For the non-initiated, it might be hard to see the links between a Seattle-based, running shoe and apparel firm and brutality in the Congo.
Yet when the Securities and Exchange Commission’s Conflict Minerals Rule went into effect in January, tracing such connections is exactly what Berkshire-Hathaway subsidiary Brooks Sports had to start doing.
Under the rule, which was mandated under the Dodd-Frank Act, companies must disclose their use of tantalum, tin, tungsten or gold (commonly called the “3TG” minerals) if they are “necessary to the functionality or production of a product” manufactured by the companies.
The minerals are found in “thousands of products ranging from cell phones and laptop computers to jewelry, golf clubs, drill bits and hearing aids,” according to a PwC report, which cited estimates that “6,000 SEC issuers will have to provide new disclosures under the rule.”
Further, about 275,000 non-public companies that are part of the issuers’ supply chains will be affected, according to PwC.
Unlike many companies, Brooks started planning its effort to comply with the rule months ago, says David Bohan, the firm’s president and chief operating officer and former CFO. Then again, the company had a leg up on compliance with materials-disclosure rules, having reported via the Reach Restricted Substances List.
Nevertheless, gathering the data for the first conflict-minerals reports, which are due May 31, 2014, will be “a huge challenge” for Brooks, requiring the firm to delve deeper than ever before into the sourcing of its supply chain than ever before, Bohan told CFO.
That will be true even though the company’s use of potential conflict minerals boils down to just the tin in the zippers of the running clothes it sells. An edited version of an interview with Bohan follows.
Before the conflict-minerals regulation was enacted, what kinds of materials monitoring was Brooks doing?
We’ve been heavily involved with it for the last few years. We have engineers here in the United States as well as our engineering team in China that continue to monitor all our products. As we roll into 2014, the conflict-materials rule is adding to the list of more and more things that we will continue to test.
What do you test for now?
We already test our kids’ shoes, making sure that there’s no lead in them. The conflict-minerals rule has really taken [testing] to another level because it’s getting more and more of our supply-chain partners involved. That’s because we really need to understand where they are purchasing raw materials. In the past, we’ve done materials testing to make sure that our products do not have certain materials. We really weren’t concerned about the source.
How many of your products will it affect?
It’s a small issue for us, relatively speaking, because — especially on the footwear side — we don’t use a lot of the materials listed as conflict materials. The apparel side is really where it comes into play on a go-forward basis. We really need to work with our apparel vendors and sourcing channels to understand where the materials are actually coming from.
Where might conflict minerals be used in your apparel products?
It’s not going to be in the performance fabrics, which are used in a large portion of our products. But a lot of it’s potentially going to be in the zipper material. It’s at the bottom of the zipper or in the zipper pull that maybe you’ll have some tin.
Potentially, tungsten is a concern. I don’t really see us using it, but things do change. That could happen if apparel designers see something that they really like that happens to have tungsten in it. But those would be the only two. We don’t do any diamonds or gold: Our customers are not interested in wearing gold and diamonds while they’re out running.
How will you respond to the challenge of complying with the rule?
While in the past we made sure that those materials were not coming from a restricted country, the conflict rule has made us add to the number of people [performing compliance tasks]. We’ll be adding another person in 2014 to the team to help with the testing, and working with our sourcing partners around the globe to make sure that we’re in compliance.
Tracking down the country where the tin in a zipper is made sounds like quite a challenge.
It’s going to be a huge challenge for us because we work with many different suppliers and many different vendors, especially cut-and-sew vendors. We give them the specs relative to the materials that we want them to build. Then they go to the next level of supply chain to purchase the raw materials needed to provide us with the finished goods.
But now we need to make sure that our cut-and-sew providers are getting confirmation from their suppliers about where they’re buying the materials from — that they’re not bringing them in from restricted countries. So on a small piece relative to the total garment, the rule is adding a lot more complexity relative to the actual making of the product.
How much deeper do you have to look into your supply chain than you did before?
In the past we’ve given specifics about the materials we need to have. But we’ve never had to actually go out and ask, “OK, is this coming out of China, India, Malaysia?” We’ve never really gotten to that level of specifics before. But now we need to understand the origin of all the materials in finished goods to make sure we’re still in compliance.
Why are you making this effort, even though you’re not a public company and thus not, strictly speaking, subject to SEC reporting rules?
Being part of Berkshire, we are public even though we’re not directly reporting. And from a policy standpoint, we’re going to do what the right thing is. We want to make sure that we’re not buying materials from an organization that the government deems illegal.
And, within our compliance and within our company, we’re not in favor of human slavery or human trafficking. Whether it’s an SEC rule or not, we want to make sure we’re not buying things that are harmful to people in other parts of the world.