Conflict Minerals Rules May Foster Corporate Social Responsibility

Last week, the SEC adopted final rules (PDF) under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF), requiring reporting companies to disclose their use of so-called “conflict minerals” that originated in the Democratic Republic of the Congo (DRC) or a nearby country. These minerals, which include tantalum, tin, gold and tungsten, are used in computers, cell phones, cameras, automotive and aerospace components, medical devices, jewelry and many other products. The rules were controversial, passing by a 3-2 margin.

Companies that file reports with the SEC will be required to file a new SEC form called Form SD to disclose the use of conflict minerals that originated in the DRC. All issuers will report on a calendar year basis on May 31 of the following year, with the first report, covering 2013, due on May 31, 2014. Smaller reporting companies and foreign issuers are subject to the reporting requirement, although smaller reporting companies get a longer transition period for reporting about products where the origin is uncertain – four years vs. two years for larger companies. Companies that manufacture products with conflict minerals in the supply chain need to study the new rules and formulate an action plan to satisfy the due diligence and audit requirements. Since the first period covered by the disclosure rules starts in four months, time is of the essence.

I won’t try to summarize the entire 356 page SEC release. As usual, the SEC has provided a very useful Fact Sheet as part of its press release announcing the rule. And the release includes a handy one-page decision tree chart (PDF) that maps out the various reporting issues under the rules.

Comment. The SEC release describes that Congress, in enacting Section 1502,

“. . . intended to further the humanitarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by the exploitation and trade of conflict minerals originating in the DRC. . . . Congress chose to use the securities laws disclosure requirements to bring greater public awareness of the source of issuers’ conflict minerals and to promote the exercise of due diligence on conflict mineral supply chains. . . .”

The disclosures are intended to reduce the use of conflict minerals that help fund the armed groups, and thus put pressure on the groups to end the conflict.

In reading the commentary and analyses on the new rules, I focused on the reactions of various groups. The rules have sparked an interesting debate about the role of disclosure requirements in shaping policy and changing corporate and governmental behavior, with both sides of the debate make valid points. However, even more fascinating, several very large electronics manufacturers, rather than fight the rules, have gone beyond mere compliance with the disclosure requirements. They have used the pendency of the rules as an opportunity to demonstrate leadership in corporate social responsibility.

Criticism and Counterpoint. Critics of the rules raise persuasive concerns about the rules’ value compared to the cost of compliance. SEC Commissioner Daniel Gallagher, who voted against adoption, released a Public Statement detailing why he could not support the rules. After deploring the violence in the DRC, Gallagher states that the benefits of the disclosure requirements in reducing the conflict cannot be quantified. On the other hand, the costs of the disclosure and audit requirements are very real, estimated by the SEC at $3 to $4 billion initially and around $200 to $600 million per year on an ongoing basis. Many commentators believe this cost is vastly underestimated. Gallagher acknowledged that Congress, not the SEC, mandated the disclosure requirement, but he could not support the final rules because the SEC did not use its discretion to exempt smaller reporting companies or create a de minimis exemption for products with incidental use of the minerals.

The statement of the other dissenting Commissioner, Troy Paredes, expressed his concern that the Commission did not determine “ . . . whether and, if so, the extent to which the final rule will in fact advance its humanitarian goal as opposed to unintentionally making matters worse.” As Professor Steven Davidoff wrote this week in a DealBook commentary, “These new rules could lead to manufacturers simply refusing to buy any of these minerals from Congo and surrounding area. This would be a de facto boycott that could harm the populace more than it would help.” Or the rules could provide a greater competitive advantage for foreign companies that do not report in the U.S.

On the other hand, the supporters of the rule respond that the SEC worked hard to craft final rules that minimize the costs to issuers and will be effective. Chairman Mary Schapiro said in her statement introducing the rules, “. . . [W]e incorporated many changes from the proposal that are designed to address concerns about the costs. I believe the rule we are considering today faithfully implements the statutory requirement as mandated by Congress in a fair and balanced manner.”

The Social Responsibility Opportunity. In reading much of the commentary on the conflict minerals rules, I was struck by the statements of a “multi-stakeholder network” that included issuers, socially responsible investor groups and non-governmental organizations. The group was really part of the process, participating in the SEC roundtable, submitting four comment letters and attending several meetings with the SEC staff. The companies in the group included major corporations: Advanced Micro Devices (AMD), Ford, General Electric, Hewlett-Packard, Microsoft, Philips and Sprint. This group submitted a letter to the SEC (PDF) supporting the disclosure rules and applauding the work of the agency.

The Co-Chair of the multi-stakeholder network was Tim Mohin, Director, Corporate Responsibility of AMD. On the day the SEC adopted the final rules, Mohin wrote a compelling piece in the Huffington Post, “How Electronics Companies Plan to Comply With the SEC’s New Conflict Minerals Rule.” He reported that an industry group not only supported the rules, but also went beyond the disclosure requirements to explore new ways to track the source of conflict minerals:

At first blush, this sounds like an impossible requirement. . . . But, after some time and thought, we, in the electronics industry -- specifically, the member companies of the Electronics Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) -- are confident we have found a way. And, more importantly as this rule ripples through the economy, we are willing to share our ideas with others. . . .

Mohin describes some of the nuts and bolts of their process for identifying smelters and the subset of “conflict free smelters” and continues:

. . . While the conflict free smelter list stands at just 13 so far, we anticipate that many more will be added as implementation of the rule progresses. . . . [Also,] [w]hile the law itself does not require any of these steps, the electronics industry has worked on a couple of programs aimed at avoiding a minerals embargo of the region [and thus harming legitimate mining enterprises]. AMD and several other companies joined the U.S. State Department to found the Public-Private Alliance (PPA) for Responsible Minerals Trade. This a joint initiative among governments, companies, and civil society aims to demonstrate that it's possible to secure legitimate, conflict-free minerals from this region. . . .

By partnering across the electronics industry and applying the spirit of innovation that created the tech revolution, we went from "it can't be done," to "we think we have a solution," to "we need to go beyond the law to make sure that our solution actually helps the people of the DRC."

In this case, a group of  companies, rather than challenging the validity of the rules, put their minds and resources into efforts to go beyond mere compliance. Consistent with the corporate social responsibility movement, their approach tries to address the problem in sophisticated ways, and they want to share their wisdom with other companies. And maybe, if their approach really works, their use of “conflict free” suppliers could actually help their sales – something like “dolphin-free” tuna. At the very least, it’s a commendable effort.

I’d really like to hear what readers think about the approach described by Mohin, and about the disclosure rules in general. Send me an e-mail, which I will keep confidential, and I can summarize the thoughts on an anonymous basis in a follow-up post.

Honored to Be Recognized for Pro Bono Work

I was honored to be recognized recently as Maslon’s 2012 Pro Bono Attorney of the Year. As Chair of our Pro Bono Committee for the past five years, I have been very proud of our firm’s commitment to the community. Also, as a Board member of the non-profit group LegalCORPS, it has been enjoyable to help LegalCORPS develop new ways to deliver business law pro bono services to low-income businesses and non-profits in Minnesota. I am currently working on an exciting project, in partnership with the in-house attorneys at a large company, to expand LegalCORPS’ reach in a novel way. After the launch of this program, I’ll share the news.

Social Enterprise: A New Way to Enhance Corporate Social Responsibility

Occasionally, we include guest columns with topics of interest to public companies and those that serve them. Here is a guest column by my partner, Terri Krivosha. Terri is the Chair of our Business & Securities Practice Group and leads Maslon’s innovative social enterprise practice.

Many public companies are developing policies of Corporate Social Responsibility (CSR) as a means to encourage a positive impact through a company’s activities on the environment, consumers, employees, communities, stakeholders and other persons. CSR is a means to include the public interest in corporate decision-making. Often companies focus on a double or triple bottom-line approach, meaning “profit, planet and people”.

The burgeoning field of “social enterprise” complements these efforts by public companies. Social enterprises are organizations that combine mission and market-based strategies to achieve a social purpose. They can be organized as non-profits, for-profits or hybrids of the two. The cover story of the May edition of Inc. Magazine, “How a Business Can Change the World,” features several companies that are at the cutting edge of this sector.

Many such companies combining money and mission are organizing as for-profit entities and seek investors with “patient capital” who are willing to invest but also understand the social mission of these projects. In many cases, public companies would have the opportunity to provide funding to these projects, and after the initial phase, many of these projects could become self-sustaining and might even pay a return on the investment of the parties that provide funding. Such investments can represent the best kind of partnership between for-profit enterprises and non-profit motives. This type of relationship can be more organic to the company than simply making donations through a private foundation.

On April 29, I participated in a conference sponsored by Maslon called “Social Enterprise: Structure and Story”. The purpose of the conference was to explain the various structures that can be used in the area of social enterprise and give attendees an opportunity to hear the stories of those who have successfully organized social enterprises. For example, one participant, Jeff Tollefson, the executive director of the Twin Cities branch of Genesys Works, a national non-profit organization that is more than 95% funded by earned income. Genesys coaches at-risk 11th graders to become IT employees. In their senior year of high school they are employed by Genesys, and Genesys contracts with companies to place the youth in paid internships. At the end of their senior year, these students have work experience that has helped them to better understand that they can succeed in the workplace.

This area is evolving, and social enterprises are rightly struggling with the tensions between mission and money, etc. The CSR effort involves similar tensions, and companies should be involved in this ongoing dialogue. Using the Genesys Works model described above as an example, a public company might choose to support Genesys through its foundation, but then could use Genesys as a source for expanding its talent pool by hiring interns to assist in its IT department.

Public companies can get involved in the developing area of social enterprise in several ways. Two organizations with chapters in the Twin Cities, Social Venture Partners and the Social Enterprise Alliance, offer assistance in connecting companies to social enterprises with missions that align with their corporate goals. These organizations sponsor events, such as the Engaged Philanthropy Conference to be held in Minneapolis on June 16, 2011. Investigating what these organizations have to offer is a perfect place to start to better understand this new field.

 - Terri Krivosha