Some Companies Are About to Get Exposed

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One of the major benefits the Securities & Exchange Commission (SEC) offers is its mandated disclosure of essential information for investors. Information is power, after all, and plenty of powerful corporate intelligence is packed into SEC filings.

Some new or proposed disclosure requirements will give investors even more information to weigh when they assess their potential investments. Corporate managements aren't thrilled, but investors should be grateful for more grist for the analytical mill.

Is there too much conflict in your portfolio?
Soon many well-known companies that make the public's favorite electronic gadgets will have to provide more information about their use of "conflict minerals." Conflict minerals are extracted from war-torn African regions, most notably the Democratic Republic of Congo.

Columbite-tantalite, cassiterite, wolframite, and gold are four minerals that can be found in just about every electronics product, and even in other common products like coffee cans, lightbulbs, and of course, jewelry.

Unfortunately, Congo's role as a supplier of these highly coveted minerals masks a tragic humanitarian crisis. Congolese militia groups have taken over the mining industry, and many populations are forced into submission through violence, murder, rape, and other terrifying extortion tactics used to control the mines. Other humanitarian issues in Congo include genocide and child labor.

Given the huge market for smartphones and other gadgets, the issue represents hidden costs and human tragedy associated with some of the most popular products we buy. Even worse, many of the minerals are traded illicitly; in 2010, The Financial Times reported that as much as 80% may be smuggled, and about $1.2 billion per year in contraband gold is exported every year by the Congolese army and former rebels who have a chokehold on the industry.

Although the SEC is still wrangling to make the disclosure of conflict minerals officially required, the hint of coming regulation is already having some positive impact on Eastern Congo. The New York Times reported that there's an unofficial embargo on traders and mines in the region. Furthermore, companies like Intel (Nasdaq: INTC  ) , Motorola, and Hewlett-Packard (NYSE: HPQ  ) have voluntarily begun better vetting their supply chains to avoid the most injurious sources of conflict minerals.

The ratio that terrifies corporate managements
Here's one closer to our own backyard. Another disclosure requirement proposed by Dodd-Frank but not yet codified by the SEC would require companies to reveal their specific CEO-to-worker pay ratio.

Given the fact that in 2010, the ratio of average U.S. CEO pay to that of the average worker was 325 to 1 (compared to 42 to 1 in 1980), investors certainly might be curious how much specific chief executives make compared to the pay of their average workers.

Some companies already have policies in place that voluntarily cap how much those in the executive suite make compared to average workers. At Whole Foods Market (Nasdaq: WFM  ) , compensation (including wages and bonuses) is capped at 19 times that of the average worker's salary. Whole Foods' workers' average annual wage was $37,947 last year, and the company's proxy statement cites executives' forfeited compensation according to the stipulations of the salary cap.

The SEC is being urged to move forward on this requirement two years after Dodd-Frank, but many companies are fighting the rule. Business interests claim this is a complicated and onerous mandate, given challenges such as numbers of workers laboring abroad, part-time workers, and employees related to joint ventures, for example.

However, let's face it: Many companies with extremely high-paid chief executives might not want to deal with the sheer embarrassment of how imbalanced pay scales are at their companies. Plus, the fact that such knowledge could ruin their own employees' morale means they're doing something wrong, not doing something right by hiding the truth.

Let the light in
Obviously, companies can voluntarily choose to do the right thing and offer full transparency on such topics, but many don't. In some ways, both of the disclosure requirements named above might force companies' hands when it comes to revealing how they run their business and why they're as profitable as they are.

Some of these revelations clearly might not be very pleasant. Such ugly public knowledge could include reliance on extremely low worker wages or even slave labor overseas, or management-centric cultures that reward their chief executives far, far more than the regular rank-and-file employees that keep the corporate machines running smoothly.

It even might reveal companies that have grown so big they aren't even quite sure what the heck's going on in portions of their business. The New York Times article on conflict minerals disclosure mentioned Kraft's (NYSE: KFT  ) 40,000 products relying on 100,000 suppliers, describing a "Herculean" task to closely audit supply chains on the conflict mineral issue. What other issues might be too "Herculean" to specifically address at large, bureaucratic companies? That's a question worth asking. CEO pay isn't the only thing that's careened out of control in our society.

In my opinion, increased disclosure is always a good thing. The more information investors have at their disposal, the better. Furthermore, information can lead to better-run organizations of all kinds. Justice Brandeis once famously said, "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants, electric light the most efficient policeman."

In other words, disclosure is illuminating. Lights on!

Check back at every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax owns shares of Whole Foods Market. The Motley Fool owns shares of Whole Foods Market and Intel. Motley Fool newsletter services have recommended buying shares of Whole Foods Market and Intel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 23, 2012, at 6:05 PM, TripleEFocus1 wrote:

    Tour de force!!

  • Report this Comment On March 23, 2012, at 6:13 PM, TripleEFocus1 wrote:

    Tour de force!!

  • Report this Comment On March 24, 2012, at 3:24 AM, goalie37 wrote:

    I think this article highlights how, at times, the role of government can be used to enhance the free market. Making information legally available to the investors, who theoretically own the company, allows for a more accurate market in the underlying security.

  • Report this Comment On March 24, 2012, at 1:06 PM, ChuckBlakeman wrote:

    Imagine the following situation: An advocacy group convinces the United States to drop a nuclear bomb on Pakistan in order to kill Bin Laden. Thousands die, 100,000's lost their homes and employment, and 1 million people are directly affected.

    Would you back that advocacy group?

    That is the question you have to answer if you are going to accept Dodd-Frank, the advocacy of Global Witness, Enough Project and others saying "cell phones are evil".

    Dodd-Frank legislates mineral trade in 10 central African countries. The Congo is the size of everything east of the Mississippi. Central Africa is the size of the continental United States. The conflict area is the size of Vermont, and is not even connected by a single road to the rich mineral areas hundreds and over a thousand miles to the west and south. Lumping all of central Africa together under Dodd-Frank has paralyzed the entire region.

    We are a Congolese-owned and based company who leaves most profits locally, uses mineral wealth to diversify local economies and break the dependence on minerals, which will eventually be depleted. Since September of 2010, minerals from honest, innocent artisanal miners all over central Africa are not selling. There is a 100% embargo on most artisanal minerals, moving 1 million people from abject poverty to utter destitution.

    One woman who left farming and worked as a miner to avoid rape, "Now what am I supposed to do? Go back to farming?" Dodd-Frank is sentencing her and thousands like her to unspeakable horrors in front of them.

    Less than 1% of all central African minerals are attached to conflict. What this article conveniently leaves out is that the UN Panel of Experts has proven smuggling by militia has "increase significantly" while exports of legitimate artisanal minerals all over central Africa has evaporated.

    You don't hunt Osama bin Laden with a nuclear bomb and you don't solve a very localized militia problem by destroying the livelihoods of everyone throughout the entirety of 10 central African countries. The "minerals are evil" message could be the worst passive tragedy perpetrated by the west on Africa in 100 years.

    I offered to pay for Enough Project and Global Witness to debate this issue. The offer stands. We'll bring at least one Congolese Chief with us.

    Demonize criminals, not minerals. Four years after Kimberley was implemented to rid Sierra Leone of militia groups selling diamonds, the only way they were eradicated was when the British army went in and routed them out. Global Witness quit Kimberley earlier this year, announcing it be an abject failure. They are the ones who have coached Enough Project on how to model Dodd-Frank after Kimberley.

    As Eric Kajemba, head of a Congolese civil society said, "If the advocacy groups are against us, who is for us?" The world is upside down.

  • Report this Comment On March 28, 2012, at 10:46 AM, mdk0611 wrote:

    Interesting comment Chuck. I'm disappointed there has been no response.

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