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Dodd-Frank Section 1502: Compliance Costs and

Externalities of Greater Information Symmetry

August 22, 2013 Chris Bayer

PhD CandidateTulane University

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Presentation overview

• This presentation will focus on: – company-level costs– implementation modalities– synergistic platforms– externalities

• Companies are thus able to peer over their respective fences and see how their neighbors are getting on

3http://www.payson.tulane.edu/dfs1502-survey-corporate-efforts

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Tulane's 2013 snapshot survey

• July 11, 2013 – August 16, 2013• Snowball method (with 40 trade associations

serving as seeds)• Online survey (using Qualtrics)• Numerator = 62 companies

o 42 based in the US – 20 with significant business activity in the US

• Indicative – not representative – of affected companies

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Survey topics

Section # of questionsA. Company Profile 8B. Overall Implementation Status 2C. Internal Resources Utilized 1D. External Resources Utilized 5E. Synergy 9F. Perceived Advantages 1G. Legislative Alternatives 1

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Company profile: primary commercial activity along supply chain

Count1 Smelting/Refining5 Processing of Smelted/Refined Metal (including

scrap/recycled sources and carbonaceous materials)1 Chemical and material manufacturing 34 Component / Sub-assembly Manufacturing11 Contract Manufacturing for Other Companies1 OEM26 Final / Consumer Products Manufacturing1 Distributor/ Retail

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Company profile: Companies with product(s) containing 3TG mineral(s)

Count43 Tungsten42 Tantalum56 Tin47 Gold

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Company profile: Industry sectorsCount11 Aerospace9 Medical33 Automotive11 Defense5 Chemical25 Electric /electronics / high-tech1 Sports / Recreational Equipment1 Energy1 Agriculture

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Company profile: public / privateCount33 Public29 Private

Count30 Supplier3 Issuer29 Supplier and Issuer

Company profile: supplier / issuer

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Company profile: annual company revenue

Count12 < US$ 50 million3 US$ 50 million – US$ 100 million5 US$ 100 million – US$ 500 million5 US$ 500 million – US$ 1 billion15 US$ 1 billion – US$ 5 billion21 > US$ 5 billion

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Four main tasks required to comply with the SEC regulation

1) Conduct the regulatory applicability determination / analysis

2) Develop and implement the Reasonable Country of Origin Inquiry

3) Develop and implement the Due Diligence system

4) Preparing for the CMR Audit and reporting to the SEC

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SEC - Degree of completion:(1) regulatory applicability determinations / analysis

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 5 10 15 20 25 30 35 40

average: 78%%

Companies

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SEC - Degree of completion:(2) reasonable country of origin inquiry

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 2 4 6 8 10 12 14 16

average: 55%%

Companies

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SEC - Degree of completion:(3) due diligence system

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 2 4 6 8 10 12 14 16

average: 41%%

Companies

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SEC - Degree of completion:(4) preparing for the CMR Audit and reporting to the SEC

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 5 10 15 20 25 30 35

N/A: 8%average: 18%%

Companies

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Degree of completion: OECD’s 5-step Due Diligence framework

1) Establish strong company management systems2) Identify and assess risk in the supply chain3) Design and implement a strategy to respond to

identified risks4) Third-Party audit of smelters/refiners’ due

diligence practices5) Report annually on supply chain due diligence

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OECD - Degree of completion:(1) Establish strong company management systems

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 2 4 6 8 10 12 14 16 18

average: 67%%

Companies

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OECD - Degree of completion:(2) Identify and assess risk in the supply chain

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 2 4 6 8 10 12

average: 51%%

Companies

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OECD - Degree of completion:(3) Design and implement a strategy to respond to identified risks

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 5 10 15 20 25

average: 39%%

Companies

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OECD - Degree of completion:(4) Third-Party audit of smelters/refiners’ due diligence practices

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 5 10 15 20 25 30 35 40 45

average: 16%%

Companies

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OECD - Degree of completion:(5) Report annually on supply chain due diligence

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-100

0 5 10 15 20 25 30 35 40 45

average: 15%

Companies

%

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Number of employees involved in CMP

0-10

11-20

21-30

31-40

41-50

51-60

61-70

71-80

81-90

91-200

0 5 10 15 20 25 30 35 40Companies

# of employees per company

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Average LOE per employee on CM team

1 2 3 4 5 6 7 8 9 100

5

10

15

20

25

30

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265 = 10% LOE19 = 50% LOE27 = 100 % LOE

Employee #

LOE %

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Non-IT related expenditures on external resources

• 41% of companies incurred costs in order to support conflict minerals program review, assessment, development and implementation

• “External resources” include:• consultants• auditors• industry association membership fees / related costs• legal fees• pilot program costs

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Non-IT related expenditures on external resources

Count14 < US$ 50,0006 US$ 50,000 – US$ 100,0002 US$ 100,000 – US$ 250,0002 US$ 250,000 – US$ 500,0000 US$ 500,000 – US$ 1 million1 > US$ 1 million

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IT gap / needs analysis

• 57% of companies have conducted a gap/needs analysis for IT systems or modifications required to support conflict minerals trace ability and/or reporting

• 34% of these companies engage external resources to support this gap/needs analysis for IT systems

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IT related external resource expenditures

Count22 < US$ 50,0002 US$ 50,000 – US$ 100,0001 US$ 100,000 – US$ 250,0000 US$ 250,000 – US$ 500,0001 US$ 500,000 – US$ 1 million0 > US$ 1 million

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IT modalities

Count5 We will/have hire(d) external resources to modify certain existing

IT systems

13 We will/have use(d) internal resources to modify certain existing IT systems

6 We will/have buy/bought wholly new IT systems

8 We have no IT system needs

19 Unknown at this time

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Actual / anticipated amount expended for completion of the IT project

Count3 US$ 022 < US$ 50,00011 US$ 50,000 – US$ 100,0006 US$ 100,000 – US$ 250,0001 US$ 250,000 – US$ 500,0000 US$ 500,000 – US$ 1 million3 > US$ 1 million13 Unknown / not estimated

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Synergy• 77% of companies use the EICC-GEeSI Template or a

modified version thereof• 26% use the EICC-GEeSI Dashboard• 21% use the IPC-1755 Conflict Minerals Data Exchange

Standard• 46% use a commercially available CM data management

system: – iPoint Conflict Minerals Platform (iPCMP)– CMO COMPLIANCE (in partnership with Deloitte)– Foresite systems– Bravo Solutions– Compliance Data Exchange (CDX)– KPMG's Conflict Minerals Tracking Tool

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Support – through purchasing requirements – of in-region initiatives

• 2 (3%) - Solutions for Hope (SfH) closed pipe system

• 2 (3%) - ITRI Tin Supply Chain Initiative (iTSCi)• 1 (1.6%) - ICGLR Certification• 0 (%) - BGR Certified Trading Chains• 2 (3%) - Conflict Free Tin Initiative• 2 (3%) - KEMET Partnership for Social and

Economic Stability

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Support for other in-region initiatives

• 3 companies (5%) are members of the Public-Private Alliance for Responsible Minerals Trade (PPA)

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Support – through purchasing requirements – of supply chain initiatives

• 31% EICC-GeSI conflict-free smelter program• 1.6% RJC Chain of Custody Certification• 1.6% LBMA Good Delivery

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DFS1502 externalitiesAgree Neither

agree nor disagree

Disagree

1. DF S1502 has leveled the playing field with regard to sourcing minerals from the DRC and neighboring countries. 3 24 31

2. Due to DF S1502–related actions, we have identified opportunities for consolidation (vertical integration) and supply chain cost reduction. 2 16 40

3. Due to DF S1502–related actions, we have improved our risk management (e.g. pre-emptive identification of risk such as reliance on sole-sourced suppliers). 4 23 31

4. Due to DF S1502–related actions, we have improved our supply chain performance management in terms of responsiveness and efficiency. 4 20 34

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DFS1502 externalities (cont.)Agree Neither

agree nor disagree

Disagree

5. Due to DF S1502–related actions, we have improved response to customer requests for CM-related information. 23 20 15

6. Due to DF S1502–related actions, we now have data and standards with which to conduct future supplier certification. 13 27 19

7. Due to DF S1502–related actions, we now have improved supplier policies. 7 28 24

8. Due to DF S1502–related actions, we now have the confidence that our company is not negatively impacting the Congo and surrounding countries. 5 28 25

9. Due to DF S1502–related actions, our Corporate Social Responsibility standing has improved. 8 33 17

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Summary findings• Companies are steadily implementing main tasks

required to comply with the SEC regulation• Almost half of the companies are turning to

external help with their CMP• The majority of companies are opting to build

rather than buy• Companies are synergizing – to varying degrees –

with information sharing platforms • Generally don't accord much significance to

possible externalities of DFS1502

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Discussion questions

• How is an increase in symmetry of B2B information in the 3TG-based industries affecting the upstream, smelter and downstream tiers?

• Due to the increased symmetry of information, are upstream companies at a greater advantage vis-à-vis downstream companies?

• To what extent can IT-related expenses be reduced through engagement of common platforms?

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Thank you for your attention!