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Rules around “conflict minerals” likely to cost New Zealand

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Tuesday, 21 August 2012

David Lont in in front of dunedin view
Professor David Lont

The New Zealand electronics industry should be prepared to come under increased scrutiny and costs due to US legislation affecting countries whose trade involves “conflict minerals,” says University of Otago Accounting Professor David Lont.

The US legislation is aimed at armed groups from the Congo who are engaged in a deadly trade of conflict minerals, earning hundreds of millions of dollars each year and helping to sustain the human rights abuses in the region.

“Conflict minerals” – such as gold, tantalum, tungsten and tin – are found in common consumer products such as cell phones, game consoles and most products with integrated circuits.

A collaborative study between the University of California, Davis, and the University of Otago has examined the impact of new US legislation which will require companies to disclose their use of conflict minerals – those mined mainly in the Republic of Congo to support armed conflict and human rights abuses.

The legislation will also expand transparency but cost shareholders billions of dollars, suggests the study, led by Professor Paul Griffin, of the Graduate School of Management at UC Davis.

The study looks at the costs of implementing section 1502 of the Dodd-Frank Act of 2010, which, through reporting and disclosure, seeks to eliminate conflict minerals from US companies’ supply chains.

Professor Lont, study co-author, says that the use of bank regulations to address the issue is unique and may have far reaching implications for auditors, non-US regulators and foreign companies in other countries.

“Some major global information technology companies have committed to address the issue. But as the new rules are enacted, New Zealand suppliers of electronic goods trading with US firms (and their auditors) will be expected to comply. For example, over 6000 US companies may seek country of origin certification from their suppliers,” says Professor Lont.

“Most New Zealand electronic companies have yet to make a public statement on the issue. The rigorous debate in the US and Europe and a targeted campaign of non-complying companies suggests our electronics industry should be prepared to come under increased scrutiny and costs.”

The research team examined 206 companies from December 2010 through March 2012, and found that those companies – half who had voluntarily disclosed before the law became mandatory – lost US $6.5 billion in shareholder value due to declining equity values.

Professor Griffin says that both disclosing and non-disclosing companies were affected because of the ripple effect in capital markets when uncertainties arise about a particular business practice – using conflict minerals in this case.

The new rules, however, would not prohibit companies from using conflict minerals, nor impose a penalty for using the minerals mined from these countries.

“These results have distinct implications for corporate social responsibility disclosure, for they show that legislators’ and stakeholders’ demands for increased social transparency can be highly costly to shareholders when the disclosure rules induce significant changes in management and customer decision-making,” Professor Griffin says.

The report concludes: “In their pursuit of a social remedy to expand transparency and eliminate trade in US companies’ use of conflict minerals, the US Congress and the US Securities Exchange Commission (SEC) should understand the amount and cost of this remedy, and who bears that cost.”

The SEC is scheduled to hold a hearing tomorrow (August 22) to decide whether to make the disclosure rules final.

Contact

Professor David Lont
Department of Accountancy and Finance
University of Otago
Tel 64 3 479 8119

The full study “Supply Chain Sustainability: Evidence on Conflict Minerals,” is co-authored by David Lont, University of Otago, and Yuan Sun, University of California, Berkeley, and may be downloaded at papers.ssrn.com/sol3/papers.cfm?abstract_id=2129371.

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