80% of companies lack knowledge of conflict minerals in products
Up to 80% of companies are uncertain whether they use conflict minerals, according to an analysis of disclosure reports by Harvard Business Review (HBR). The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act made it mandatory for companies listed on US stock markets to provide information about the presence of such minerals in their products. HBR studied every report on conflict minerals submitted to the Securities and Exchange Commission from 2014 to 2016. Just 1% of firms claimed their products were free of conflict minerals, whilst 19% stated they had no cause to suspect the presence of such minerals.

Manufacturing used to be highly vertically integrated in the U.S. For example, Ford’s River Rouge plant not only assembled cars but also made its own steel, glass, fabrics, power, and cement on-site. But since outsourcing has become an increasingly common approach to cutting costs, many producers now rely heavily on globally dispersed supply chains. For example, Apple works with at least 200 suppliers and 242 smelters and refineries across the world. There are similar stories in the electronics industry, pet food, pharmaceuticals, and even national security. It’s no wonder so many consumers have no idea where their favorite brands come from.

But are businesses any better informed than their customers? We wanted to find out.

In 2010 Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act, which included a provision, Section 1502, mandating that companies listed on American stock markets disclose whether their products contain conflict minerals: tantalum, tin, tungsten, and gold originating in the Democratic Republic of the Congo (DRC) or adjoining countries. This regulation came as a result of concerns that the exploitation and trade of conflict minerals by armed groups was helping to finance conflict in the DRC region and contributing to its emergency humanitarian crisis.

The law was meant to encourage firms to shift to conflict-free suppliers in DRC and elsewhere in order to deprive combatants of resources. However, Section 1502 does not require firms to avoid DRC conflict minerals — it simply requires them to make a good faith effort to disclose the source of the minerals in their products.

Eligible companies had more than three years to investigate their supply chains; the first disclosure reports were due in May 2014. We now have three years’ worth of reports in hand, and our analysis, published in the Academy of Management Journal, shows that giant multinational corporations often have little idea where their raw materials come from.

We analyzed every conflict minerals report submitted to the SEC in 2014, 2015, and 2016 (though our paper only includes results for the first two years). Filing companies were primarily based in the U.S. but they included foreign firms listed on U.S. stock markets. Using computerized content analysis and human coders, we categorized every company into one of three groups: “DRC conflict-free,” for companies that certify that their products are free of DRC conflict minerals beyond a reasonable doubt; “no reason to believe,” a somewhat lower standard of evidence, implying that it is more likely than not that products are conflict-free; and “DRC conflict undeterminable,” for those that were unable to answer the question with reasonable certainty. Firms could also admit that their products contained DRC conflict minerals, but thus far none have done so.

Only about 1% of the companies were able to declare that their products were conflict-free beyond a reasonable doubt. Of the rest, 19% declared that they had no reason to believe their products contained DRC conflict minerals. The remaining 80% admitted that they were unable to determine their raw materials’ country of origin.

Two things stood out to us. First, the more global the company (in terms of the range of countries it operated in and the proportion of its sales made outside the U.S.), the less likely it was to declare its products conflict-free. Second, the bigger and more dispersed the supply chain (we created this measure using data from Bloomberg), the less likely the company was to declare itself conflict-free .

We also interviewed a dozen supply chain executives, lawyers, and activists, who told us that their supply chains were simply too complex to track every input. Most notable brands are typically several tiers removed from actual smelters and mining sites that produce the minerals that go into their products. For example, for companies to know where their tantalum comes from — the metal is widely used by the electronics, chemical, pharmaceutical, and aircraft turbine industries — they need to survey their suppliers and persuade them to survey their suppliers, and so on. If suppliers don’t bother to respond to the survey or cannot persuade their own suppliers to respond, the inquiry grinds to a halt, leaving the company in the dark.

One supply chain manager of a multinational Fortune 500 company told us that their firm had over 1,000 first-tier suppliers, and these suppliers had 8,000 second-tier suppliers, and the second-tier suppliers had perhaps 30,000 third-tier suppliers. Conflict minerals might be three, four, or more steps back in the supply chain.

Of course, firms could seek to avoid buying tantalum from any suppliers that source from the DRC. The problem is that doing so harms clean suppliers there. This is what some Western brands did after workplace disasters in Bangladesh: Rather than try to find out which suppliers in Bangladesh followed high standards of safety and human rights, they simply vowed not to buy from Bangladesh anymore. It came at the expense of suppliers (and their employees) in Bangladesh that were making the effort to provide a humane workplace.

Fortunately, there are efforts under way to hold suppliers accountable and give companies more visibility into their supply chains. A few firms, such as Intel, recognized early on that the only way to tackle the problem was to investigate the smelters that process tantalum and certify those that rely on conflict-free sources. Apple implemented a third-party auditing system and has parted ways with dozens of smelters and refiners. Industry groups such as EICC, GeSI, and AIAG have made substantial progress in identifying conflict-free smelters in the region, which enables their suppliers to shift to these smelters.

Despite the real possibility of Dodd-Frank being “revamped” under the Trump administration, these efforts are paying off: According to the Enough Project, “More than 70% of the world’s smelters for the four minerals have now passed conflict-free audits,” a vast improvement since 2010. One sign of progress is that prices of verified conflict-free minerals are now substantially higher than those of untraceable minerals. Contemporary supply chains may seem impossibly complex, but there is some reason for cautious optimism.

Editor’s note: This post has been updated to properly attribute one data source.