For the non-initiated, it might be hard to see the links between a Seattle-based, running shoe and apparel firm and brutality in the Congo.

CaseStudy_BugYet when the Securities and Exchange Commission’s Conflict Minerals Rule went into effect in January, tracing  such connections is exactly what Berkshire-Hathaway subsidiary Brooks Sports had to start doing.

Under the rule, which was mandated under the Dodd-Frank Act, companies must disclose their use of tantalum, tin, tungsten or gold (commonly called the “3TG” minerals) if they are “necessary to the functionality or production of a product” manufactured by the companies.

The minerals are found in “thousands of products ranging from cell phones and laptop computers to jewelry, golf clubs, drill bits and hearing aids,” according to a PwC report, which cited estimates that “6,000 SEC issuers will have to provide new disclosures under the rule.”

Further, about 275,000 non-public companies that are part of the issuers’ supply chains will be affected, according to PwC.

David Bohan, president and chief operating officer, Brooks Sports

David Bohan, president and chief operating officer, Brooks Sports

Unlike many companies, Brooks started planning its effort to comply with the rule months ago, says David Bohan, the firm’s president and chief operating officer and former CFO. Then again, the company had a leg up on compliance with materials-disclosure rules, having reported via the Reach Restricted Substances List.

Nevertheless, gathering the data for the first conflict-minerals reports, which are due May 31, 2014, will be “a huge challenge” for Brooks, requiring the firm to delve deeper than ever before into the sourcing of its supply chain than ever before, Bohan told CFO.

That will be true even though the company’s use of potential conflict minerals boils down to just the tin in the zippers of the running clothes it sells. An edited version of an  interview with Bohan follows.

Before the conflict-minerals regulation was enacted, what kinds of materials monitoring was Brooks doing?
We’ve been heavily involved with it for the last few years. We have engineers here in the United States as well as our engineering team in China that continue to monitor all our products. As we roll into 2014, the conflict-materials rule is adding to the list of more and more things that we will continue to test.

What do you test for now?
We already test our kids’ shoes, making sure that there’s no lead in them. The conflict-minerals rule has really taken [testing] to another level because it’s getting more and more of our supply-chain partners involved. That’s because we really need to understand where they are purchasing raw materials. In the past, we’ve done materials testing to make sure that our products do not have certain materials. We really weren’t concerned about the source.

How many of your products will it affect?
It’s a small issue for us, relatively speaking, because — especially on the footwear side — we don’t use a lot of the materials listed as conflict materials. The apparel side is really where it comes into play on a go-forward basis. We really need to work with our apparel vendors and sourcing channels to understand where the materials are actually coming from.

Where might conflict minerals be used in your apparel products?
It’s not going to be in the performance fabrics, which are used in a large portion of our products. But a lot of it’s potentially going to be in the zipper material. It’s at the bottom of the zipper or in the zipper pull that maybe you’ll have some tin.

Potentially, tungsten is a concern.  I don’t really see us using it, but things do change. That could happen if apparel designers see something that they really like that happens to have tungsten in it. But those would be the only two. We don’t do any diamonds or gold: Our customers are not interested in wearing gold and diamonds while they’re out running.

How will you respond to the challenge of complying with the rule?
While in the past we made sure that those materials were not coming from a restricted country, the conflict rule has made us add to the number of people [performing compliance tasks]. We’ll be adding another person in 2014 to the team to help with the testing, and working with our sourcing partners around the globe to make sure that we’re in compliance.

Tracking down the country where the tin in a zipper is made sounds like quite a challenge.
It’s going to be a huge challenge for us because we work with many different suppliers and many different vendors, especially cut-and-sew vendors. We give them the specs relative to the materials that we want them to build. Then they go to the next level of supply chain to purchase the raw materials needed to provide us with the finished goods.

But now we need to make sure that our cut-and-sew providers are getting confirmation from their suppliers about where they’re buying the materials from — that they’re not bringing them in from restricted countries. So on a small piece relative to the total garment, the rule is adding a lot more complexity relative to the actual making of the product.

How much deeper do you have to look into your supply chain than you did before?
In the past we’ve given specifics about the materials we need to have. But we’ve never had to actually go out and ask, “OK, is this coming out of China, India, Malaysia?” We’ve never really gotten to that level of specifics before.  But now we need to understand the origin of all the materials in finished goods to make sure we’re still in compliance.

Why are you making this effort, even though you’re not a public company and thus not, strictly speaking, subject to SEC reporting rules?
Being part of Berkshire, we are public even though we’re not directly reporting. And from a policy standpoint, we’re going to do what the right thing is. We want to make sure that we’re not buying materials from an organization that the government deems illegal.

And, within our compliance and within our company, we’re not in favor of human slavery or human trafficking. Whether it’s an SEC rule or not, we want to make sure we’re not buying things that are harmful to people in other parts of the world.

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4 responses to “On the Trail of Conflict Minerals”

  1. Frankly I think the concentration on this issue is ridiculous.

    As a CFO, despite the fact that I have some left-leaning views, I don’t consistently identify with any particular party…a different issue for another time. In my position I never allow my personal feelings to interfere with my decision making.

    To expect organizations of less than Billion$ status to be able to track down
    the source of every part of their product is not feasible or sustainable. It creates additional unnecessary costs to the organization and ultimately to the consumer. To know how whether workers were paid fairly (subjective), the workers’ personal situation, from their housing to virtually aspect of their welfare is absurdly out of touch with reality.

    A recent article in the LA Times about the Canadian Oil Fields (Tar Sands)
    reflected, in response to some evidence that there was a higher indication of
    pollutants and a higher incidence of cancer in the indigenous population, that
    the respondent give the really honest answer that “we can either die from starvation, or we can take the chance of dying from cancer”. The realistic
    choice is obvious to them. Not good choices, but “real” choices.

    Just as we as a country seem to feel the need to impose our version of democracy on the rest of the world, we also seem compelled to impose our
    notion of human rights into environments in which we don’t have to live. I’ll guarantee you that, were you to be living in some of these other countries, and faced with their daily realities, given the choice between having a job and starving it wouldn’t take an MBA to make the necessary decision.

    So what do we do about countries, from which we need their resources, that have a different set of values? Guess what? You don’t have to go any further than the primary source of our petroleum resources over these many decades.
    We need to stop being so obviously hypocritical.

    We need to stand up – invest back in America by creating jobs. Stop setting on unprecedented cash piles while complaining about uncertainty. That’s ridiculous! There is no certainty in business. To the extent that we sit on the sidelines awaiting certainty, someone (the smart ones) will eat your lunch.
    Our willingness as a nation to be risk-taking and innovative is what got us
    to be one of the most financially powerful nations in the world. This is not the time to abandon that notion, and to the extent that we concentrate on issues such as tracking the ultimate source of materials as indicated in this article, we are taking our eye off of the ball. We’re misusing the human capital and the financial resources that could be better directed into creating jobs and reinvesting in the future.

    If we want to make a socially/humanitarian statement, we should appeal to the major corporations that are hoarding cash to look at things differently. Instead of boasting about “improved efficiency”…translation – cut jobs, and make the remaining employees so afraid for their jobs that they’ll longer and harder and not complain, these corporations should think about investing back into their own communities by creating jobs. More jobs, more purchasing power.

    Instead of “stock buy-backs” – Instead of larger Investor Dividends –
    Instead of higher executive pay – Instead of concern with quarterly earnings and satisfying the analysts, we should concentrate as CFO’s on fighting back
    against the nonsensical social issues (reference the article) and replace it by making a genuine effort to create jobs; get over the boogeyman fear of uncertainty; not pander to the shareholder blocks; and truly invest in our nation’s future.

    hmaterials that go into a relatively small part of your own offering presupposes that someone on high has made that sometimes subjective determination of what is and what is not acceptable.

    All that having been said, the notion that we should have linkage between social issues and business related issues is something that should be challenged on a case-by-case basis.

    I’ve always been about maximizing the utilization of available resources
    As a CFOthis is particularly troubling for me
    because I think that my personal attitudes linkage between social issues and business
    I concentrate on primary things.

    • Thank you. I could not have said it better. Stop using our Supply Chains as a whipping boy for social causes half a world away!

  2. It’s unlikely that the SEC would concentrate on something (like conflict mineral restriction) without reason or vision. It’s widely believed that the EU and Canada are likely to follow with their own version of conflict mineral rules. Why all the fuss? Because “Africa is the new Asia.” In 10 years, a blooming African middle income consumer base will dominate the global market landscape. Major companies are already establishing manufacturing bases in Africa with that vision in mind. The goal of conflict minerals restriction is: political stability. This is not a humanitarian effort, which is why it’s an SEC law rather than just an activist initiative (although it certainly is that, too, and with good reason). This is a bid for an economic future in the Next Big Industrial & Consumer Region. The SEC is essentially asking companies to invest in their own economic future. Would like to hear whether readers agree or disagree with this view.

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