Intro: Welcome to NACD "BoardVision." Where leading boardroom advisors, governance professionals and seasoned directors discuss critical issues related to your responsibilities in the boardroom.
Chris: Hi, I'm Chris Clark, publisher of "NACD Directorship" Magazine and this is "BoardVision." Today’s topic is going to be on regulatory compliance, with a real focus on the Conflict Minerals rule. To shed some light on that complex subject, both on compliance and what I would call the "Hanging Chad" for the conflict minerals rule, I brought together three subject matter experts - Bill Olson from Motorola Mobility, Rich Goode from Ernst & Young, and Howard Heppelmann from PTC. Welcome, gentlemen.
Rich: Thanks, Chris.
Howard: Thank you.
Bill: Glad to be here.
Chris: I want to start with Bill first. And I've got a two-part question for you. If you could share with our audience what Motorola Mobility has done historically or usually with materials compliance. And then part two, how this new rule with that hanging deadline in May has affected your firm and company.
Bill: Well, historically, I think Motorola has really sought to take the high road in materials compliance by going beyond what the letter of the law has set at that point and time. When RoHS first came out, it was mainly looking at six materials it was looking to legislate. And we thought it would be better to look at all the materials that happened to be in component or product.
And so, we beyond the initial regulation to come up with a material disclosure system, which we call our EW18, which discloses all the chemical substances in the part, component or product. Conflict minerals is a new area, which is looking at tin, tantalum, tungsten and gold. Where those happen to be in your components and your products and where they came from. And that's a very new requirement, thinking about where's the metal mined from, what smelters does it go through, and how does it come through your supply chain and into your product, into your customers?
And so, those are new requirements and they're challenging ones, frankly. Looking 7 to 11 layers down into a supply chain to really get at where the ore is coming from.
Chris: "Challenging" in terms of bandwidth, cost or all of the above?
Bill: Well, one, understanding where these materials are in your products. Which, because of our environmental compliance solution, we have that data. But second, what's the country of origin of the ore, what smelters are it going through? How does it change form?
Chris: Rich, you worked at Ernst & Young. You have a lot of clients: small, medium and large that fall under this category or this umbrella. Can you share with us what you're finding what their challenges are and what your challenges are in servicing them?
Rich: Sure. So, you're right, Chris. We have many clients from small, family-owned businesses all the way up to Fortune 5-sized companies. But when it comes to this law, the challenge is really the same. It's understanding where the 3TG are in your products, reaching out to your supply chain, and being able to report on that on a consistent, timely fashion.
Your "hanging chad" as you say, May 31st. A lot of companies are also under the false impression that they have a two-year grace period here. And while you may not have to have an audit for two years, you still have to do everything else. Which is engaging the supply chain, asking them where the 3TG originates from, and then, finally, reporting on your results.
Chris: Rich, thank you. That's a good segue to Howard. And I want to, Howard, get your opinion on the realities for you and PTC.
Howard: Yeah. Well, I think that the big challenge that we see customers dealing with right now is the urgency of the May 31st, 2014 deadline. And as such, they're scrambling to quickly try to get a response, the disclosures from their supply chain.
But I think companies need to also think beyond that. We're seeing that from our customers. They're starting to ask the tough question, which is, when May 30th, 2016 comes around and I'm obligated to go to a much lower level of detail, how am I then going to report? How do I understand where these supplier responses...
Chris: Lower in the chain.
Howard: Lower in the chain and more specifically, describe their products. So, now, they have to understand where do these suppliers show up in the products and be able to disclose those products. Now, that's a one-time per year event for the SEC. But think about companies that have thousands of customers. They are being asked this question continuously throughout the year. To have information updated, so that other customers can meet their own filing obligations. And one of the big challenges here is “How will I describe to the companies that I do business with, for the products that I sell to them, whether or not I'm conflict free?” And that issue will become a real issue in 2016 when the “indeterminate” filing period goes away and companies really have to understand, “What is the impact of the products and components that I source from you?”
Chris: This subject always kind of turns negative to a degree. It's risk. A lot of companies, as we've talked about prior, are flat-footed still, which I find remarkable. But there is opportunity here for C-Suite executives and the board to work together. So, if there are any other positives, opportunities? And again, you can expand a little bit on the holistic approach to things or the cost end of it. But, I think there may be one or two things that we may have missed.
Howard: So, I think one thing that, many times, we fall into, is thinking about this as being a burden. And while certainly, it does create an obligation for companies to do things differently, there is an opportunity in here to think about “How do you use this information to create value in your organization?” To create forward-looking visibility in your supply chain that can not only help you the new potential regulations that might come out, but can fundamentally help you with having a more efficient supply chain and better products.
Chris: You had me at "forward-looking visibility." Rich, or Bill?
Rich: Yeah, I'd like to build on that. You had mentioned risk and of course, there's regulatory risk, there's compliance risk. But, there's reputational risk as well. And for a lot of companies who are faced, particularly household brand-name companies like Motorola, they're often faced with a reputational factor. You can do everything right. But still, you might have an NGO that takes issue with the work you've done.
The second thing I think to look at with your supply chain is, look, this law is complex. But there's really not anything truly difficult about making a conflict minerals policy or making a presentation about why conflict minerals are important. The difficult piece is engaging your supply chain.
So, if you have to go through the process of engaging your supply chain, you might as well turn a regulatory exercise into a value-added exercise. Mine innovation, mine good ideas. Bring thorny business issues that you have to solve to your supply chain. You might be surprised at the results you get in return.
Chris: Just by the activity itself. Bill, can you bring us home?
Bill: Yes. I think that one of the things that, where working with PTC has been very helpful, is having a central place where we're managing all these different kinds of complex regulations. And global regulations and their reach across the planet. And adding conflict minerals as part of that overall suite.
It gives us a consistent process and a consistent lens for looking at the world and how we manage it. So, we can have a compliance verdict for any regulation, anywhere in the world, for any component, sub-assembly or product that we happen to produce. And we get used to looking at the problem in a consistent way.