On Tuesday, the Securities and Exchange Commission (SEC) convened a roundtable for an area the Commission does not usually delve into: the humanitarian crisis in the Democratic Republic of Congo (DRC). As part of the Dodd-Frank financial reform legislation, the SEC was given the responsibility of drafting rules requiring publicly listed companies to disclose whether their products contain “conflict minerals.” In this context, the conflict minerals are tin, tungsten, tantalum, and gold produced in the DRC or adjoining countries, as well as any others the U.S. Secretary of State may designate as financing conflict in the DRC.
Although the SEC issued proposed rules on the disclosure in December 2010, it has since failed to meet its April deadline established for final rules, citing difficulties in drafting a rule that would not pose prohibitive costs of compliance for companies. To this end, the SEC convened a public roundtable representing corporations, investors and human rights advocates.
The first panel discussed what is covered by the rule, and what steps would be required to comply. Panelists included Sandy Merber, General Electric; Irma Villarreal, Kraft Foods Inc.; Yedwa Zandile Simelane, AngloGold Ashanti Ltd.; and Mike Davis, Global Witness. The panel discussed a series of questions the Commission had developed from the first round of comment letters including:
Should functionality be a test of whether a product is included in the report?
If the mineral is used as an ornament, should it be included?
Should rules include a de minimis point?
How to define “contract to manufacture” in rules
Unlike many of the rules to develop from Dodd-Frank, this did not trigger contention among those representing corporations, investors and advocacy groups. While the representatives from Kraft Foods and General Electric noted the practical impossibility of fully identifying the sources of all their products by the next reporting season, the other panelists, recognizing this, responded that they would be content with a “good faith” effort, improving year over year. Even so, the sheer scope of the rule’s potential impact demonstrates the difficulties the SEC faces in writing the rules, and for companies to comply. Villarreal noted that Kraft Foods has 40,000 different products with 100,000 suppliers.
The second panel continued to discuss the steps necessary for compliance as well as reporting. Panelists included Benedict S. Cohen, The Boeing Company; Jennifer Prisco, TE Connectivity; Darren Fenwick, Enough Project; Kay Nimmo, ITRI, Ltd.; and Darrel Schubert, Ernst & Young LLP and the Auditing Standards Board. Picking up where the first panel left off, the roundtable discussed further questions from the SEC, such as:
Should the disclosure be included in the annual report or in a separate report?
Should scrap and recycled minerals be exempt?
How should the country of origin be defined?
Who should conduct the audit? A Certified Public Accountant (CPA), or non-CPA?
Should the SEC specify a standard for the audit, and, if so, what standard?
The SEC faces a difficult task—draft rules that satisfy the Dodd-Frank requirements and advocacy groups, without imposing punitive costs or unattainable expectations on corporations. In light of the recent dismissal of proxy access rules from the U.S. Court of Appeals, the SEC must also create rules that will survive potential court challenges. As the voice of the director, NACD is currently drafting a comment letter. Stay posted for further developments in this area.
But back to GRI: More than 1,300 companies worldwide use GRI standards for corporate reporting on environmental, social and economic performance (we’ll call these “social” issues for short). Most of the companies are located outside the U.S., however, hence the “Focal Point USA” campaign. The New York kickoff will be the first point in a tri-city tour. On February 3,The World Bank will host a breakfast meeting to gather the local sustainability community and discuss latest trends in social disclosure and sustainability reporting. On February 4, Ceres, the longtime sustainability initiative that launched GRI, will host a roundtable event in Boston for sustainability reporters. Will there be a dramatic surge in the number of companies adopting GRI and embracing social issues? The answer is yes—but only if corporate social responsibility can correct its image. Let me explain…
When yours truly was at Chesterbrook Elementary School in Falls Church, VA (later renamed as McLean), having gained a reputation as a writer for my stories on heroic figures such as “Slowpoke the Snail” (painstakingly handwritten on many pages of regulation line paper and usually circulated for only a few days before being ripped up by the school’s top bully) my peers elected me to become the editor of the school newspaper, produced with pungent purple ink on a mimeograph machine. Well, being a writer was one thing and being an editor was another. The deadline for the newspaper was fast approaching, and I had gathered no copy—not even from the boy who had taken the trouble to dance with me at Cotillion before revealing his true motives (“Will you make me a sports editor?” he asked, dashing my first hopes of unconditional love). So I had a bright idea. An artistically inclined pal of mine could draw a picture with as much incompetence as she could muster, and title it, What is wrong with this picture? The arrival of this first official submission to the school paper broke the logjam. Soon other articles appeared and I had enough copy to make a newspaper.
Alex's early ventures in editing
But when it comes to corporate social responsibility, something really IS wrong with the picture and I think I know what it is. But like the tale of “Slowpoke,” it will take me a while to tell, and I recount it in an environment—our current business world—that tends to overpower nuance.
Here is the two-part dilemma.
1. By their very existence, corporations are based in fundamentally moral principles such as meeting needs, setting viable prices, paying wages and so forth. There are of course, outlier exceptions like monopoly, fraud and other ills but these are already combated by government with taxpayer dollars. We need to shout that business really does do good day in and day out.
2. At the same time, however, there is overwhelming proof that companies making additional investments in social issues do better financially than peer companies that ignore such issues. Don’t just take my word for it. Read the extensive writing of Steven Jordan of the Business Civic Leadership Council of the U.S. Chamber of Commerce or of Stephen Young, Executive Director of the Caux Roundtable. Or consider the fact that a leading social/governance issues expert at the World Bank and International Finance Corporation, Mike Lubrano, cofounded the Cartica Capital and left a secure government job to invest his career by investing in companies that “get it right.” The fund is doing quite well.
Are these additional investments optional, like giving to a favorite charity, or necessary like paying insurance premiums? In my view, they are necessary, but not because corporations have or should have a “responsibility” to contribute to society. Any red-blooded company would rebel at such a guilt trip. It’s because corporations are woven into the social fabric, and if they harm that fabric, they themselves are harmed. If they help that fabric, they themselves are helped. So the problem is the picture. We need not envision a magnanimous corporation giving to society. But rather society giving to a corporation…employees give their time, customers give their treasure, and the public gives its trust. The real question is, will corporations receive or reject this wealth that is available to them in return for a modest and necessary premium?
In conclusion, what is wrong with the current picture of corporate social responsibility? The problem is that corporate responsibility is a confusing misnomer. Social investments are not merely a “responsibility.” They are economic necessities. As for me, yes, there was something wrong with my picture when, out of desperation, I had to commission that illustration. I was promoted beyond my level of competency. I needed to stick to writing. The same goes for corporations. They are not there to do good. They are there to do business—making good products and services, sold in free markets, and voluntarily investing in the social infrastructure that makes those markets possible.
Now that picture is worth a thousand words—and untold returns on investment.