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27 Apr. 2011 | Comments (0)

Through the use of sustainability reporting, a handful of public electronics companies are learning how the processes used in the due diligence of tracking their supply chain can help them get out in front on a little known section of the Dodd-Frank Act. Section 1502 of Dodd-Frank will require public companies to disclose and possibly audit its manufacturing process when it is believed they may be using so-called conflict minerals from the Democratic Republic of Congo and neighboring countries. It is believed that country uses the proceeds of sales of those minerals to finance sexual and gender-based violence and exploitation in the war-ravaged nation. Under the law, the SEC is supposed to draw up rules that will require companies to conduct supply chain due diligence, third party verification and possibly audits of sources such metals as tin, tantalum, tungsten and gold. As you may have read in my post last week, the SEC has delayed the implementation of the final rules until later this year most likely due to funding issues. However, the agency did write and approve proposed rules. Although the comment period for those rules ended in January, the SEC pushed back final rules until the last quarter of 2011. Among the electronics suppliers and manufacturers out front on conflict minerals is Intel. In fact, the computer processor maker along with other members of the Electronic Industry Citizenship Coalition could write the best practices for implementing the rules, if not the rules themselves. Intel began focusing on building a conflict-free supply chain in 2009 before the Dodd-Frank Act was even approved. It had directed its suppliers to complete a survey about the origin of metals used in their supply chain. In a white paper (Intel’s Efforts to Achieve a “Conflict Free” Supply Chain ) the company originally published in September 2010 and updated on April 19, Intel wrote: “The purpose of this survey was to understand three items: (1) whether our supply base had implemented a conflict-free sourcing policy; (2) did our suppliers have the ability to trace the metals they used back to mine of origin; and (3) could they identify the smelters that were used to refine the metals in their specific supply chain.” Intel reported that its 2009 survey led the company to believe the best way to determine the origins of metals in its supply chain was to implement a verification system at the smelters its suppliers used.  For Intel, that included reviews of 25 smelters in eight countries. The company plans on completing 10 more reviews by the end of this year. As part of its efforts with the EICC, Intel and other companies have agreed to third party smelter audits to measure the accuracy of those reviews. In its own PowerPoint presentation on conflict minerals, KPMG analyzes the impact of Section 1502 of Dodd-Frank on public companies that use such metals in the manufacturing of their products. Its overview gives one of the most detailed explanations of the proposed rules that is out there. It includes an executive summary of the impact of the rules, industry’s response to conflict minerals and a timeline for implementation. As part of the timeline, KPMG describes a three-step best practice process that includes:
  • Internal analysis: Determine if those metals are necessary for manufacturing their product and determine if those metals being used in products or processes in-house or at contract manufacturers
  • Supply chain due diligence inquiries: Develop a list of suppliers of these metals, survey those suppliers about their sources of those metals, then if any of those metals are found to have come from DRC countries have those suppliers conduct an audit to see if they support the conflict
  • Changes to policy and procedures: Publish results of supplier due diligence and audits on corporate Web site, develop a policy statement on not using such metals that come from DRC countries and mandate certification of DRC conflict-free sources of such metals in supplier contracts.
The SEC conflict minerals rule, which most likely won’t be effective until 2012, could give companies a reason to start making sustainability reporting as important as financial reporting. When the proposed rule goes into effect, it basically calls for creating a sustainability-like report on the supply chain for companies that use those metals in its manufacturing process. And such a practice could be replicated in other parts of a business so that companies can begin to understand the importance of tracking both their corporate responsibility and environmental impacts. One such example is company disclosure of issues related to climate change, which the SEC issued guidance for last year. The agency reiterated in an October 2009 announcement that it no longer allows management to exclude from proxy statements shareholder proposals related to evaluating the risk associated with climate change. [For more on that issue, read our Director Notes report, Sustainability in the Boardroom, June 2010.]
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

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