UC DAVIS (US) — Recently approved federal rules requiring companies to disclose use of “conflict minerals” could cost shareholders billions of dollars, a study predicts.
Conflict minerals are those mined in the Republic of Congo and neighboring countries and those linked to armed conflict and human rights abuses.
The study, led by Paul Griffin, a professor in the Graduate School of Management at the University of California, Davis, looks at the costs of implementing section 1502 of the Wall Street Reform and Consumer Protection Act, a broad national reform of the US financial system signed into law by President Obama in 2010.
Section 1502 requires publicly traded companies to report to shareholders and the Securities and Exchange Commission whether their mineral supplies come from strife-torn areas of Central Africa.
Conflict minerals—such as gold, tantalum, tungsten, and tin—are found in such common consumer products as cell phones, game consoles, and most products with integrated circuits (including automobiles).
Griffin and his research team examined 206 companies from December 2010 through March 2012 and found those companies—half who had voluntarily disclosed before the law became mandatory—lost $6.5 billion in shareholder value due to declining equity values.
Both disclosing and nondisclosing 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 losses experienced by the firms were similar to earlier predictions by academic researchers and company trade groups, Griffin says, but exceeded the SEC’s estimated compliance cost of $71 million.
The disclosure rules do not prohibit companies from using conflict minerals, nor impose penalties for their use.
The rules could trigger additional state regulation. California in 2011 approved Senate Bill 861, which precludes companies in violation of Dodd-Frank reporting requirements from contracting with state agencies. SB 861 is expected to take effect after the SEC ruling. Maryland has adopted similar legislation.
“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 SEC should understand the amount and cost of this remedy, and who bears that cost,” the report concludes.
David Lont of the University of Otago in Dunedin, New Zealand, and Yuan Sun, a doctoral student at the UC Berkeley Haas School of Business, co-authored the study.
Source: UC Davis