Although proposed one year ago, a sleeper rule from the Securities and Exchange Commission has taken the governance community by storm. Mandated in 2010’s Dodd-Frank Act, the SEC’s proposed rule on the disclosure of conflict minerals has placed Africa on the list of topics to discuss in U.S. boardrooms. Depending on the projection used, the rule stands to affect thousands of publicly traded companies, costing anywhere from millions to billions of dollars.
The Rule. As it currently stands, the rule requires companies to examine their supply chains for use of any of the four “conflict minerals”: tin, tantalum, tungsten and gold. If these materials are used, the company will have to demonstrate it exercised due diligence to source the country of origin in a separate Conflict Minerals Report. This report must also be certified by an independent private-sector audit. The intent of this rule is to bring to light whether minerals used in manufacturing are sourced from the Democratic Republic of Congo or neighboring countries.
The Minerals. Control over mines of the four cited minerals in the rule fuels the conflict in the DRC between various groups, including local militias, the Congolese army, as well as rebels from both Congo and Rwanda. According to the Enough Project, while the DRC produces just 6 percent to 8 percent of global production, cassiterite ore—refined to produce tin—was the top mineral contributing to armed groups in 2008 (see chart). In the same year, gold contributed $50 million. However, due to its nature of being easily concealed—95 percent of gold in the eastern Congo is traded informally, according to Resource Consulting Services—these amounts are difficult to pinpoint.
The Products. The scope of the SEC’s rule becomes clear when assessing the range of products that contain any amount of these minerals. Tungsten, for example, is used in the creation of ballpoint pens in addition to cemented carbides. Tin and tantalum, while primarily found in electronics, are used in products ranging from medical devices to canned goods to jet engines.
Furthermore, combinations of the minerals can be found in metal powders used to create computer motherboards. With so many wide-ranging—and not always apparent—applications of the minerals, it is no surprise that the National Association of Manufacturers projects that most publicly traded companies will be affected by the rule.
The Potential Burden. In the proposed rule, the SEC estimated that 1,199 companies would be affected by all aspects of the new disclosure, with an implementation cost of $71.2 million. Fresh off its success with proxy access, the U.S. Chamber of Commerce has questioned the practicality of the rule, noting the punitive costs most companies will face in sourcing their products and providing the ensuing audited reports. Numerous groups have similarly commented to the SEC, including the Office of Advocacy for the U.S. Small Business Association and the NAM. It its comment letter, the NAM estimates that the disclosure rule will impact close to 12 million companies (all 5,994 publicly-held manufacturing companies multiplied by an average of 2,000 suppliers per company), at a cost of $9 billion to $16 billion.
In a white paper released in October, faculty from Tulane University provided a third model. Tulane found the SEC to have underestimated the potential costs, as the rule will likely affect the bulk of the 5,994 manufacturers, and the Commission left out the costs most likely to be incurred by suppliers. Conversely, claims Tulane, the NAM has overestimated the cost of disclosure by overstating the number of suppliers, as well as not accounting for overlap in supplier/customer relationships and likely cost efficiencies. Projected costs, according to the Tulane model, come in at a substantial $7.9 billion: $3.4 billion toward in-house company personnel time; $4.5 billion to third parties for consulting, IT systems and audits.
While the SEC has struggled to find a method that fulfills the Dodd-Frank mandate without overburdening companies, the agency has fallen six months behind schedule for issuing final rules. This should not stop companies from identifying their sources and making supply chains more transparent—if they have not done so already.
Kate Iannelli is a research analyst with NACD.
As you’ve pointed out, there has been much discussion of the costs of this measure. But most analysis is of a static nature, and doesn’t reflect an assessment of how costs may decline as supply chains come to understand the new requirements and learn how to comply with them. There is also insufficient discussion of the eventual business benefits of compliance.
These are issues we are exploring in a research project right now that should be released early next year. If you are interested in learning more, please contact via our Web site.