Monday, September 8, 2014

Conflict Minerals and Costs to Shareholders

Here is the story from the Wall Street Journal:
"Good morning. Conflict minerals reporting can’t seem to get a break. First, the rule itself, required by Dodd-Frank, was found unconstitutional because it amounted to compelled speech, a ruling that forced the SEC to water it down. As a result, companies don’t have to declare whether conflict minerals are in their supply chains, but instead merely confirm that they’ve looked into it. But now the government has had to admit that it isn’t up to the challenge of figuring out which smelters are financing the violence in the Congo either.
The Commerce Department already missed its January 2013 deadline under Dodd-Frank to list “all known conflict-mineral processing facilities world-wide.” But on Friday, though the department published a list of 400 sites from Australia to Brazil and Canada, it also conceded that it “does not have the ability to distinguish” which are being used to fund militia groups, CFOJ’s Emily Chasan reports.
Companies including Intel Corp. and Apple Inc. said they spent years and millions of dollars investigating their supply chains for evidence of metals from mining operations that are paying for violence. A dozen companies acknowledged their suppliers may have obtained minerals from such mines, but the vast majority said they simply didn’t know. “At the end of the day, the conflict minerals rule creates the worst outcome—it has not helped lessen the conflicts in the Congo and creates economic harm in the U.S.,” said Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness."
With all the potential benefits from improving disclosures that could meaningfully help investors assess the value and governance of their companies, our legal, accounting and political elites force the entire market apparatus to focus on things like disclosures on conflict minerals.  Irrationality is said to invade the market psyche in bubbles, but what about our normal regulatory processes? Regulatory capture is not something that happens only from 'big corporations' lobbying for their own narrow interests.

Institutional investors and fund managers have to pick their battles, and they don't choose to fight many. (see our post on the Sequoia Fund) Any institution that came out in opposition to these disclosures would be tarred as being insensitive, hostile to developing nations and poor miners, or worse.  The impact on their marketing and potential loss in net asset value make opposition a bad trade.  Just agree to pay tens of millions as a group, nod your heads in silence, and move on.

Legal firms and accounting firms have no downside to playing along, after all their billings increase from formulating, helping to create 'systems' and monitoring the meaningless disclosures.

Politicians love this, because they can take credit for addressing a real issue, which indeed 'blood diamonds' and 'conflict minerals' have been for many, many decades, without having to break a sweat or taking any interest in the real problems, which are not about disclosures.

The regulatory arena, in which players on all sides act rationally from a financial risk-reward point of view highlights the dead weight losses absorbed by our financial system from an incoherent, growing web of arcane regulations surrounding accounting standards and financial disclosure.

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