The Growing Impact of Compliance in the RF/Microwave Supply Base

Growing global concerns about environmental, social and ethical issues are changing the regulatory climate in electronics industries, and the impact of these issues on corporate policy and strategic decision making has grown in kind.  In the RF/microwave industry, environmental standards such as RoHS and Reach have long been givens for most off-the-shelf parts, while more recent regulatory requirements have included documentation and disclosure of responsible sourcing of conflict minerals, and now reporting requirements for corporate social responsibility orCSR.”

The goals of these regulations are noble, and the social value of preventing environmental pollution, human rights abuses, and other forms of unethical business conduct is self-evident.  However, what is less clear is the effectiveness of new and existing regulatory requirements in realizing those underlying goals.  Driven in large part by new legislation, rising levels of shareholder activism among public companies, and consequent pressure up the supply chain, companies have assumed greater responsibility in addressing some of todays most challenging social, economic, and environmental problems.   Unfortunately in the cases of regulations currently in place for the electronics industry, the ideal of social and political reform through flow-down regulation of global business is lost in the practical details of administering those regulations at the ground level

As regulatory requirements increase in number and complexity, as they have in the cases of Conflict Minerals and CSR, companies incur high costs associated with management systems, legal reviews, data management platforms, and due diligence activities.  These activities add significant administrative burden to operations, but no direct value to the products and services being sold to the customer.  At the same time, evidence demonstrating the social benefits of these programs has been vague or absent altogether, and their efficacy has been met with skepticism by policy experts

Advocacy efforts by industry groups, most notably the IPC, have led US regulators to reconsider the effectiveness of such disclosure and reporting requirements.  On April 7th, acting SEC chairman Mike Piwowar released a statement citing IPC comments relaxing enforcement of its conflict minerals rule, suspending requirements of costly due diligence reviews and audits.   In a speech to the Economic Club of New York on July 12th, SEC chair, Jay Clayton remarked that lawmakers and regulators havesignificantly expanded the scope of required disclosures beyond the core concept of materiality.”   Statements like these indicate a change in sentiment on the part of regulators, at least with regard to Conflict Minerals, but for now, many of the costs for suppliers remain unabated.  Meanwhile, with the EU Commissions new Guidelines for social responsibility reporting, customer requirements for expansive third-party surveys continue to grow in number.

The unfortunate result is an increasingly complex set of regulatory requirements that has created a shift in organizational focus from product quality and performance to paperwork; investment by companies and efforts by regulators largely wasted on merely documentingcompliancewithout meaningfully effecting positive change in the social, economic and geopolitical crises that was their original intent to resolve.

 

Conflict Minerals: Flawed Means to a Noble End

Conflict minerals rules emerged in 2010 from section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The underlying goal of the legislation is to prevent funding of violent actors and human rights abuses in the eastern Democratic Republic of the Congo through the sourcing ofT3Gminerals (Tin, Tantalum, Tungsten, and Gold) from mines controlled or taxed by warring factions.  The European Union and the Far East have developed their own versions of Conflict Minerals regulations based on the rules imposed on US manufacturers.  In response electronics suppliers are required, either by regulatory bodies like the SEC or by their customers, to provide documented evidence tracing minerals in their products back to the smelter and further to the point of origin.  

Due to the scale and complexity of the global electronics supply chain, establishing a reliable chain of custody from the finished product back to the mine comes with several significant challenges.  For example, Mini-Circuits is fully committed to taking all necessary steps to meet the disclosure requirements of customers and regulators to comply with Conflict Minerals rules.  However, we rarely if ever purchase T3G minerals directly, but rather in the bill of materials of sub-components, several levels downstream from the smelter.  We maintain strict standards of documentation from our direct suppliers, but the difficulties obtaining relevant data suppliers further upstream and beyond the smelter, many of whom are not required to file disclosures under US Law, are well known.  Therefore, our best efforts to provide traceability of minerals to a conflict-free source are ultimately only as reliable as the companies and individuals providing it down the line.  It is our desire not only to meet our customersrequirements and comply with the rules of the Conflict Minerals agenda, but also to see that our efforts to do so contribute to its fundamental humanitarian goals.  Unfortunately, much research on this issue has shown evidence to the contrary.

The IPC cites a study by Tulane University Adjunct Lecturer, Chris Bayer that found SEC issuers incurred an average annual expense $545,962 to comply with Dodd-Frank.  A follow up study of 238 survey participants, 73% of whom were not SEC issuers but still performed conflict minerals due diligence to meet customer requirements, found that the average cost of due diligence activities was $129,000 per year.   Despite this level of investment, a 2014 open letter signed by over 70 academics and experts policy in the region asserts, “The conflict minerals campaign fundamentally misunderstands the relationship between minerals and conflict in the eastern DRC.”  Profit from minerals does fuel conflict but is not the underlying cause, nor is it a necessary element to sustain violence.  Mining is also vital to the local economy, employing eight to ten million people across the country.

The letter goes on to say, “nearly four years after the passing of the Dodd-Frank Act, only a small fraction of the hundreds of mining sites in the eastern DRC have been reached by traceability or certification efforts.”  The artisanal mining sites in question are located in isolated regions where systems for reliable auditing and certification, have yet to be established, making it difficult if not impossible to obtain proof that a mineral source is conflict-free.  The requirements of section 1502 of Dodd-Frank unintentionally drive buyers to simply source minerals from other parts of the world.  This may succeed in delivering more ethical products, but does nothing to improve the security and livelihood of the Congolese people, which was the original basis for the legislation.

The Conflict Minerals agenda has been a source of much debate, and in part due to its questionable results since the passing of Dodd-Frank in 2010, regulatory reform seems to be already underway.  In addition to the statements of SEC senior officials, easing enforcement, in May, the House Financial Services Committee passed the Financial Choice Act to repeal and replace Dodd-Frank, which includes a provision to repeal Section 1502 from the legislation.  When these changes will have a palpable effect on the administration of compliance processes among electronics suppliers remains to be seen.

 

Corporate Social Responsibility: Not a One-Size-Fits-All Proposition

The recent industry trend toward Corporate Social Responsibility requirements spans a broad variety of issues ranging from environment, safety, labor, and ethics, among others.  Most companies have policies and processes in place to reflect their organizations values and to ensure their business is contributing to the common good of society.  At Mini-Circuits, for example, our company is deeply committed to supporting the education of the next generation of engineering talent and weve nurtured a successful program of donations to RF/microwave design labs at academic institutions around the world.  As an ISO14001 certified company, we uphold an environmental management system that commits to regulatory compliance, pollution prevention, and continuous improvement.  Community involvement is a cornerstone of our company values, and we believe in having a positive impact on the lives of our neighbors in the areas where we do business, so we sponsor our local baseball team, the Brooklyn Cyclones.  These are a few examples of internal policies and management principles that comprise our social responsibility as an organization.

Due in part to the EU rules on non-financial reporting, customer requirements for expansive CSR disclosures, including surveys like ECOVADIS and CDP have recently grown in number.   Again, while the underlying goal of this campaign is well-intentioned, the new disclosure requirements carry significant cost and administrative burden for suppliers while evidence of their benefit as a universal standard is questionable.  Socially responsible behavior has been shown to benefit company shareholder value,  but this benefit doesnt apply to private companies, and weve seen no evidence correlating the adoption of the new reporting requirements with a lower risk of socially or environmentally harmful events

The goal of more socially responsible behavior and reduced reputational risk is desirable, but the standardized survey approach to enforcement results in inappropriate fit between some of the reporting requirements and many of the responding suppliers.  For example, the CDP survey asks for documentation of the impact of a facilitys water usage on the local reservoir.  For a facility of over a thousand employees or a production process that uses large volumes of water, this may be significant, but for a small company of under a hundred employees with only incidental water consumption, its irrelevant.  As an upstream supplier to many OEMs, at Mini-Circuits, what weve seen is a diverse array of reporting requirements on CSR from many different customers, each with different areas of focus.  The consequence is a need for ever expanding systems for gathering the different kinds of data requested by different customers, and again, a shift away from the quality, performance and value of our products and toward non-value-added documentation.

Mini-CircuitsOngoing Commitment to Customers and Compliance

The purpose of this article is not to dispute the value and importance of ethical business conduct where it pertains to Conflict Minerals, environmental responsibility, and other social issues.  At Mini-Circuits, and at most reputable suppliers in the RF/microwave industry, continuous improvement is a central principal of our business, and this applies to our products as much as it does to the benefits our business brings to our employees and our community.  But it warrants asking how campaigns like Conflict Minerals and CSR are performing relative to their stated goals.

Mini-Circuits recognizes our responsibility to our customers, our employees and to our community.  Just we were a leader at the forefront of conversion to the RoHS standard in the RF/microwave industry, we will continue to honor requirements for documentation for Conflict Minerals and CSR as we receive them.  We see it as part of our commitment to customer service and support, just as we provide proper export documentation for international shipments.

In every area of our business, we measure our performance relative to a stated goal.  This applies to everything from the electrical performance of our components to the promptness of our shipments to customers and more.  The goals of the latest compliance campaigns in the RF/microwave space are clear, but the evidence of performance toward those goals under the reporting standards are less so.  As an industry, we should be asking together if the effort is producing the desired result, and if not, we should be thinking about what a better way might look like.

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