More than CSR: The Benefits Of Conflict Minerals Disclosure To Business And Investors?

MAKE MONEY BLOG$~Embedded in the Dodd-Frank Act signed by President Obama is a truly historic regulatory provision, one targeted at eliminating funding for armed groups in the eastern Democratic Republic of Congo.

Armed groups there finance themselves through trade in four main minerals: tin, tantalum, tungsten and gold, used in technological products sold worldwide, including mobile telephones, laptop computers, and digital video recorders.

Section 1502, or the conflict minerals provision, is a disclosure requirement that calls on companies to determine whether their products contain conflict minerals, by carrying out supply chain due diligence, and to report this to the Securities and Exchange Commission.  Although the law has been in effect for some time, the SEC has yet to release final rules giving life to the terms of the statute.

Much attention has been paid to this particular rulemaking, withsome contending that the SEC is not the correct agency to deal with non-financial disclosures. But the SEC’s mission is investor protection, and non-financial disclosures could reveal consequential facts about a company that could threaten the law’s mission.  As the SEC’s own website states:

“The world of investing is fascinating and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That’s why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.”

In order to do this research and to ask these questions, investors need to have access to all material information that may affect their investment decisions. Investors have said as much, stating that they have a right to know the management of risks affecting a company’s global supply chain.

It would seem that if the investors say something is material to them, then the SEC, as the agency tasked with investor protection, should work to deliver that result. One would therefore have expected full and detailed regulations to be developed in short order.

But the story is not that simple. To complicate matters, the SEC has been increasingly targeted in rulemaking by industry and business groups, including the US Chamber of Commerce. Last year, a three-judge panel in the Business Roundtable case said the SEC did not adequately analyze the economic consequences of a rule that would make it easier for shareholders to oust members of corporate boards, an important tool for bringing more democracy to the boardroom. The court declared that the SEC had acted “arbitrarily and capriciously.”

The Chamber has also indicated that other Dodd-Frank regulations are within their cross-hairs, including conflict minerals regulations.

As owners of companies, investors should be alarmed by the attacks being leveled by the Chamber of Commerce and other industry groups against regulators. At the same time, those in the boardrooms of major corporations, ultimately accountable to the shareholders they represent, should understand that transparency and disclosure mechanisms are key measures to improve corporate governance, to understand the impacts of corporate activity and to build longer term corporate value by knowing and showing risks that may affect the company.

Corporate social responsibility is in fact mandated through requirements like Section 1502 of the Dodd-Frank Act.  But the duty to act in ways that help address the links between a horrific trade in minerals and human rights abuses should also be seen as an opportunity to provide companies with critical information about their supply chains and to provide investors with more accurate information relating to their investments decisions.

Without viewing such a non-financial disclosure in this lens, we’re all worse off–the companies that continue to work unknowingly with conflict in their supply chains, the investors who are left blind to these practices and ultimately the mining communities in the Congo who continue to suffer as a result of this trade.

source: forbes.com

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