Conflicting Motions

How the use of “conflict minerals” has shaped compliance at Western Digital

The days of typewriters, rolodexes, and stacks of papers adorning the desks of business professional are long behind us, and companies like Western Digital provide the data storage to support that revolution. While data-storage products have become ubiquitous, what is often overlooked are the minerals needed to build them.

Western Digital is one of the largest independent manufacturers of hard-disk drives, which record, store, and recall volumes of data. The company is also a leader in solid-state drives, which are faster and more power-efficient than their hard-disk counterparts. Drives for personal computers are a significant part of Western Digital’s business, but the company also makes drives used in servers, cloud data centers, external storage devices, and home-entertainment products, such as set-top boxes and video game consoles. All of these products use highly regulated minerals.

Materials like magnetite and hematite are crucial to Western Digital’s business, and they are among the most closely monitored materials in the world. This is because they are often imported from impoverished countries and drive socioeconomic and political events, or “mineral conflicts.”

The Securities and Exchange Commission (SEC) regulates these minerals, and Linda Park, Western Digital’s associate general counsel, ensures the company remains compliant with SEC guidelines and federal law.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s conflict minerals provision (Section 1502) seeks to reduce the global sale of specific metals sourced from mines that have directly or indirectly benefited an armed group in the conflict-ridden Democratic Republic of the Congo (DRC) and neighboring countries in Central Africa.

Congo is one of the world’s most valuable countries in terms of natural resources. The country produces cobalt, copper, uranium, gold, silver, and many gemstones, in addition to petrol, timber, and several other minerals. Yet a history of slavery, corrupt politics, and colonialism, as well as bitter fights over the country’s natural wealth, have made it one of the poorest and most unstable countries in the world.

The problems surrounding conflict minerals are especially pronounced in Congo, but it is a story echoed across many regions.

Though the Wall Street Reform Act required the SEC to issue a rule on conflict minerals, interestingly, that rule, which was adopted in 2012, doesn’t prevent a company from using minerals from conflict sources in its products or manufacturing processes; it says if a company does have such minerals in its in-scope products, it must provide disclosure concerning the source of the minerals in the hope that increasing transparency in companies’ supply chains will encourage responsible sourcing of minerals. With that in mind, the SEC’s final rule requires domestic and foreign issuers to trace and report the source of necessary tin, tungsten, tantalum, and gold—often referred to as “3TGs”—contained in the products that they manufacture or contract to manufacture. They must disclose if the 3TGs came from Central Africa—even if they don’t support conflict—or, if the source is indeterminable, furnish a conflict minerals report.

One method companies have chosen to stay compliant, Park says, is to prohibit the sourcing of all 3TGs from Central Africa. But not all minerals from that area are from sources that support conflict; many are responsibly sourced. “There’s a lot of controversy around the law,” Park says, such as concern that it will result in boycott of all sourcing from the region. “Artisanal miners are being put out of work,” she says, “and it’s disrupting the non-conflict local economies.”

The challenge for a company such as Western Digital is to trace its entire supply chain in order to determine whether its products are conflict-free. The company has two operating subsidiaries and hundreds of suppliers globally. Western Digital expects its suppliers to share in the compliance process, albeit indirectly, and requires information on the suppliers’ materials sourcing. “All suppliers, down to the smelters from which we get minerals, are being asked to provide information,” Park says. “In most cases, we are many levels removed from these market participants. Because of the depth, geographic diversity, and constant evolution of our supply chain, like other manufacturers, we have a lot of difficulty identifying participants upstream from our direct suppliers.”

The process is made more difficult by the nature of the company’s suppliers, many of which are based in Asia. Western Digital requires accurate information from suppliers and companies that aren’t used to making public governmental filings or gathering that type of data. “For us, the onus is great,” says Park because when Western Digital files reports with the SEC, it knows that disclosure needs to be factually accurate. “Suppliers who are not public issuers aren’t used to such strict disclosure requirements and will often say, ‘Okay, that sounds about right,’ but ‘about right’ isn’t good enough. Our internal teams spend a great deal of time checking and double-checking supplier responses and following up with suppliers.”

To that end, a global compliance task force at Western Digital led by legal and comprising procurement, corporate compliance, financial reporting, internal audit, and investor relations, created a process to determine which suppliers are in scope; how to effectively and efficiently review information and conduct due diligence after receiving suppliers’ responses; and how to ultimately prepare the data for inclusion in necessary forms.

Park admits this process wasn’t easy. “We were doing everything for the first time in real time, having to anticipate issues and come up with workable solutions,” she says. It was a lengthy, involved process to develop effective, efficient, and scalable procedures now used as a base for the company’s conflict minerals compliance program.

The biggest challenge is the time and cost involved in compliance with the conflict minerals rule. “Many commentators have weighed in as to whether this rule is, in fact, the best way to address this public policy issue,” Park says, “especially due to the costs associated with compliance.”

Though the process isn’t perfect, it is working. Western Digital’s first filing, which involved significant preparation, was in June 2014. The company was one of few to accurately identify a significant number of the potential smelters and refiners in its supply chain. None of the smelters and refiners identified was found to support conflict, keeping the company compliant—as well as socially responsible.