Maturing Conflict Minerals Programs in Year 2

Let’s be honest: The first year of compliance with the Conflict Minerals Rule was pretty much a disaster.

Confusion reigned. Costs soared. Sure, tech giants like Motorola, Intel, and Apple succeeded by building upon initiatives they already had in place; other mere mortals in Corporate America struggled with the new Securities and Exchange Commission requirement to report on the use of certain minerals mined in the war-torn Congo.

Heading into the second year of filings—and facing greater expectations for better work—companies are looking for ways to reduce costs and improve effectiveness. To accomplish that, many are turning to new technology to help automate the process. Automation, however, raises questions of how best to execute that idea and what pitfalls may exist.

Aside from confusion about the scope of the Conflict Minerals Rule in its first year (complicated by still-ongoing legal challenges), the biggest headache was how to collect, parse, and verify the voluminous data collected from a deceptively deep, complex supply chain. Relying on questionnaires distributed to the manufacturer of a given part opened up a Pandora’s box: Who supplies the supplier? Who supplies those suppliers, and so on? How can all this data be compiled, verified, corrected, and tracked back to smelters? How do these slices of information fit into the bigger puzzle?

“As time goes on, you recognize that it is not getting any simpler,” says Garry Felker, manager of environmental health and safety for Quantum Corp., a California-based storage and data protection company. “It will continue to get increasingly complex as time goes on.”

“The problem is going to be, regardless of automation, that you still have to have your suppliers do the work and you still have to have an outside audit to make sure they are doing what they say they are doing. That’s where the cost comes in.”
Mickey Rizza, VP of Strategic Services, BravoSolutions

If you are required to file conflict minerals reports, by now you’ve likely been approached by multiple vendors promoting technology intended to simplify the task. The analysis of the cost and benefits of these solutions will differ from one company to the next, but some basic considerations are: the use of technology and automation, including the compilation of all suppliers and products in scope of the rule; collecting, analyzing, and reporting relevant data; ensuring an audit trail; and leveraging the process to provide additional business benefits, such as reducing supplier risk.

Proper automation can help a business reach deeper into its supply chain and communicate through the many tiers of vendors, says Rob Kasameyer, president of Green Status Pro, a technology consulting firm. Used in conjunction with readiness assessments and mock audits, it can help to identify both problems and solutions.

Automation is appealing because it alleviates the burden on compliance staff. A 2013 survey by audit firm EY (conducted prior to the inaugural SEC filings in June 2014) found that nearly 45 percent of companies planned to rely on Excel spreadsheets or a similar product for their data management needs.

Fast-forward to today. Many companies that relied on manual data collection have no desire to relive the hundreds of man hours spent porting thousands of data points into spreadsheets and, ultimately, having little to show for all that work. “It is drudgery and tedious work,” Kasameyer says. “It is easy for somebody to just zone out and make errors when you are doing it manually, especially over an extended period of time.”

Suggestions

Tulane University did a survey of companies that filed conflict minerals reports in 2014 and a study of the information those filings contained. Among the first-person descriptions of what constitutes an effective conflict minerals program:

WHAT’S IT ALL COST?

Below is a breakdown of conflict mineral costs from Tulane University.
Reviewing the 1,300 disclosures made to the Securities and Exchange Commission’s first year of conflict minerals disclosures, Tulane University assessed what those efforts cost and where those expenditures were directed. It found that issuers mobilized substantial in-house and external resources, an aggregate total of $709.7 million, to set up their conflict mineral programs.
Issuers each invested an average of $545,962 worth of time and effort to comply with the law, the value of each company’s conflict mineral program largely comprised of in-house corporate time, external human resources, an IT evaluation and IT system expenses.  Small issuers, with less than $100 million in revenue, spent $190,330 worth of resources on average – roughly one-third as much as their large issuer counterparts. 
A breakdown of costs includes:

Internal company time, $420,784,310 (59.3 percent of expenses)

Non-IT related external resources, $149,950,495 (21.1 percent)

IT gap/needs analysis, $40,866,337 (5.7 percent)

IT project element supporting conflict minerals traceability processes and reporting, $97,500,000 (13.7 percent)

Independent Private Sector Audit, $650,000 (0.0009 percent)
Source: Tulane University.

“We modified our product development process to identify the inclusion of 3TG minerals [those subject to the rule] at the time of component sourcing, and then further adopted through our IT system a process to segregate those of our products that contain any 3TG minerals that are slated for sale or rental to third parties. This allows us to accurately determine which components in our supply chain are subject to reporting requirements and which are excluded as a result of being manufactured for internal use only.”

“The good practice our company implemented was an increased emphasis on data integrity. We assessed the accuracy of the data in our enterprise resource planning (ERP) system as well as the procedures for entering the information and maintaining it. Moreover, it led us down the path of creating more traceability in our system surrounding the data integrity and management.”

“We surveyed all suppliers and provided complete lists of SKUs to determine product types with the most exposure to having contents of these minerals.  Based on responses received in Year 1, we will scale down surveys in Year 2 to focus on products and suppliers with highest risk of containing 3TG minerals.”

Under the rule, companies are required to conduct a “Reasonable Country of Origin” assessment of their products, the initial process for discovering the origin of the 3TG in products. One big problem in the initial disclosures was that many companies didn’t have systems in place robust enough to do more than take their suppliers’ word at face value, says Kirsten Wallerstedt, senior regulatory analyst, global supply chain at 3E Co. “They simply took an accounting of what their suppliers reported.”

Smelter due diligence will also need to improve. “Many companies struggled with thousands of lines of smelter data, many of which were duplicates or were simply inaccurate,” Wallerstedt says. Moving forward, companies will have access to the CFSI (Conflict Free Sourcing Initiative) list of known smelters, half of which are certified as conflict-free; as well as a delayed list compiled by the Department of Commerce that may become more detailed and helpful.

Companies can use these lists to create a “master” reference list of smelters that will help them “quickly weed through smelter lists gathered from their suppliers and create a consolidated, legitimate list to use as a reference as they vet supplier data,” Wallerstedt explains.

“The problem is going to be, regardless of automation, that you still have to have your suppliers do the work and you still have to have an outside audit to make sure they are doing what they say they are doing,” says Mickey Rizza, vice president of strategic services for technology consultant BravoSolutions. “That’s where the cost comes in.”

“You still have to do the analysis to see what is conflict-free and what determinations are still uncertain,” Wallerstedt adds. “Technology can help you understand the supply chain, but you still need to connect the dots and make sure you are not missing something. You still have to check the boxes and make sure they are all complete. The one area you miss could be the one that ends up getting you.”