Citizens Talking Like Traders
The debate about the legal status of disclosure requirements revealed how a coalition of NGOs and ethical investors—who would be associated with a ‘corporation as citizen’ construction of responsibility—also mobilized the ‘corporation as trader’ construction when convenient to justify expanded responsibilities. The SEC’s proposal stated that conflict minerals reports would have to be furnished, rather than filed. The distinction is important because if a disclosure is filed rather than furnished, the corporation who made that disclosure is liable for any misleading statements. Misleading statements in disclosure always bring some legal sanction, but the Securities and Exchange Act involves additional liabilities to investors who traded depending on the misleading statement filed with the SEC. Several commentators argued that conflict minerals posed reputation and supply chain risk, and therefore disclosures about conflict minerals were no different than other financial disclosures that were being filed. For example, in its letter February 1 2012, Boston Common Asset Management, an institutional investor, says
Given the materiality of the data in evaluating a company’s risk, we urge the Commission to require all information outlined in the proposed rule to be filed in the body of the annual report rather than furnished as an exhibit. This will allow investors greater assurance that conflict minerals disclosure is as comprehensive, transparent and accurate as possible.
Similarly, Enough, an NGO writes on March 2 2011:
Enough recommends, however, that the Commission require issuers to file their Conflict Minerals Report, including the audit report, with the Commission, rather than simply furnish a copy. This distinction between “filing” the report, and simply furnishing such a report, is significant because it promotes greater transparency, makes Section 1502Footnote 3 more effective, and is consistent with the statute’s intent and legislative history.
Beyond the file versus furnish debate, the proposal required issuers to maintain reviewable business records supporting its conclusion that its conflict minerals did not originate in the covered countries based on its reasonable country of origin. Several “citizens” agreed with the proposal and gave examples of business record maintenance requirements of traders such as brokers and dealers, suggesting that records about conflict minerals were not different than other records of traders. In its comment letter dated February 28, 2011, Global Witness, an NGO, says:
If companies are going to be held accountable for their conflict minerals disclosures, they should be required to retain these records for a sufficient period of time to allow for review by the Commission or other regulatory authorities. For example, the Commission generally requires registered broker-dealers and investment advisers to retain most business related records for a period of three to 6 years…. The general five-year statute of limitations applicable to material misstatements also provides a useful benchmark
Interestingly, Global Witness here uses a more traderesque argument of “supply chain complexity”, arguing that maintaining business records for at least 5 years is necessary:
Discovery of conflict mineral abuses, just like the discovery of information suggesting false or misleading statements by issuers, often occurs more than one year after the conduct takes place or the statement is made. Indeed, some industry sources have informed us that it can take many months for a batch of minerals to make their way through the whole supply chain.
Similarly, CPEA Consulting, an advisory firm, says on its letter dated October 31 2011:
It is standard practice for there to be a requirement for documents and records that form the basis for compliance with other regulations to be maintained and available for a prescribed period of time.
The SEC changed the proposal and did not put the requirement of maintaining business records in its final rule, in spite of recognizing that most commentators thought otherwise (SEC 2012 p.160).
Some traders expressed concern that the legislation would lead to a de facto economic embargo on all minerals mined in the DRC (see below). Only a few NGOs acknowledged the embargo as a potential problem (e.g. Global Engagement Pact and Southern African Resource Watch). Other NGOs, such as Enough (March 2 2011), argued against the likelihood of such an embargo in a way that reified existing corporate priorities:
On the contrary, Congo’s mineral reserves are too great for world markets to ignore. For example, Congo’s supply of tantalum accounts for at least 25 % of the world’s global supply.
This evocation of global financial interests via the construct of ‘world markets’, something that Enough elsewhere in its discourse appeared to be fundamentally critical of, illustrates how NGOs evoked ‘corporation as trader’ rhetoric, in an attempt to debunk what they saw as scaremongering on the embargo issue.
Traders Talking Like Traders
The OECD guidelines (OECD 2013)Footnote 4 are the only nationally or internationally recognized due diligence standards on the conflict minerals issue. These guidelines prohibit a Conflict Minerals Report auditor from having provided any other service for the company within a 24-month period. In response to this, audit firms and companies argued that such a prohibition would dramatically decrease the pool of auditors. Audit firms also claimed that they did not see any reason that auditing a company’s financial statements would jeopardize auditor independence when it comes to auditing the conflict minerals report but did not give any reason to back up such claims. For example Deloitte (March 2 2011) wrote:
we do not believe that an external financial statement auditor’s independence will be impaired if the auditor were also to perform the IPSA (Independent Private Sector Audit) of the issuer’s Conflict Minerals Report.
In its final ruling, the SEC clarified the independence standards and allowed a company’s auditor of the financial reports to also audit the conflict minerals, in contrast to the OECD guidelines (OECD 2013) and justified this with the following remarks:
Conflict Minerals Statutory Provision only requires an audit and no other functions that may imperil independence, such as “management functions” described in Rule 2- 01(c)(4)(vi) of Regulation S-X. Therefore, we do not believe that it would be inconsistent with the independence requirements in Rule 2-01 of Regulation S-X if the independent public accountant also performs the independent private sector audit of the Conflict Minerals Report. (SEC 2012, p. 216)
It is very curious that Regulation S-X (United States Code 2012), legislation that came into force following perceived excess in the provision of non-audit services, is invoked here in order to justify the provision of non-audit services. Both Regulation S-X and the OECD guidelines (OECD 2013) are clear about the potential compromise of independence that the provision of such services can bring about.
Advocating a narrow conception of responsibility, some industry participants asserted that gold should be treated differently than the other three conflict minerals because of its unique qualities, bringing in cost considerations. For example, Tiffany&Co (February 22, 2011) said:
Including gold in the definition of “conflicts materials” is impractical and could lead to unintended burdens because (a) the Democratic Republic of the Congo (the “DRC”) accounts for only a miniscule amount of the global gold supply (0.3 % of the newly-mined gold on the market in 2009) and (b) refined gold bullion generally consists of gold from multiple sources that is smelted together, making it impossible to trace such gold back to any particular source unless the smelter employs single source batch input.
Similarly, Barrick Gold Corporation (February 28, 2011) said:
With respect to the content of the audit report, we are concerned that it has the potential to expose sensitive information about, among other things, transportation routes and storage facilities, which raises serious security concerns and could put staff of the mining company, smelters and refineries and others at risk. The risk is particularly acute in the case of gold, given the high value of this commodity.
The SEC kept it proposal as is and did not offer an exception to gold in the final rule.
Traders, at least on the surface, applauded the efforts to cease the humanitarian conflict in the DRC, but then very quickly veered onto the costs of ceasing such conflict. For example, in its letter dated March 2 2011, American Apparel and Footwear Association wrote
While we support efforts to prevent Conflict Minerals to enter into global supply chains, including the supply chains of our member companies, we are concerned that application of this regulation may have unintended adverse consequences for apparel and footwear companies.
In a few cases, traders did not even acknowledge the regulation’s benefits for reducing the humanitarian conflict and focused purely on the adverse economic consequences of the regulation (see letters of Washington Legal Foundation, an establishment which describes itself as a non-profit organization promoting limited government, March 30 2011, Taiwan Semi-Conductor Company Limited, January 27 2011, and Tiffany&Co, February 22 2011).
Traders Talking Like Citizens
Interestingly, in addition to using “trader” argument in an attempt to have gold exempted, traders also used a “citizen” argument for the same purpose. World Gold Council (the trade association for the gold industry), in its letter dated February 28, 2011, highlighted the humanitarian uses of gold:
We are concerned, however, that certain aspects of the Proposed Rules will actually work to the detriment of the statute’s humanitarian goals. For example, gold is crucially important to certain pharmaceuticals and life-saving medical treatments. Any regulation that increases the costs of these pharmaceuticals or treatments or that discourages companies from conducting medical research involving the use of gold should be avoided.
In launching a challenge to the moral legitimacy of the legislation itself, many opponents mobilized a discourse around corporations as concerned “citizens”, stating that they worried about the unintended consequences of the legislation for artisanal miners. In that view, the legislation would lead to a de facto embargo being implemented in the DRC to the harm of poor communities. For example, Viasystems Group, Inc. (August 9, 2012) argued that the conflict minerals rule
may result in a de facto embargo on minerals mined in the Congo, leaving many legitimate miners without means to provide for their families.
Chuck Blakeman, an entrepreneur trading in Congolese minerals, blamed NGOs for the de facto embargo and copied a portion of his correspondence with Enough, an NGO which had been very active in campaigning on conflict minerals, to his letter the SEC.
You [Enough] and your organization continue to deny the fact that there is a de facto embargo, but we cannot find a buyer…of artisanal coltan…Only a few of the lowest of the low [buyers] are hanging out in Goma [Congolese mining town] buying coltan at as little as 30 % of what it sold for before you told everyone Congolese minerals were evil.
The embargo argument was mostly used for a phase-in period, which was essentially a delay for the full enactment of the regulation. For example, Chuck Blakeman, once again argued (November 18, 2011):
Time is of the essence. Starvation does not wait for the slow machinations of bureaucracy. Please act quickly to provide a grace period.
Traders also asserted that the proposed legislation would violate the First Amendment: the citizen’s right to free speech. The main grounds for this were that the rules would compel speech that is not of a commercial nature and would require some issuers, such as those unable to determine the status of their conflict minerals, to provide false, stigmatizing information (SEC 2012). For example, Tiffany&Co (February 22 2011) said:
Perhaps the most fundamental concern is that the proposed regulations would compel speech in a manner that violates the First Amendment. Specifically, the proposed regulations would require companies which use gold and certain other minerals to state publicly that their products support human rights violations, even when there is no reason to believe that is true.
On April 14 2014, The United States Court of Appeals decided in National Association of Manufacturers et al. vs. SEC that requiring companies to declare whether their products are “DRC conflict free”, unconstitutionally compelled commercial speech, thus violating the First Amendment. The Court ruled:
At all events, it is far from clear that the description at issue—whether a product is “conflict free”—is factual and non-ideological. Products and minerals do not fight conflicts. The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that “message” through “silence.”
This ruling supports the interests of the ‘corporation as trader’ coalition, but it is predicated on an anthropomorphization of the corporation. Moreover, the corporation is afforded rights we understand in terms of personhood. Both of these are logically closer to the ‘corporation as citizen’ construction of CSR.
On April 29 2014, SEC commented on the effect of the court ruling, pointing out that most aspects of the conflict minerals rule were not affected by First Amendment objections. Thus, companies were expected to file any reports required under Rule 13p-1 on or before the due date of May 2014. However,
No company is required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” If a company voluntarily elects to describe any of its products as “DRC conflict free” in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule.”
On the other hand on April 28 2014 two SEC commissioners, Daniel M. Gallagher and Michael S. Piwowar individually published a “Joint Statement on the Conflict Minerals Decision”:
We believe that the entirety of the rule should be stayed, and no further regulatory obligations should be imposed, pending the outcome of this litigation…A full stay is essential because the district court could (and, in our view, should) determine that the entire rule is invalid.
This suggested that there was a split within the SEC on the matter. The Court did not determine the entire rule to be invalid, and companies submitted their first Conflict Minerals Report to the SEC as planned. At the time of writing, aspects of the legislation were still being contested.
Citizens Talking Like Citizens
Seeking to advance a strict interpretation of the legislation, several stakeholders claimed that corporations had a responsibility to stop or at least not to be involved in a humanitarian conflict. As the faith group A Thousand Sister’s Outcry for Congo (December 15 2010) argued: “major U.S. industries simply cannot be allowed to continue profiting from the blood and suffering of the Congolese people”. Similarly, senior school students from Idaho wrote (May 31 2012):
We are writing to you because legislation has been passed, Section 1502 in the Dodd-Frank Act, that would make it much more difficult for these rebel groups to make money by selling conflict minerals. Without these profits rebel groups will have a much harder time continuing their violent activities. However, we are frustrated that these rules are being held up and watered down in the Security and Exchange Commission. Some people are even calling for the Section 1502 to be repealed because it causes extra expense to American companies. The electronics companies in question are some of the most profitable and innovative in our nation. We are confident that they can afford to support human rights and figure out how to make this process work, even in the very complex situation presented in the DRC.
Citizenship responsibilities obliged companies to take actions to resolve this conflict even if such a responsibility “may be lost in pursuit of profit” (Presbyterian Church, February 15 2012). Advocating stakeholders included individuals who were concerned about the conflict, investors, NGOs, politicians, as well as companies who had already taken steps to make their supply chains more responsible. For instance, under the fitting header of the “Electronic Industry Citizenship Coalition” (EICC), a group of electronics companies supported the development a conflict-free smelter programme in response to civil society pressures.
Many citizens argued against a gold exemption as gold was one of the primary drivers of the conflict in DRC. For example, an investor group wrote (February 1 2012):
Reporting standards should be consistent with the statutory language of Section 1502 and should therefore apply disclosure rules equally to all stipulated conflict minerals—namely tin, tantalum, tungsten and gold. For example, gold has been a key contributor to conflict financing in the DRC.
Most NGOs also argued against a phase-in period. For example, International Corporate Accountability Roundtable (ICAR), a coalition of human rights groups including Amnesty International, EarthRights International, Global Witness, Human Rights First, and Human Rights Watch. ICAR, along with their partner Enough, said the following in its letter dated August 24 2011:
The sad reality is that the majority of businesses will not live up to their responsibilities until legally compelled to do so. A delay in the implementation of the law means further scope for armed groups in Congo that kill and rape to finance themselves via the minerals trade.
The final rule modified the proposal and provided a transition period for all companies for 2 years and for smaller companies for 4 years.