Tag Archives: Chris Bayer

Conflict Minerals IPSA Objectives, Country of Origin Identification Criticized

The highly respected duo of Mike Loch and Dr. Chris Bayer published a pointed article exposing several flaws in company conflict minerals reporting and the Independent Private Sector Audits (IPSAs) for CY15.  Based on their analysis of the findings, companies:

… failed basic plausibility tests concerning the Tin, Tantalum, Tungsten and Gold (3TG) Country of Origin (COO) and the 3TG Smelter or Refiner (SOR) countries.

Examples include references to DRC as the location of smelters/refiners  (“As far as we know, no smelter or refiners processing tin, tungsten, tantalum and gold ore are located in the DRC”).  Further, they found “a considerable number of companies, over 250, cite countries as the source of their 3TG that are highly unlikely to be the actual source.”

In our view, these are legitimate concerns, indicating a widespread over reliance on a single source of smelter/refiner data with no substantive review or consideration given to the data by the issuers themselves.

With regard to the IPSA,

… among the companies submitting implausible COO, four (4) companies made a “DRC conflict free” product determination and underwent an IPSA.  These four IPSA’s were performed by three different audit firms.

These findings illustrate the fact that the two IPSA objectives in the SEC Rule do not take into account the accuracy of the content and conclusions …

At first glance, this may be taken as a critique of the three audit firms – but in reality it is not.  Rather, Mike and Chris point out – as we ourselves have stated many times – the specific IPSA objectives offer very little assurance with respect how thoroughly or how well companies conduct their due diligence.  Other critiques of IPSAs and auditors have incorrectly placed blame on audit firms for following the legally-mandated objectives.  Even though Elm was not one of the three audit firms indicated, we – as do Mike and Chris – do not believe the auditors are at fault in any way.

Update on 2016 Conflict Minerals IPSA Audit Requirement

With the Securities and Exchange Commission’s decision earlier this year to forego an appeal to the US Supreme Court of NAM v. SEC, much uncertainty hangs around the requirement for filers of Form SD and Conflict Minerals Reports (CMRs) to conduct an Independent Private Sector Audit (IPSA) for filing year 2016.  We expected the question to be resolved once and for all before the end of CY2016.  However, that now appears doubtful.

As of last Friday, a judge had not yet been assigned to the case in the lower court that is to provide the SEC direction.  The SEC’s Flex Agenda published June 6, 2016 does not list the matter as a rule making activity currently planned by the Commission in the next six months.  Also, there is no hint that the Commission will issue any interpretative guidance or other statement to supersede their 2014 Statement and Partial Stay, which remains in effect “pending further action”.

So for the time being, it appears the the CY2016 IPSA trigger will be identical to CY2015 – the IPSA is necessary only when an issuer voluntarily chooses to classify a product as “DRC Conflict Free” or “not DRC Conflict Free” after due diligence.  It is important to understand that when the Reasonable Country of Origin (RCOI) indicates that there is no reason to believe that tin, tantalum, tungsten or gold in a product did originate – or may have originated – in the Covered Countries, only a Form SD is to be filed and no IPSA is required in such instances.

If you do not wish to commission an IPSA for your 2016 CMR, we recommend you read your CMR language carefully, and even engage a third party to do so, to ensure the language is okay.  According to Dr. Chris Bayer’s newly released study of the CY2015 conflict minerals filings, twelve (12) companies did not file an IPSA even though their CMR language triggered the requirement.

 

 

Two Major Studies of 2015 Conflict Minerals Filings Released

Bloomberg’s Emily Chasan published an article that provides an overview of the Source Intelligence and Dr. Chris Bayer’s analyses of the 2015 conflict minerals filings.

Some of the high level findings:

  • The number of filers was generally consistent with 2014
  • Page length of the Conflict Minerals Reports increased
  • About half the filers provided a supplier response rate, which averaged 83%
  • 181 filers stated that achieved 100% supplier response
  • Only 19 companies obtained an Independent Private Sector Audit (IPSA), but more than 100 companies stated or implied they had conflict-free products
  • 656 companies failed to disclose their suppliers’ country of origin

Dr. Bayer’s study also suggests the number of filers is only a portion of the total that should be filing conflict minerals disclosures with the SEC.  An explanation and methodology for estimating what he considers a plausible filing universe is provided.

These studies are available for free download and we recommend reading them both.

 

CY15 Conflict Minerals Filings Analysis Underway: Don’t Call it “The Tulane Study”

As in past years, Dr. Chris Bayer is leading an analysis of the CY2015 SEC filings on conflict minerals.  Like last year’s report, it is an independent review and ranking of the disclosures – what Dr. Bayer is calling “assess and bless”.  Although this year’s analysis of good practice indicators has changed, the compliance indicators remain unchanged.  Previous years’ reports attracted much attention in the media and did indeed drive company behavior rather broadly – perhaps more than other reports or organizations in the past.

However, it is incorrect to refer to the CY2015 report as “the Tulane study” or link it directly to Tulane University in any way.  Dr. Bayer conducted the work under Development International, a firm he founded.  Indeed, the CY2014 study was also conducted under Development International as well.

So for this year, please don’t call it “the Tulane study”.

Ahead of Public Release, Elm Previews Full Data from Bayer/Assent Report on RY2014 Conflict Minerals Filings, Key Trends Emerge

The recent report Dodd-Frank Section 1502 – RY2014 Filing Evaluation authored by Dr. Chris Bayer and sponsored by Assent Compliance, has received a great deal of attention since its publication this past July. The report reviews the SEC conflict minerals filings for all issuers that filed reports by the regulatory deadline of June 1, 2015 covering the calendar year 2014. Summaries of key data collected are provided in the report, along with “scores” of 25 issuers. The “Top 100” scores were released on October 6, and the complete data set covering all 1,267 issuers is to be released to the public around November 2.

Elm was on the Advisory Committee of the study and as such, provided input into the data-gathering tool and scoring criteria, but we had no involvement in the data collection, interpretation or evaluation as Dr. Bayer undertook the study to be wholly independent. Although the Advisory Committee had a say on the instrument, Dr. Bayer had the final word. Also, he is the primary author with ultimate responsibility for the survey implementation, data evaluation and results. He, along with Assent, allowed us to review the full data ahead of the public release date and publish our thoughts. We greatly appreciate the opportunity to have the sneak peek.

Jonathan Hughes of Assent set the stage for the study: “The idea behind the study came from questions and comments we heard from customers and at conferences. Companies want to make sure that their program is in line with others in their industry and other issuers in general. This study provides a common benchmark that companies can use to measure their program against their peers. While it is not perfect and based only on publicly available data, it is currently the best source of benchmarking available to issuers.”

The report and the data/scoring released thus far have generated controversy, which will no doubt increase when the full data set is publicly available. As with any scoring methodology, some do well and others not so well. We make no comment on the validity of the study or scoring criteria, although many others are likely to do so. Differences and divergent opinions are bound to crop up.  Dr. Bayer and his team of researchers interpreted the SEC Rule based on their view of the legislative intent.  While their interpretations were widely shared in many instances, it is evident that there is room for other interpretations and opinions. Also, with 1,267 disclosures evaluated and over 85,000 individual data points collected, errors in the data may exist. Dr. Bayer and his team are setting up a mechanism to address requests for corrections from issuers who believe such errors have been made. We took the numbers at face value and our following thoughts are based on that.

We appreciate Dr. Bayer’s independent perspective on the SEC’s disclosure requirements and his interpretations thereof. At the same time, we disagree with the scoring approach to one criterion. This is not a bad thing – it illustrates the ambiguity facing issuers in writing their disclosures. Where others disagree with interpretations taken in the scoring, we hope they take the same view.

Question 5 of the compliance scoring for SD+CMR filers asks if the issuer’s description of their due diligence framework explicitly lists all five steps of the OECD Due Diligence Guide. Points were awarded where the answer is “yes”, with no points given for a ”no”. Merely referencing the OECD Framework was considered a “no”. As a result, 431 issuers received no points (42.7% of CMR filers), 578 were awarded points (57.2% of CMR filers) and 257 were considered N/A as SD only filers. We disagree that the SEC disclosure instructions mandate the explicit call-out of all five OECD steps. In our opinion it is acceptable to make a direct reference to the OECD Guidance without regurgitating it; we (and other notable experts) find no language in the rule specifically mandating detail.

Results of Question 2 were informative. Question 2 asked if the issuer separated RCOI activities from the description of due diligence measures. Issuers that do not separate the two will likely to pay unnecessarily high IPSA costs when the IPSA is required. Of the 1,010 CMR filers, 245 (24%) conflated RCOI and due diligence descriptions, and therefore face paying an IPSA auditor more than they should.

In looking at the results from SIC groupings, there were a few notable things. Within some SIC codes, significant variability exists in issuer reliance on their RCOI to make their final conclusion about sourcing and the need for due diligence. There can, of course, be meaningful differences in circumstances between companies, even those in the same SIC code. Additionally, SIC codes are not always completely accurate representations of a company’s products or business – SIC codes are self-determined and there is no regulatory oversight.  So while these numbers are interesting, they don’t tell the whole story. Even so, the following stood out as rather lopsided.Slide1Also, for SIC 2820 (plastics manufacturing), six of the ten filers in this SIC code submitted a CMR, possibly indicating less than universal acceptance (or perhaps knowledge) of the metal compound interpretation embodied in the Keller & Heckman letter on SEC’s website. On the other hand, those six issuers may manufacture other products that are within scope of the disclosure.

Finally, for those fourteen issuers in the difficult position of being distributors or wholesalers of electrical apparatus, electronic components or hardware, every one filed a CMR. Distributors typically do not contract to manufacture products – they are a sales channel for “generic” products – and rely on that position when responding to customer requests for conflict minerals data. The prevalence of CMR filings appears to be a juxtaposition to how they respond to customers.

A total of 136 companies scored 70 or below, which could be considered an “F”. Twelve are household brand names and the average market value of the 136 is $6.6B, so there are a number of sizable companies in this list. Looking at a these scores in terms of a few selected SIC codes:

  • 10 in 2834 (pharmaceutical preparations) – the SIC code with the most scores below 70.
  • 3 in 3670 (electronic components)
  • 7 in 3674 (semiconductor)
  • 6 in 3841 (surgical & medical equipment)
  • 5 in retail

Finally, we were interested in the differential between compliance scores and “good practice” scores. The good practice scoring criteria are those used by Responsible Sourcing Network (RSN) in their Mining the Disclosures report.  It is worth noting that RSN has stated that their scoring methodology is different from that used by Dr. Bayer, although for purposes of Dr. Bayer’s report – as well as this article – we don’t see this point as critical.

For this article, we decided that a score differential* of less than 50 (the halfway point of the category score) reflected above average uptake of the good practice indicators in comparison to the company’s compliance efforts. Conversely, a score differential of 50 or more reflected a focus on compliance over good practices. The breakdown of the 1,267 filers (RSN and Dr. Bayer scored both SD-only filers and SD+CMR filers) is in the table below.

Slide1

Surprisingly, of the 314 issuers with a 100 compliance score, 60% (189) also had a score differential greater than or equal to 50, indicating lower uptake of good practices than anticipated. We expected greater parity in those with a perfect compliance score. There was a single instance where the differential was negative, meaning the good practice score was higher than the compliance score.

In conclusion, the data shows a variety of approaches used by issuers, even those in the same industry groups. Much of this likely stems from the lack of clarity that exists in the disclosure requirements and the variability in interpretations of key components of the rule. At the same time, the numbers themselves can be misleading as they do not provide visibility into meaningful differences in circumstances between issuers, even those in the same peer groups. It can also be said that these numbers don’t reflect year-over-year improvement or progress made by many issuers, even if their score is considered low.

There is much value in this study, even if it is not perfect. Issuers slogging through the haziness of the rule need a stationary beacon as a navigation guide. These scores offer a generally consistent point of reference, especially for companies in the same peer groups. Dr. Bayer commented, “All together, issuers have invested millions of hours of effort to implement the Rule within their supply chains. In a way, our evaluation validated much of that effort by applying a coherent, comprehensive evaluation framework, and finding that many companies did great in terms of compliance. The report also points to weaknesses and low-hanging fruit for improvement. I am optimistic that next year overall we will see a higher compliance score.”

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*   The differential is determined by subtracting the good practice score from the compliance score.  A smaller differential indicates more parity between the two categories, which we took as meaning comparatively more attention was apparently paid by the issuer to the good practice indicators.  We understand this is far from scientific or statistically precise, but we only sought to find generalized trends.

New Study of all CY2014 Conflict Minerals Filers Available

After the June 2 filing deadline for the SEC conflict minerals disclosure, a study similar to our own analysis last year of the CY2013 filers was commissioned by Assent Compliance.  Assent engaged well known conflict minerals researcher Dr. Christopher Bayer, Adjunct Professor at Tulane University, to develop and conduct this year’s study.  Dr. Bayer also authored the 2011 cost analysis of the SEC’s then-proposed regulation, on which the SEC relied heavily in developing their final rule cost analysis.

As part of this years’ conflict minerals filing study, Dr. Bayer assembled an Advisory Panel to provide input on the study protocol and data evaluation criteria.  Elm Sustainability Partners is proud to be one of panelists on this important study.

But we are even more pleased to see Elm clients and good friends on the Top 25 list of companies getting a 100 on the compliance score.

Click here for a video introduction and links to the study.