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Shop Talk: The Burden and Benefits of Conflict Minerals Disclosures

Joe Mont | May 13, 2014

Amid a volley of legal challenges and shifting expectations, the only certainty when it comes to conflict minerals is uncertainty.

Click on attendees below for full biographies.
  David Carnevale
  Sr. Global Energy and Environmental
  Compliance Engineer,

  Dolby Laboratories
  Sue Gong
  Global Compliance Manager,
  Howard Heppelmann
  General Manager, Supply Chain

  Ravi Inthiran
  Director, Global Compliance and

  Gabriela Janusz-Renault
  Environmental Compliance Manager,
  JDS Uniphase
  Kamal Kant Gupta
  VP of Finance, Corporate Controller,
  Ken Kapur
  Associate Director, Global
  Compliance Engineering,

  Thermo Fisher Scientific
  Lee Wolfe
  Leader, Supply Chain Group,

Compliance with the controversial Securities and Exchange Commission rule has been an uphill battle. But as companies prepare to meet the June 2 deadline for inaugural filings, among the most pressing concerns are preparing for future disclosures and finding ways to extract ongoing value from an exercise that has otherwise been a drain on manpower and monetary resources.

Last month, Compliance Week and PTC, a software company with a 10-year track record of providing materials compliance solutions,  invited compliance managers and other business leaders overseeing conflict minerals efforts at their companies to an executive forum in San Francisco to discuss disclosure requirements, their approach to compiling the needed data, and what they may face moving forward.

The SEC's conflict minerals rule requires companies to disclose information each calendar year on the source of “conflict minerals”—tin, tantalum, tungsten, and gold—in their products, using the new Form SD. Congress included the provision in the Dodd-Frank Act to address concerns that the mining of these minerals is funding armed militias in the Democratic Republic of the Congo and adjoining countries. Companies must conduct a “reasonable” country-of-origin inquiry to determine if the minerals originated from the covered countries; track and document the source and chain of custody; and include findings in a public Conflict Minerals Report. The initial deadline for filing that information is June 2.

It should come as little surprise that most of the nearly dozen participants said they plan to declare the end result of their current supply chain investigations as “undeterminable.” For two years, the SEC will allow companies to make that assessment before being forced to make a more definitive report on whether or not their products are “conflict free.”

Recent surveys show that nearly all public companies plan to go the “undeterminable” route, and those that might be prepared to make a more definitive report will not have to worry anyway. An ongoing legal challenge by the U.S. Chamber of Commerce, National Association of Manufacturers, and Business Roundtable recently led to a federal court's decision that forcing companies to make these status declarations would violate First Amendment free-speech protections. For reports due this year, pending further legal clarifications and an ongoing battle to vacate the rule completely, the SEC will only ask companies to detail their due diligence without drawing a conclusion.

Setting aside the courtroom battle, a bigger concern for roundtable participants was the difficulty obtaining the required data from all points of their supply chain. How far along are they? Different companies had different responses, but most feel confident that they are prepared to meet their year-one requirements.

“To say, in black-and-white terms, whether you are conflict free or not is going to be extremely challenging for many companies, but we are charging forward,” said Lee Wolfe, leader of the supply chain group at data storage company NetApp.

Other companies are similarly optimistic. “I think there is still a lot for industry to learn, and for us to learn, but we are dedicating resources to meet the requirement,” said David Carnevale, senior global energy and environmental compliance engineer for Dolby Laboratories. “We are on a good pace to get the information we need and be ready for our submittal.”

Nevertheless, some at the roundtable described supply chain due diligence as a formidable challenge. “It is extremely complicated when it comes to the number of smelters and suppliers out there,” one participant said. “This is the beginning, and we will do everything we can to move forward with efforts for our supply chain to be compliant. How do we get there? We have to take it one year at a time right now.”

Getting the Data

Data collection is complicated by the number and diversity of suppliers involved, ranging from Tier 1 giants to specialty “mom and pop” producers. A single component can track back to dozens of smelters. To prioritize tracking efforts, now and in the future, Howard Heppelmann, general manager of supply chain management segment for PTC, suggested ways to prioritize the approach. One way is to focus on the riskiest suppliers and those that account for the greatest share of spending. “You don't have to go boil the ocean from the beginning, but you do have to be able to explain why what you took was a reasonable approach to your supply base,” he said.

“To say, in black and white terms, whether you are conflict free or not is going to be extremely challenging for many companies, but we are charging forward,” said Lee Wolfe of NetApp.

“The value isn't simply in compliance, it is in integrating efforts into the business processes to optimize our systems,” said Ken Kapur, associate director at Thermo Fisher Scientific (right); Ravi Inthiran of McKesson at left.


It is difficult enough to verify the veracity of information provided upon request from suppliers using templates and questionnaires, but companies are also encountering some suppliers that don't respond at all. “I don't think we will ever have 100 percent accurate disclosures and there will always be some who will not respond,” said Gabriela Janusz-Renault, environmental compliance manager for JDS Uniphase.

“When we don't see a declaration from a particular supplier, a lot of times it is because it's a small supplier and they are still learning what to do,” Carnevale said. “Even the mid- to large-sized companies still have a lot to learn about how to comply with this requirement.”  

“The problem for us isn't unresponsiveness, it is bad data,” suggested another participant. “Thirty percent of the responses coming back to us don't make sense when you read them.”

“We will look at the percentages of suppliers who are not answering and go to them and say, ‘Ok, if you aren't going to answer the questions, we are not going to pay you,' which is a very effective tool,” one participant threatened. Others suggested that they will have to end relationships with suppliers that don't respond over time.

While roundtable participants agreed that conflict minerals compliance has been a tough slog, they also agree it will only get harder. “The number one challenge is about the phase out of the undeterminable category,” said Ken Kapur, associate director of global compliance engineering for Thermo Fisher Scientific.

“I see another problem that is arising,” offered Janusz-Renault. “We have customers that are asking not only for a company declaration of smelters, but also for a disclosure of smelters tied to specific products they purchase.”

From Project to Process

Companies aren't just thinking ahead to forthcoming challenges. They are also seeking opportunities and upside—such as cost savings and risk mitigation—that may come from having greater visibility into where all those parts and materials they use come from.

One corporate compliance director suggested that companies move from “having a program, to having a process.”

Other participants agreed that the goal isn't just to comply with conflict minerals regulations, but to end up with better intelligence about suppliers and the contents of products. “Our goal is to start with the compliance regulation, but to really turn it into an opportunity,” Kapur said. “The value isn't simply in compliance, it is in integrating efforts into the business processes to optimize our systems.”

Pictured above: Sue Gong, global compliance manager for Xilinx.


“Companies are looking for more of a strategic process going forward,” Heppelmann said. “The best advice one could give with respect to conflict minerals is to not look at it as a tactical issue just about conflict minerals,” he added. Supply chain visibility can also help companies better navigate the abundant regulations that, internationally, affect the use of materials and products in the supply chain.

Heppelmann cited Motorola Mobility, a company his firm has worked with since 2006, as an example of this approach. “Motorola Mobility demonstrates what is possible with a mature compliance program. They were able to address conflict minerals as simply another regulatory obligation within an existing process they have,” he said. “Because they have already been collecting material data from the supply chain, they pushed a button and knew exactly where the problems were and which products and components contained tin, tantalum, tungsten and gold, as well as which suppliers were affected.  When it came time to work with their suppliers to collect additional due diligence information, it was a very simple process because they had already had the systems in place and the suppliers knew what to expect.”

The ideal is for companies to evolve their materials compliance and supply chain due diligence to the point where their process can address any existing and emerging risks or regulation without adding much burden. “That's really the utopia: to get out of looking at the specifics of this legislation and instead look at how you can manage the compliance process more holistically,” he said. Companies that fail to do not only face increased costs, as they address each new regulation with tactical solutions, but also increased risk of brand damage and lost revenue as they are caught unprepared and unable to meet ever-evolving regulatory and customer requirements.”