Tag Archives: risk assessment

Predicting the Failure – or Success – of Sustainability Leadership

Ed. Note: Elm Sustainability Partners is exceedingly grateful to Commander Kerry F. Gentry, USN (Ret.) who has granted Elm the use of his leadership assessment framework, data and tools developed over more than forty years as a Commander in the US Navy Submarine service and numerous positions within Computer Sciences Corporation.

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“Let’s make sure our sustainability program and initiatives fail.”

It is doubtful any company thinks like that. Some companies use sustainability as a fundamental business tool and competitive advantage. Internal organizations are created to support the strategy and people are promoted from within or hired from outside to be Directors/Vice Presidents.

But are those individuals leaders or simply managers? Are they suited to moving all the necessary parts of the organization? Or are they predisposed to mediocrity and be ineffectual? No company intends for their sustainability initiatives to disappoint but by not ensuring the needs of the position match the individual, failure is all too often an option.

Two recent business cataclysms – Wells Fargo and Equifax – perfectly illustrate mismatches between leadership needs and their respective CEO’s capabilities. Both resulted in the CEOs losing their jobs, being grilled at Senate hearings, major loss of customers and of course meaningful drops in stock price and investor confidence.

Even more bad news: these CEOs’ inadequacies were predictable. This article presents Elm’s method for assessing leadership capabilities that can help prevent self-destruction of corporate sustainability success due to inadequately matching the correct person to the unique attributes of sustainability.

Leadership is …?

Leadership is often seen as an intangible characteristic few people innately possess. In the corporate world, managers routinely rise through higher levels of management and increased responsibility, yet few become true leaders. There are examples too numerous to count of managers initiated into internal leadership development or mentoring programs, only to stagnate. Enterprises, law firms and management consultants reward situational success (to be explained later) with promotions up to a point, until an individual’s star fades while another individual rises who demonstrates true leadership, or disappoints.

But these failures are often less the fault of the individual than their assignment to a position inappropriate to their personal aptitude. They are the result of how a company assesses and selects individuals for leadership positions.

Leadership itself should be clarified and defined. Most requirements of leadership are universal, but each situation is unique due to the environment in which the individual must perform. There are four primary components:

  • Setting or accepting objectives and goals
  • Aligning objectives and goals of individuals with those of the leader/organization.
  • Influencing those individuals to achieve those objectives of their own volition.
  • Managing risks to those objectives and goals

Situational success is frequently misinterpreted as leadership. A manager’s success is based on the entire team/organizational ecosystem in which the manager is embedded. Changing the team structure/dynamics, or placing that manager in a different setting frequently produces dramatically different results. In other words, managers perceived as leaders may only be successful in a specific situation; if their situation changes, their ability to succeed may falter. In 1969, Laurence J. Peter published The Peter Principle – a theory that promotions are based on a candidate’s performance in their current role, rather than on abilities relevant to the intended role. Or as commonly summarized – “an employee will be promoted to their level of incompetence.” This is situational success.

Why is situational success not equivalent to leadership? Because each leadership need/position is its own unique situation, with its own unique team/organizational ecosystem.   In assessing leadership, the company must clearly define what is important to be successful in the new role, not how well an individual has performed in their current one.

Leadership is generally confused with management, but they are not the same. Management is characterized by defined processes and learned skills. Because these are conflated, managers are promoted primarily for their management abilities (a technical skill) to the exclusion of other – more important and less teachable – attributes. And, as noted by Laurence J. Peter five decades ago, managerial assessments focus on past performance, not needs of the new position. Managers rise beyond their abilities; leaders rise to their abilities.

The Leadership Wheel

The Leadership Wheel was developed by Commander Gentry as director of the US Navy’s Atlantic Fleet FBM Submarine Training Center. As shown below, it illustrates the relationship between leadership factors. Every position/opportunity requires its own distinctive mix and weighting of leadership characteristics, so there is no “standard.” However, an inventory of frequently identified factors was developed by Commander Gentry and is being adapted by Elm.

At the hub of the wheel are core personality attributes that are necessary for an individual to be a leader in a specific position. These are hard-wired into our brains by the time we are a few years of age. They are essentially not changeable through training, incentives or punishment. Certain abilities and personality attributes – good and bad – exist at different levels within different individuals.

The spokes represent habituated behaviors that characterize an individual’s interaction with others, and are those necessary to the position. Behaviors can be learned to varying extents, depending in large part on an individual’s core personality attributes. Generally, modifying behaviors is effective only when training and intervention is sustained over a long period of time.

The rim represents technical skills necessary for the position and is perhaps the most frustrating paradox in leadership decisions. Individuals tend to be selected for leadership positions based mainly on their technical capabilities. Yet of the three leadership elements, technical skills are the most teachable and easiest to attain/modify. Underlying personality attributes and behaviors are less teachable and therefore tend to be more important in leaders.

 Using information from reports about the recent disasters by Wells Fargo and Equifax CEOs, we can build the following example table with some interesting contrasts – but with similar calamitous results. 

Leadership Element Wells Fargo CEO Equifax CEO
Hub
Morality No Uncertain
Empathy No No
Courage No No
Spoke
Confidence Yes No
Decisiveness Yes No
Rim
Communication No No
Disclosure Knowledge Uncertain No

 

The individual traits are obviously notable, but the dynamics between them are also highly relevant. In the case of Wells Fargo, early assessment of the CEO’s deficient moral compass with high decisiveness would have foreshadowed a propensity to make independent decisions that place the CEO’s own interests ahead of the company’s. And had Equifax identified an apparent lack of courage, decisiveness and confidence as attributes of their CEO, they may have prevented catastrophic hesitation in timely public disclosure of their massive data breach, along with his singling out of one employee as the scapegoat. Recall that hub traits are not teachable and spoke behaviors are minimally learnable; therefore, training and education on those topics would be ineffective at altering the actions of those two individuals.

Characterizing Sustainability for the Company

Having defined principles of leadership, the same must be done for sustainability. Sadly, corporate sustainability still is a victim of ambiguity and inconsistency. It is couched in terms of environmental impact, social issues, human rights, employee satisfaction, safety, chemical content of products, supplier behaviors, corporate transparency, talent retention, climate change, governmental lobbying, governance, community involvement and/or philanthropy. The 2017 United National Sustainable Development Goals encompass 17 different topics.

The breadth of sustainability’s potential scope frustrates corporate efforts to describe the concept internally, let alone outside of the organization. There are also diverse views on where a sustainability function should be placed within an organization – does it fit it the EHS department, Investor Relations, Quality, Finance/Reporting or HR?

Setting criteria for performance, success and leadership is problematic without basic scope/definition of a sustainability function and understanding where it fits organizationally. Successful sustainability leaders have necessary defined characteristics in an appropriate mix to influence others in achieving the company’s sustainability objectives. Obviously, without clarity on what sustainability means and where it fits in the corporate structure, a company will be unable to attain effective leadership, and the individual and program are unlikely to last long or prosper.

Connecting the Dots

The common thread between leadership and sustainability is the need for clarity. Clearly defining sustainability helps establish appropriate leadership characteristics, relative importance of skills and expectations of performance. That is used to establish clear criteria with which the company can appropriately assess individuals and create performance goals.

  • What are the core personality attributes necessary to achieving the objectives that are aligned with the scope/definition of sustainability? Critically, the organization must understand that personality attributes are fundamental to an individual’s personality and difficult to modify. Therefore the individual’s inherent character must be well-suited to the particular position to begin with.
  • What behaviors related to interacting with others are required? Does an individual need to change or adapt to the new position/ecosystem and to what extent can the individual do so?
  • What technical skills are necessary and what is their relative importance? What knowledge does the individual currently possess, are there gaps compared to the requirements of the new position and how important are they?

Spinning the Wheel

Elm is adapting the Leadership Wheel by identifying position requirements and developing dynamic interactive versions in Excel to quantitatively assess individuals against those requirements. In order to create requirements for a successful sustainability leader, an inventory of hub, spoke and wheel competencies is developed using internally identified criteria in conjunction with Commander Gentry’s inventory of frequently identified factors. Once the position-specific inventory is ranked and completed, candidates complete a self-assessment, with the same assessment performed by subordinates, peers, managers, mentors, internal sponsors and others. In some instances, third parties such as customers may also provide valuable input. The assessment process can consist of written questionnaires, tests, interviews and role playing exercises. The results are entered into Excel individually and charted/graphed, allowing the data to be analyzed in different ways and manipulated to reflect changes in position requirements, actual assessment results or what-if scenarios.

Applying the Leadership Wheel in practice for both the enterprise and the individual helps avoid placing individuals in highly stressed positions for which they are ill-suited rather using them where they are most valuable and comfortable – benefitting the company and the individual.

Obvious comparisons arise to what HR departments and recruiters do, but leadership assessments are different in several critical ways.

Leadership Assessment Performance Reviews
Leverages specific data from hundreds of previous structured assessments, with consistent themes Inconsistent data over time due to constantly changing corporate performance management systems, review methods and criteria
Specifically focuses on the individual’s attributes and capabilities by eliminating ecosystem influences on situation success Do not differentiate between the “masking effects” of the ecosystem and the individual’s past performance.   Many times performance is specifically assessed in terms of team – rather than individual – performance
Structured and quantified process of assessing an individual’s attributes and suitability prospectively Use a position requirement statement to compare individuals against each other on past performance. Annual performance reviews are frequently seen as a perfunctory administrative task that is not used after completion

Give us a call to learn more about ensuring the success of your sustainability program by selecting the appropriate leader.

Results from the Auditor QuickQuiz

Our auditor quiz is now closed after a month. The questions were based on existing international non-financial auditing standards, Association of Certified Fraud Examiners (ACFE) fraud identification/examination techniques and US Government Auditing Standards for non-financial audits. There were fewer respondents than we had hoped so we can’t extrapolate beyond our dataset. Even so, some notable trends did emerge.

Of those who responded, 47% were EHS auditors and 27% were CSR auditors. We had hoped more CSR auditors would have participated. Other information about the respondents’ backgrounds:

  • 60% had no certification or “other”
  • 50% have 10 years or less auditing experience
  • 50% have 50 or fewer audits
  • 13% have participated in more than 500 audits during their career
  • 63% spend at least 75% of their time conducting audits

There were only 2 “passing” scores – i.e., greater than 70%. The average score was 49% – far lower than was expected.

Knowledge of standard terminology seems to be lacking, further reflected in poor scores for questions that embedded the terminology within them. For instance, only 30% correctly defined “audit criteria” as meaning the audit protocol. This likely led to 53% of respondents incorrectly answering that QA/QC reviews should include assessing the correctness of the “audit criteria used by the auditor.” QA/QC reviews of auditor working papers should look at how an auditor applied the audit criteria, not the inherent accuracy of the criteria (or audit protocol) used by the auditor. Indeed, only 10% correctly identified that none of the answer options are appropriate for QA/QC reviews.

Only 3% considered interviews better than document reviews when asked directly what type of evidence is strongest. Yet when the question was placed in a practical setting, 73% indicated they would rely on interviews over documentation. Only 26% correctly identified the evidence hierarchy (from strongest to weakest).

On a more positive note, 83% answered that they would decline to develop a document that they audited, meaning 17% did not view this as a conflict of interest. Frankly, we were disappointed that there was not a perfect score in identifying this to be an independence issue.

In answering the question listing possible common evidence problems, just over half (53%) correctly indicated that all of the answer options are common evidence problems.

Finally, 2/3 incorrectly answered that initial determinations of significance/materiality should be made after assessing evidence. It is possible that respondents did not read the question carefully and pick up the word initial.

Certainly more responses would have provided a better representation, but we think there are some valuable take aways from our limited data.  Among them – the gap between EHS/CSR auditor knowledge and existing (and theoretically similar) non-financial audit standards may be larger than previously thought.  As the importance – and liabilities – of sustainability/CSR audits grow, increased auditor training and competence seems warranted.

You Are What Your Suppliers Do: Supplier Actions Make Headlines, Break Business

With companies facing increasing pressure for the actions of every part of their supply chain, demand for – and reliance on – supplier/corporate social responsibility (CSR) audits conducted by third parties has grown rapidly.

Shirts, Phones, Rocks and Shrimp

But there is concern about the quality, reliability and credibility of these audits.

CSR Auditing and Toilet Paper

Is Social Auditing Really Auditing?

Harvard Professor Identifies Factors for Meaningful CSR and Supply Chain Audits

You Don’t Know What Your Suppliers Are Hiding

Companies rely on their CSR audit firm to utilize qualified auditors, employ adequate QA/QC processes and expend adequate time to conduct a reasonable audit. Yet there are no generally-accepted professional CSR audit practitioner standards. Moreover, due to cost pressures, lowest cost audit providers are frequently selected that may not have appropriate auditing skills or training – the largest CSR audit firms conduct tens of thousands of these audits each year. Increasing audit time and costs to improve quality or credibility is typically not realistic – the business model is inherently high-volume, low margin.

Are these audits effective at findings supplier actions that create risks for you? Can a company gain confidence in their CSR audits without adding costs? Is a change in auditors necessary?

Improve Credibility for Disclosures, Media and Customers

Changing audit firms is not necessary, nor is another layer of auditing. Instead, a formalized auditor training program can be a low cost yet effective solution.

The Elm Consulting Group International is expanding our well-proven auditor training program to companies who use CSR/supply chain auditors. The intent of this program is for brands to provide detailed communication and training to their current CSR/supply chain auditors about the company’s requirements for auditor competence, audit quality and processes in order to enhance the credibility of audit information.

Our formalized training for existing CSR auditors builds their client’s confidence in the quality of the work provided. The program is not intended to provide training on specific audit topics such as child labor or worker rights. Instead, the focus is on proven audit techniques such as:

  • Understanding and applying professional skepticism
  • Interviewing and active listening
  • Identifying and responding to non-verbal cues within multi-cultural contexts
  • Evidence sampling methodologies
  • Using information from different sources
  • Verification and recomputation techniques
  • Judging audit evidence quality and limitations
  • Fraud detection
  • Using working papers and audit protocols
  • Writing effective and complete audit findings
  • Audit quality expectations, requirements and processes
  • Maintaining auditor independence, including auditor rotation

Our Qualifications as The Leader in Auditor Training

Our HSE auditor training experience began in the 1980s and we have successfully trained hundreds of external and internal auditors. Elm Principals hold auditor certifications from the US Board of Environmental, Health and Safety Auditor Certification (BEAC, now wholly merged into the Institute of Internal Auditors) and UK Institute of Environmental Management & Assessment, are approved trainers for the IIA EHS auditor certification program and are subject to annual continuing education requirements ourselves. Further, Elm Principals have served in various Board positions in The Auditing Roundtable (merged into the IIA in 2016) and BEAC, including the current BEAC Chair.  More information about our internal audit quality and auditor competence standards is available here.

Give us a call at 678-200-3424 or contact us via email to discuss how we can help you increase confidence in your CSR audits.

Shirts, Phones, Rocks and Shrimp

You are most likely asking yourself what the nonsensical title means. It probably won’t seem nonsensical after you read this article.

New and emerging legal requirements, customer/consumer demands and media attention are pushing product compliance and procurement staff in unprecedented directions. Suppler responsibility is now a critical component of their functions and is no longer limited to just certain products or industries.

Arguably, the emphasis on supplier responsibility has it roots in the garment manufacturing sector and specifically, the offshore subcontractors in areas such as Bangladesh and Viet Nam. Working conditions and human rights violations were brought to light and brands initiated supplier screening and audit programs. There we have Shirts.

The electronics industry was next but things went further as a new US law (Dodd-Frank Section 1502) required publically traded companies to disclose origins of the ore used to produce tin, tantalum, tungsten and gold in their products. The sale of some of these ores soured from certain African countries was thought to fund violence and human rights abuses by informal militias.   Now automakers are being pilloried for the mica in their paint.  Phones and Rocks now join Shirts.

New laws in the US and UK require companies to continue their supply chain assessment and screening to include whether suppliers are supporting (or actively engaged in) human trafficking and slavery. A high profile lawsuit against a major US retailer alleged that the retailer’s sub-sub-contractor used slave labor as part of the supply chain for commercial shrimp production. Although the suit was dismissed, the issue in the public eye remains. So there you have it – connective tissue between Shirts, Phones, Rocks and Shrimp.

If your company hasn’t begun evaluating your supply chain beyond your direct supplier, there is a risk that that your product could be the next addition to our article’s title. We are happy to discuss this with you, so feel free to call.

Elm Comments on SEC’s Sustainability Disclosure Concept Release

On April 13, 2016, the SEC published a Concept Release discussing potential modernization of financial disclosures required by Regulation S-K.  A number of questions were posed in the Release and public comment was requested, which closed June 21, 2016. Among the topics included in the Release was “Public Policy and Sustainability Matters,” which the Release terms as Environmental, Social and Governance (“ESG”) concerns. By way of the Release, the Commission is exploring whether ESG matters are material – a term that is subject to much interpretation (we will not discuss that in this post).

As usual, Elm took a pragmatic, client-centric and contrarian position in our comments to the SEC.

Many may be surprised that our comments contrast with potentially increasing our own revenues. However, we put forth our objective views based on 30 years of quantifying environmental, health, safety and sustainability matters, including risk assessment and risk reduction valuation, as well as reviews of dozens of studies on the subject. Our work with companies and their conflict minerals reporting also yielded relevant information.

We welcome any thoughts or comments.

Catch Us Tomorrow at ThomsonReuters Compliance and Risk Forum

We are pleased to be a panelist at tomorrow’s Compliance and Risk Forum sponsored by ThomsonReuters, to be held at the W Hotel in Buckhead (Atlanta).  We will speaking about conflict minerals, sustainability and EHS matters as important elements in the assessment and management of third party/supplier risks.

If you will be there, please make sure you say hi.

 

Cyber Attack on Iron Furnace Controls Causes Physical Damage to Plant

A few years ago, we wrote about how the growth of cyber attacks should be considered when companies assess environmental risk of their operations.  As highlighted in that article, rogue code was discovered before harm was done.

But an iron foundry in Germany was not so lucky.  As reported in this  WSJ article,

The plant’s control systems were breached which “resulted in an incident where a furnace could not be shut down in the regular way and the furnace was in an undefined condition which resulted in massive damage to the whole system,”

This situation should cause concern to anyone responsible for HSE and sustainability matters.  Malicious control of production operations can result in all sorts of nightmare scenarios, especially where the manufacturing operation involves the use of chemicals.  In the most minor case, environmental permit violations and media coverage are probable.  The worst scenario could involve the intentional weaponization of manufacturing by hacking operational controls and intentionally creating another Bhopal or Chernobyl.

We continue to recommend that companies consider these issues when conducting environmental risk assessments of their operations.

All that Glitters: Conflict Gold Accusations in Dubai

Global Witness just published a rather shocking report that blows the whistle on allegations related to gold due diligence activities at one of the world’s largest gold refiners (located in Dubai) and the audit firm engaged to conduct the audit of the company’s due diligence processes.

According to the report, Kaloti Jewelry International hired Ernst & Young to conduct an audit of their operations in 2012 against supply chain due diligence guidance developed by the Dubai Multi Commodities Centre (DMCC), a regulatory body.  DMCC’s due diligence guidance was based on the OECD Due Diligence Guidance.

The audit team reportedly found that the refiner:

  • Engaged in suspicious cash transactions totaling more than US$5.2 billion in 2012 alone;
  • Knowingly – and routinely – accepted tonnes of gold from Morocco that was coated in silver to intentionally circumvent that country’s gold export laws; and
  • Had inadequate supply chain documentation for suspect gold from Sudan.

From there, the report points fingers at the DMCC and Ernst & Young directly for various governance failures related to the Kaloti audit results.  Eventually, the lead auditor from Ernst & Young refused to sign the audit report and resigned because the firm did not report the findings publicly (as was specified in the original DMCC guidance) and did not disengage from the client at that point.

There are, of course, two sides to this story and the Global Witness report reflects but one.  We only know what is presented in the report and have no basis on which to judge or assess the larger set of facts.  But a partner resigning from a Big 4 firm (apparently voluntarily) in response to the situation does raise eyebrows.

Even if the facts eventually demonstrate that there is more to this, the perception alone of the report could result in significant and wide ranging impacts for all stakeholders in the conflict minerals supply chain.

Additional coverage has been published by British media BBC and The Guardian, both of which include interviews with the auditor.

Conflict Minerals Report (CMR) Audit Cost Reduction Strategies, Part 3

UPDATES:  On April 7, 2014 – almost a year after we originally posted this article – the SEC published a second set of Q&A.  Question 18 clarifies that the SEC staff position is fully consistent with the strategy discussed below.  In addition, the September 2014 Department of Commerce report adds another reference point against which smelters/refiners need to be compared in due diligence measures.

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The last installment of our three-part series on strategies to minimize the costs of upcoming Independent Private Sector Audit (IPSA) of the Conflict Minerals Reports (CMRs) required under the SEC final regulation. Each installment focuses on one strategy.

Our short series of articles explores ideas for reducing the cost of the Independent Private Sector Audit (IPSA) of the CMR. This final article focuses on the third cost reduction strategy – defining the due diligence process. Fair warning – this discussion gets deep into the weeds of the regulation and the OECD 5 Step framework.

As a quick reminder, recall that SEC narrowly focused the IPSA by establishing the specific two-part audit objective, and clarifying that “the final rule does not require an audit of the entire Conflict Minerals Report” (p. 56329). The IPSA is to cover the elements of the CMR that describe the due diligence activities – nothing more1.

Clearly, it is critical to clearly define/delineate how due diligence activities relate to – and contrast from – other activities.

Isn’t Due Diligence the OECD 5-Step Framework?

The default response to the question of “what is conflict minerals due diligence?” is the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High Risk Areas and the associated supplements. This document is frequently referred to as “the OECD Due Diligence Framework” or the “OECD 5-Step Framework” in reference to the five-step conceptual design outlined in the document. SEC referred to the OECD framework in the preamble to the final regulation, acknowledging that it “satisfies our criteria and may be used as a framework for purposes of satisfying the final rule’s requirement” (p. 56326). Indeed, at the time of rule’s adoption, the OECD document was the only such framework (p. 56281).

So there it is.

Or is it? Must a company’s due diligence process, along with the description of it in the CMR (which defines the boundaries and cost of the IPSA) contain all five steps?

We think not, and this graphic illustrates our views.

Statements made by SEC and OECD support the position that some steps of the OECD framework align with SEC regulatory elements other than due diligence. Among the more significant:

  • Risk identification (OECD Step 2) is part of the RCOI (SEC Step 2) (p. 56312)
  • Policy development (OECD Step 1) is part of RCOI (SEC Step 2) (p. 56312)
  • RCOI precedes – and determines the necessity for – “further work outlined in the OECD guidance – due diligence”, indicating that the OECD 5-step process includes more elements than just due diligence. (p. 56312)
  • Due diligence processes are not prescriptive, are intended to be flexibly implemented, may differ between companies and even between minerals within the same company (p.56326; OECD p. 14 and Annex I, P. 16).

The OECD Cycle 3 Report also bears out these, and other, supporting points.

Perhaps not everyone will agree with this interpretation. But we believe that for many, it will make sense and help manage IPSA costs.

Setting It Up

Once a company has reviewed the facts and circumstances and decides to move forward in this manner, the next question is how to proceed and/or prepare. We don’t think this needs to be complicated, burdensome or require significant changes in processes/systems already underway.

We use this analogy: visualize the OECD 5-step framework as separate tabs in a 3-ring binder. Removing the Steps 3 and 4 tabs and placing them in a separate binder labeled “Conflict Minerals Due Diligence” establishes the distinct scope of the due diligence process and by definition, the IPSA. The original binder can be appropriately labeled “Conflict Minerals Management Systems, Risk Assessment/RCOI and Reporting” – or similar descriptive terms. Just don’t call it “Due Diligence”.

Now place relevant documentation behind the appropriate tabs in the correct binders. As a front page for each tab, consider adding a short description of each element, how it relates to the other elements and due diligence, maybe even using a diagram. Do the same for the stand alone due diligence binder to clearly illustrate the distinction between it and the others. The summary description may even form the basis for the CMR due diligence description.

Again, keep in mind that the IPSA should focus only on the elements of the CMR that describe the due diligence activities. Emphasize clarity in these explanations as that will help the auditor understand the program element boundaries and ease the audit process. As mentioned in the previous article, companies need to ensure they select qualified auditors with appropriate expertise so that the delineation of the processes is understood.

What about Step 4?

OECD Step 4 is the audit of the due diligence practices of the smelters/refiners themselves. It is well established that both OECD and SEC support use of industry initiatives such as iTSCi and EICC’s Conflict Free Smelter (CFS) program to conduct the smelter/refiner audits2. For downstream companies in particular – as OECD made clear in the diagram on page 20 of the Cycle 3 report – Step 4 is about supporting the development and implementation of third party audits.

But in our view, the connection between the smelter audits and the due diligence “binder” is not about conducting or participating in smelter/refiner audits as that may not be reasonable or appropriate given the company’s place in the supply chain. We think the relationship between due diligence and Step 4 centers on obtaining additional information about smelters/refiners that are potential “risks” as determined from the RCOI process (e.g., non-responsive suppliers and smelters/refiners that are not CFSI audited or even on the CFSI lists) and if or how the company uses smelter/refiner audit information within its risk mitigation/response strategy and decisions.  This is consistent with the SEC’s clarification on RCOI versus due diligence.

Under this interpretation, the company’s due diligence process and explanation thereof in the binder and CMR report would identify the third party audit scheme relied on by the company (e.g., EICC CFS), and describe how the company uses that information. The IPSA would not assess the smelter/refiner audits themselves, but as defined within SEC’s stated IPSA objective, would instead compare the CMR’s description of the smelter/refiner audit information use with the way the company actually makes its risk mitigation decisions.

Are We Done Yet?

In our three articles, we presented ideas to consider in managing the costs of complying with the IPSA requirement when such an audit is triggered. Some of our commentary may be considered controversial and there may not be general consensus on them. Over time, other ideas and interpretations will likely emerge that reinforce, supplement or supersede these. We will attempt to offer commentary as we become aware of these developments, and invite others to engage in the discussion.

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1 Although to be precise, auditor guidance for the GAO audit standards is in development to help auditors interpret when or if conformance to Attestation/Performance Audit standards require what some may perceive as scope expansion.

2 Others include gold audits under Responsible Jewelry Council (RJC) and London Bullion Marketers Association (LBMA), both of which have obtained mutual recognition status with EICC. The tungsten industry’s Conflict Minerals Council was launched very recently; it is unclear at this time how that initiative aligns with Step 4.

These articles represent views, observations and opinions of The Elm Consulting Group International LLC/Elm Sustainability Partners LLC and are not to be construed as legal advice, nor should they be relied on without appropriate business and legal reviews.

Business Continuity Strains Under Combination of Flooding, Dodd-Frank

After the devastating tsunami in Japan early in 2011, we began exploring the interrelationship of green/ethical procurement (such as conflict minerals) with business continuity/disaster recovery planning.

Now, an article from leading electronics supplier Digi-Key states that lead times are delayed up to almost 6 months for a significant amount of the world’s production of tantalum capacitors as a result of the flooding in Thailand, combined with raw material supply impacts of conflict minerals laws/policies.   Of course, higher prices are also expected.  “Combine those two things together and that put a big strain on the supply of raw materials in the market as well as pricing,” said Joe Porter, vice president tantalum product marketing at Kemet Corp. based in Greenville, S.C.

We continue to believe that significant opportunities exist for business continuity/disaster recovery planning efforts to incorporate growing green/ethical procurement initiatives.  Robust sustainability risk assessment exercises are essential in identifying relevant gaps and areas for improvement.  Feel free to contact us for more information about how we can help.