Conflict Minerals Showdown Heats Up

March 19, 2013

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New minerals regulations from the Securities and Exchange Commission (SEC) are expected to affect more than 6,000 manufacturing firms – not just raw materials companies but also the shops in their supply chain. Industry groups have issued a legal challenge to have the legislation modified or overturned entirely, but could this cause more harm than good?

Business groups have mounted a court challenge against the new conflict minerals rule imposed on U.S. companies by the SEC. The new rule arises from a section of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R.4173), which was signed into law by President Barack Obama on July 21, 2010.

Section 1502 of the law requires companies to precisely determine the source of materials they use and to report the use of any “conflict minerals,” that is, ores that are financing armed conflict in the eastern Democratic Republic of Congo. The ores in question are gold, coltan, casserite, and wolframite, the last three being the ores used to produce tantalum, tin, and tungsten.

According to British business intelligence firm Billiter Partners, these minerals “are most widely used in consumer electronics such as mobile phones and laptops,” but “also feature in the manufacture of industrial tools as well as in the aerospace and defense sectors.”

In January, the National Association of Manufacturers (NAM), together with the U.S. Chamber of Commerce, sued the SEC over the rule, arguing that it is too costly and burdensome on manufacturers, along with other objections. The case is scheduled to be heard May 15 at the D.C. Circuit Court.

Although NAM declined to reply to specific questions “given the ongoing litigation,” the group did send a brief joint statement also attributed to the Chamber of Commerce and the Business Roundtable, which has joined the lawsuit.

The joint statement acknowledges “the seriousness of the strife occurring in the Democratic Republic of Congo and the need to implement solutions to bring an end to the violence” and calls the SEC's conflict minerals rule “well-intentioned.” Regardless, the organizations insist that the rule “is no solution to these problems” and “is inconsistent with federal law and creates an unworkable system that will impose billions of dollars in costs on American businesses, large and small, with no clear benefits to the people of Congo or the neighboring countries.”

Robert J.S. Ross, sociology professor at Clark University in Worcester, Mass., who studies ethical issues around supply chains, is critical of the lawsuit. “What are the firms afraid of?” he asked.

“Firms have traditionally resisted transparency requirements,” Ross told IMT. This seems like more of the same to him. As far as the charge that the rule won't do any good to war-torn nations, Ross disagrees. According to him, it makes sense that “if one can eliminate so-called conflict minerals from a supply chain – or many of them – the effect will be to starve bad actors who use their proceeds to fund atrocities and violence.”

In fact, he added, “There is positive evidence that this can make a difference.” Eliminating “blood diamonds” in Western markets, he said, “did play a role in ending the wars and atrocities in East Africa.”

Management professor Joseph Sarkis thinks that ultimately it's in companies' best interest to remove conflict minerals from their supply chains because of the risk to their reputations. “A lot of companies are already doing this,” he told IMT. Sarkis suspects that the court challenge might in part be calculated to delay the reporting requirement for some companies that could have a hard time complying, such as smaller firms in the supply chain.

Attorney Michael R. Littenberg, who heads the public-companies practice at Schulte Roth & Zabel, explained the context of the conflict minerals rule and businesses' objections to it. The rule is controversial, he said, “because of the cost and logistical burdens that it imposes on companies.” Among public companies, “initial compliance costs are estimated in the billions and ongoing compliance costs are estimated in the hundreds of millions,” not to mention smaller and non-public suppliers that are also affected by the rule.

In spite of these objections and the pending lawsuit, Littenberg noted, companies are taking conflict minerals seriously. “Even if the rule is struck down by the court, I have many clients that still intend to implement compliance programs that are consistent with the rule's policy goals as part of their CSR [corporate social responsibility] commitment.”

Warren TeBrugge, who heads Manzimvula, a non-governmental organization that works with mining companies on CSR efforts, told IMT that “the real issue and elephant in the room is, ‘Are the lives of children more important than the bit of extra work or reduced profit margins?’” The U.S. has a serious responsibility, he said: “If we are the most powerful economy in the world, then we need to, want to, have to start holding ourselves accountable and doing the right things. If we don't set the example, why should anyone else?”

 

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