Exchange Commission has come and gone, and the early word is that many companies didn’t include a lot of detail in their reports—that is, if they filed them at all.
Public companies in the United States that manufacture products containing tin, tantalum, tungsten, and gold from the Democratic Republic of the Congo and surrounding areas were required to file their first Conflict Mineral reports with the SEC, detailing the due diligence taken to check their supply chains and assess risk.
Among the biggest surprises from the inaugural filings is how few companies made them—just one-sixth of the number initially expected. Jim Low, a partner at audit and advisory firm KPMG, says he is surprised by how few companies made the initial filing. “When the SEC finalized the rule, in their cost benefit analysis, they indicated that 6,000 registrants would have to do something,” Low says. “That subsequently was revised by the State Department, down to around 4,700 issuers, based on its understanding of the usage of the minerals.” Only about 1,200 companies actually filed the new Form SD that contains the conflict minerals report, says Low, about 3,500 fewer companies than expected.
“I’m just shocked that only 1,200 companies filed something,” Low says. “It is negligence if companies were just adamant that they didn’t want to do this because it was something they didn’t politically agree with as part of Dodd-Frank.”
Less Expensive Than Thought
The SEC, in its cost-benefit analysis for the rule, estimated that the cost to companies could be as much as $4 billion in the first year. But new research by Claigan Environmental, a compliance consultant, estimates that the final cost will be about 75 percent less than expected, roughly $390 million.
Several factors came into play, says Bruce Calder, Claigan’s general manager. Mostly, however, it was because fewer companies actually filed than expected and many of those that did put less effort into the process that they should have, says Calder. “The ones that did the best work were more efficient and might not have spent as much money as the others,” he adds. “They were just more focused.”
The view that many of the companies that did file didn’t put enough effort into the exercise and detail into the reports is a common impression among those examining the first reports.
Last month, as the first conflict minerals filings were trickling in, activists were alarmed by what they saw. A statement issued by Global Witness, a key proponent of the rule, described the first batch of disclosures as “disappointing” and lacking substance.
In a statement, the group expressed concern that the reports didn’t contain adequate detail. “While some firms have made strong submissions, most reports filed to date don’t include enough information to show that companies are doing credible checks on their supply chains,” said Sophia Pickles, a campaigner for Global Witness. “The failure by some companies to disclose meaningful information suggests they have not taken the necessary steps to find out what is really going on along their supply chains.”
Specific concerns flagged by the group included:
Some companies published minimal, if any, information on their efforts to determine which countries the minerals in their products are sourced from.
The majority of companies have not demonstrated how they assess their suppliers’ due diligence practices.
The majority of companies failed to demonstrate the steps they have taken to identify and mitigate the risks in their supply chain and very few obtained an audit of their Conflict Minerals Report, in particular its section on due diligence taken.
Going the Easy Route
While most companies were expected to take advantage of an SEC allowance to declare that their conflict minerals status was “undeterminable,” many took advantage of more recent guidance, the result of ongoing legal uncertainty, and decided not to attach any label at all. Nevertheless, among those who did use the “undeterminable” assessment, “there’s a huge difference between those who did the work and those who didn’t,” Calder said. For many, it was merely “a cop out,” he says.
You’ve almost got to give companies a pass in year one. The bigger question is how does the process improve over time?
Jim Low, Partner, KPMG
In Calder’s review of filings, he sees plenty of sloppy wok, including a poor job collecting and scrutinizing supplier data. “Ninety percent of companies did not even spend the effort of taking one of those companies, putting it into Google, and seeing if they source from the conflict region,” he says. “If they just searched, they would have had all the answers they needed.”
CONFLICT MINERALS DISCLOSURES
The following are a selection of conflict minerals filings by major companies.
IntelHamilton Beach (Nacco)HPSmart TechnologiesNavistarToyotaSmith & NephewAppleNiemen MarcusSignet JewelersJDS UniphaseMotorolaMedtronicFordAnheuser-BuschEli LillyBakerHughes
Many companies were content to let tech giants do the heavy lifting, Calder asserts. “It really wasn’t the entire industry working on this,” he says. “It was Apple, Intel, BlackBerry, and H-P doing all the work on the due diligence,” he says. “Nobody else is looking, so the pressure on the smelters is actually quite low.”
One reason that so many filings were lacking could trace to in-house debates. “The person doing the work may have wanted to do certain things, but the people on the legal side said ‘don’t look,’” Calder says. “If they looked, they had to disclose what they found, so they felt it was better not to look. They were all trying just to be mid-pack. They all wanted a gentleman’s C.”
Lots of Mistakes
Plenty of mistakes were also made, says KPMG’s Low. “Some companies just blatantly did it wrong, they declared themselves DRC conflict free, but didn’t have an audit,” he says.
Because the filings and Conflict Minerals Reports are subject to liability under the securities laws, many were not written with investors in mind,” Anderson says.
The number of supplier responses caught Anderson’s attention. “One report said they had a 100 percent response rate, but still had no idea where the minerals were coming from,” she says. “Presumably everybody responded, but they knew nothing.”
“A few people had very high levels of responses, others were in between, 30-60 percent, and some didn’t even say how many responded,” Anderson adds. “I think some of the smaller companies had lower response rates because they have fewer suppliers and less pull, but I didn’t see that larger companies were necessarily having a better response rate.” Even with all its clout, Intel, for example, only reported an 83 percent response rate.
Leaders of the Pack
What Apple Said
The following is a selection from tech giant Apple’s conflict minerals filing to the Securities and Exchange Commission.
Apple’s conflict minerals policy requires that all of its suppliers map their supply chains through all levels down to the smelters and refiners and report the results to Apple. Accordingly, between 2010 and 2013, Apple surveyed more than 400 suppliers.
Apple designed its due diligence measures to conform to the Organisation for Economic Co-operation and Development Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: Second Edition, including the related supplements on tantalum, tin, tungsten and gold. Apple believes that auditing smelters and refiners through the CFSP or equivalent independent third-party audit programs provides a reasonable basis for determining if the smelters and refiners process minerals originating from “conflict free” sources.
Based on its assessment of survey responses received from suppliers, Apple implemented due diligence measures with approximately 400 survey respondents that reported use of Subject Minerals. These due diligence measures included engaging directly with smelters and refiners to drive them to comply with the CFSP or equivalent third-party audit program. Apple personnel also conducted on-site visits of smelters and refiners, and established action plans with particular smelters and refiners, to prepare for and undergo conflict mineral audits.
Apple also directed its suppliers to ensure that their smelters and refiners undergo audits to verify compliance with the CFSP or equivalent audit program. Where particular smelters or refiners were unwilling to engage with Apple or seek compliance with the CFSP or equivalent independent third-party audit programs, Apple required its suppliers to terminate their relationships with those smelters and refiners.
Source: SEC.
While many filers offered little that was actionable for activists and consumers, a handful of companies did try. Anderson points to Microsoft’s 11-page Conflict Minerals Report as one of the more investor-friendly and one of the few to pepper its narrative with useful charts and maps. “They appeared to take a view that they weren’t just writing this for compliance purposes,” she says.
Companies that earned high marks for their reports detailed their due diligence efforts. Apple, for example, stressed efforts to expand the verified smelter and refiner base, pushing them to comply with the Conflict-Free Sourcing Initiative’s Conflict-Free Smelter Program or equivalent independent third-party audit programs and holding them accountable by publishing their names, countries, and participation status. Apple personnel also conducted on-site visits of smelters and refiners and established action plans with particular smelters and refiners to prepare for and undergo conflict mineral audits.
Intel was one of the few companies to back its report with an independent audit (completed by Ernst & Young). In contrast, several companies that claimed to be “conflict free” failed to provide that verification.
Looking to the Future
KPMG’s Low expects companies to develop more robust conflict minerals programs in time for future filings. “Perhaps it is going to go to their audit committee going forward, and there is going to be more scrutiny around the quality of data and what goes into this report,” he says.
KPMG is currently looking to see what percentage of C-level executives signed off on the filings and reports. “The ones I’ve seen so far were mostly the chief accounting officer and CFO,” Low says. “Does this now sit in finance going forward?”
What’s next from the SEC? Time will tell whether it takes a stand against companies for inadequate filings or not filing at all. Low expects that it may use the traditional comment letter phase of 10K and 10Q reviews to put its mark on future reports.
“You’ve almost got to give companies a pass in year one,” he says. “The bigger question is how does the process improve over time?”
“After this year, I expect the SEC will come out with guidance,” Anderson says. “When Compensation Discussion and Analysis (CD&A) came out, after a while the SEC said, ‘This is what everybody is doing, but this is what we are looking for and what we are not seeing.’ It wouldn’t surprise me if we see some of that with respect to conflict minerals.
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