Executive Briefings

Moving Beyond Outrage on Conflict Minerals

If only good intentions were enough. Unfortunately, we've learned time and again that the desire to do the right thing can run quickly off the rails if the complexities of an issue aren't fully understood. The battle against injustice doesn't stop with an expression of outrage.

So it is with the problem of conflict minerals emanating from the Democratic Republic of the Congo and neighboring states. Generally identified as tantalum, tungsten, tin and gold, these minerals or metal ores are found in countless consumer products, from automobiles to cell phones. For regulators and global business, the challenge has been to stop the flow of minerals from mines where violence, slavery, worker exploitation and rape are common occurrences.

All well and good, except that the issue is too complex to be solved by an outright ban on materials originating in a suspect part of the world like the DRC. U.S. lawmakers have addressed the problem through passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes a requirement that publicly traded manufacturing companies report annually to the U.S. Securities and Exchange Commission if they are using conflict minerals from the DRC or nine adjoining countries. But as of last week, the SEC had yet to follow through with a final rule on the precise definition of a "conflict mineral." In the meantime, some manufacturers have reacted to Dodd-Frank by banning all minerals from the DRC, regardless of whether they came from a mine where violations of human rights were taking place. As a result, "tens of thousands" of miners have been thrown out of work and are drifting around the country in search of jobs, according to Assheton Stewart Carter, senior vice president for global engagement and strategy with the international development agency Pact Inc.

The lesson, says Carter, is that the problem won't be solved by focusing on just one piece of the puzzle. Companies need to understand the totality of their supply chains, and be able to trace raw materials, components and finished product every step of the way.

Included in that map are mines, refineries, traders, exporters, contract manufacturers and original equipment manufacturers. Carter says companies must be able to provide end users with assurances that a given item is completely free of conflict minerals. Considering the number of hands through which a typical electronics product passes on its way to market, that's no easy task. Raw materials from multiple points of origin often get blended together at certain stages of production, erasing their individual provenance.

What's more, the price of such an undertaking is likely to be quite high. A recent study by Tulane University pegs the total cost of implementing the Dodd-Frank provision on conflict minerals at $7.93bn. That's 100 times higher than the SEC's estimate.

Jennifer Prisco, counsel for general procurement with TE Connectivity (formerly Tyco Electronics), demonstrates how tough it can be to ensure due diligence in monitoring the presence of conflict minerals. She cites the hypothetical case of a U.S. maker of consumer electronics that buys assemblies and components incorporating all four conflict materials. Some of that company's foreign suppliers don't actively monitor their supply chains for conflict metals. In addition, certain suppliers assert, the gold used in such products is untraceable because it's controlled by banks in multiple countries. The OEM also purchases passive electronic components from a global manufacturer, which in turn buys conflict minerals from wholesalers, who get the materials from smelters. Finally, there's an automaker that buys some electronic devices from both the OEM and its Tier 1 supplier. Each of those entities has declared itself in favor of a socially responsible supply chain, but how can they turn that desire into reality? Says Prisco: "It's an overwhelming thought."

A partial solution is to capture mined materials at "pinch points" such as smelters, says Robert Leet, who is program manager for the supply chain code of conduct of Intel Corp. Aiming to do just that, the Electronic Industry Citizenship Coalition has developed a smelter validation program. Leet says there are a limited number of entities involved in the smelting process - between 400 and 500 worldwide - making the monitoring task relatively manageable. It's just as important, he adds, that companies be able to transmit the resulting information throughout the downstream supply chain, by way of a standardized reporting tool.

Monique Oxender heads up the supply-chain sustainability program at Ford Motor Co. A former high school teacher, she says supply-chain managers and 16 year-olds tend to react similarly in the face of new and difficult problems: they panic. But she doesn't believe companies can afford to do nothing while the SEC dithers over its long-delayed final rule on conflict minerals. There are a number of small steps that can be taken in the meantime, beginning with the act of "talking with your operations people who are doing the work and reporting to the SEC." Another good starting point is the due-diligence framework developed by the Organization for Economic Cooperation and Development, which points the industry in the direction of a global template for addressing the issue.

While not a perfect document, the OECD effort is a good means of providing initial guidance to suppliers, says Oxender. It lays out five basic steps toward compliance: establish a strong program at the level of senior management; identify risk wherever it occurs in the supply chain; design and implement a strategy based on that assessment; carry out individual, third-party audits of smelters, and report regularly on the company's efforts at due diligence, along with the results.

For most businesses, the effort to eliminate conflict minerals in a rational way is just beginning. Contract manufacturer Flextronics is a leader among high-tech companies in that area, yet as of two years ago just 45 percent of its suppliers had established sourcing policies on conflict minerals, according to corporate environmental sustainability manager Seb Nardecchia. (Interestingly, 100 percent of Flextronics' suppliers declared at the time that they weren't sourcing any materials from conflict regions. Right.)

The SEC might be taking its sweet time in firming up rules on reporting conflict minerals (it has already missed the nine-month deadline established by Dodd-Frank), but private companies can't afford to do the same. Looming on the near horizon is the California Transparency in Supply Chains Act, which takes effect on January 1 and requires companies doing business in the state to report on actions taken to eradicate slavery and human trafficking in their supply chains. Meanwhile, the sleeping dragon that is the SEC is bound to awake at any moment. So delay is not an option. No company ever got a pass from regulators for having its heart in the right place.

(Note: the above quotes were derived from the annual conference in San Francisco of BSR, an organization consisting of some 250 companies promoting global corporate responsibility.)

Next: Does global business really care about sustainability?

Comment on This Article

If only good intentions were enough. Unfortunately, we've learned time and again that the desire to do the right thing can run quickly off the rails if the complexities of an issue aren't fully understood. The battle against injustice doesn't stop with an expression of outrage.

So it is with the problem of conflict minerals emanating from the Democratic Republic of the Congo and neighboring states. Generally identified as tantalum, tungsten, tin and gold, these minerals or metal ores are found in countless consumer products, from automobiles to cell phones. For regulators and global business, the challenge has been to stop the flow of minerals from mines where violence, slavery, worker exploitation and rape are common occurrences.

All well and good, except that the issue is too complex to be solved by an outright ban on materials originating in a suspect part of the world like the DRC. U.S. lawmakers have addressed the problem through passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes a requirement that publicly traded manufacturing companies report annually to the U.S. Securities and Exchange Commission if they are using conflict minerals from the DRC or nine adjoining countries. But as of last week, the SEC had yet to follow through with a final rule on the precise definition of a "conflict mineral." In the meantime, some manufacturers have reacted to Dodd-Frank by banning all minerals from the DRC, regardless of whether they came from a mine where violations of human rights were taking place. As a result, "tens of thousands" of miners have been thrown out of work and are drifting around the country in search of jobs, according to Assheton Stewart Carter, senior vice president for global engagement and strategy with the international development agency Pact Inc.

The lesson, says Carter, is that the problem won't be solved by focusing on just one piece of the puzzle. Companies need to understand the totality of their supply chains, and be able to trace raw materials, components and finished product every step of the way.

Included in that map are mines, refineries, traders, exporters, contract manufacturers and original equipment manufacturers. Carter says companies must be able to provide end users with assurances that a given item is completely free of conflict minerals. Considering the number of hands through which a typical electronics product passes on its way to market, that's no easy task. Raw materials from multiple points of origin often get blended together at certain stages of production, erasing their individual provenance.

What's more, the price of such an undertaking is likely to be quite high. A recent study by Tulane University pegs the total cost of implementing the Dodd-Frank provision on conflict minerals at $7.93bn. That's 100 times higher than the SEC's estimate.

Jennifer Prisco, counsel for general procurement with TE Connectivity (formerly Tyco Electronics), demonstrates how tough it can be to ensure due diligence in monitoring the presence of conflict minerals. She cites the hypothetical case of a U.S. maker of consumer electronics that buys assemblies and components incorporating all four conflict materials. Some of that company's foreign suppliers don't actively monitor their supply chains for conflict metals. In addition, certain suppliers assert, the gold used in such products is untraceable because it's controlled by banks in multiple countries. The OEM also purchases passive electronic components from a global manufacturer, which in turn buys conflict minerals from wholesalers, who get the materials from smelters. Finally, there's an automaker that buys some electronic devices from both the OEM and its Tier 1 supplier. Each of those entities has declared itself in favor of a socially responsible supply chain, but how can they turn that desire into reality? Says Prisco: "It's an overwhelming thought."

A partial solution is to capture mined materials at "pinch points" such as smelters, says Robert Leet, who is program manager for the supply chain code of conduct of Intel Corp. Aiming to do just that, the Electronic Industry Citizenship Coalition has developed a smelter validation program. Leet says there are a limited number of entities involved in the smelting process - between 400 and 500 worldwide - making the monitoring task relatively manageable. It's just as important, he adds, that companies be able to transmit the resulting information throughout the downstream supply chain, by way of a standardized reporting tool.

Monique Oxender heads up the supply-chain sustainability program at Ford Motor Co. A former high school teacher, she says supply-chain managers and 16 year-olds tend to react similarly in the face of new and difficult problems: they panic. But she doesn't believe companies can afford to do nothing while the SEC dithers over its long-delayed final rule on conflict minerals. There are a number of small steps that can be taken in the meantime, beginning with the act of "talking with your operations people who are doing the work and reporting to the SEC." Another good starting point is the due-diligence framework developed by the Organization for Economic Cooperation and Development, which points the industry in the direction of a global template for addressing the issue.

While not a perfect document, the OECD effort is a good means of providing initial guidance to suppliers, says Oxender. It lays out five basic steps toward compliance: establish a strong program at the level of senior management; identify risk wherever it occurs in the supply chain; design and implement a strategy based on that assessment; carry out individual, third-party audits of smelters, and report regularly on the company's efforts at due diligence, along with the results.

For most businesses, the effort to eliminate conflict minerals in a rational way is just beginning. Contract manufacturer Flextronics is a leader among high-tech companies in that area, yet as of two years ago just 45 percent of its suppliers had established sourcing policies on conflict minerals, according to corporate environmental sustainability manager Seb Nardecchia. (Interestingly, 100 percent of Flextronics' suppliers declared at the time that they weren't sourcing any materials from conflict regions. Right.)

The SEC might be taking its sweet time in firming up rules on reporting conflict minerals (it has already missed the nine-month deadline established by Dodd-Frank), but private companies can't afford to do the same. Looming on the near horizon is the California Transparency in Supply Chains Act, which takes effect on January 1 and requires companies doing business in the state to report on actions taken to eradicate slavery and human trafficking in their supply chains. Meanwhile, the sleeping dragon that is the SEC is bound to awake at any moment. So delay is not an option. No company ever got a pass from regulators for having its heart in the right place.

(Note: the above quotes were derived from the annual conference in San Francisco of BSR, an organization consisting of some 250 companies promoting global corporate responsibility.)

Next: Does global business really care about sustainability?

Comment on This Article