Two Norwegian women are silently changing the world, one stock at a time. Gro Nystuen, leader of the funds Council on Ethics, and Anne Kvam, leader of the Ownership Strategies, impact the lives of millions of people who have no idea they are doing so. By imposing Norway’s ethical guidelines on the universe of possible investment opportunities, Nystuen is forcing companies to behave or face being thrown out into the cold. And, through investor activism, Kvam hopes to change the structure of corporate boards, banning chief executives from also being chairmen of the board.

The background

Sovereign Wealth Funds (SWF) are funds consisting of assets held by governments in another country’s currency. When a country, by running a current account surplus, accumulates more reserves than it feels it needs for immediate purposes, it can create a sovereign fund to manage those extra resources. Simon Johnsen, professor of entrepreneurship at the Sloan School of Management at MIT and former chief economist of the International Monetary Fund, believes these funds have existed at least since the 50s, but it was only recently, when their size increased dramatically, that they started receiving attention. Norway’s sovereign wealth fund is the world’s second largest (see textbox on page 51 and figure on page 49) and is accumulated from the oil revenues the country gets from its continental shelf in the North Sea. The world’s largest fund, Abu Dhabi Investment Authority, is also a result of oil. 60% of the world’s sovereign wealth funds are based on hydrocarbon revenues.

It was established early that the Norwegian oil revenues could not be funnelled into the Norwegian economy, at least not all at once, without a risk of the so-called Dutch disease. This is the fear that a large increase in government spending would have adverse effects on competitiveness and lead to deindustrialisation, named after what happened in the Netherlands in the 60s. As a result, the fund was established in 1990. After a while, the realisation that the future rise in public pension expenditures would need a lot of financing began to cause debate. This was highlighted in 2006 when the fund changed its name to Government Pension Fund – Global.

Norges Bank Investment Management (NBIM), a department under the central bank, is the operational manager of the fund, based on guidelines from the ministry of finance. The government’s ambition is for the fund to be the best managed fund in the world. The mission is as follows: achieve maximum financial return with moderate risk. And please do it nicely.

Every year, the surplus from oil production and taxes on oil producers is put into the fund. NBIM then distributes the wealth on 40 percent bonds and 60 percent equity. All investments must follow to the ethical guidelines (see textbox on page 51).

The ethical dozen

Gro Nystuen, an associate professor of law, is the head of the Council on Ethics, which ensures that ethical investments are made ethically. The council also counts another law professor, a Harvard doctor  in philosophy, a freshwater ecologist and an ex-McKinsey consultant. Together with a full-time secretariat of seven members the council monitors the companies in the fund’s portfolio and checks that they behave ethically.

The Council on Ethics was established in 2004, following the embarrassing revelation in the late 90s that the fund was investing in a Singaporean company involved in anti-personnel landmines - shortly after Norway hosted a diplomatic conference in Oslo that banned these weapons.

The council’s work has helped change some companies’ behaviour. In 2006 the council initially recommended the finance ministry to exclude the US agricultural company, Monsanto, for its use of child labour in its cotton production in India. But, after working together with the company, and going as far as visiting the fields to count the number of child workers, it was decided to keep Monsanto, as it had made significant improvements.

The fund has also been influential in changing the way other pension funds invest. The Swedish AP Fund was persuaded to disinvest from Walmart following Norway’s decision to do so in 2006. Nystuen has been contacted by other sovereign wealth funds eager to learn about the ethical guidelines, including the Canadian Alberta’s Heritage Fund and New Zealand’s Superannuation Fund.

Making money or saving the world?

The fund’s investments are plagued by paradoxes, however. Some question the contradiction of excluding companies for violating carbon emission standards, when the fund itself is based on revenues from fossil fuels. The fund has excluded Lockheed Martin from its investment portfolio, yet Norway buys its planes. Others ask: why exclude Walmart for violating human rights, but allow investments in China, which repeatedly abuses human rights? Supporters argue that, since 10% of American imports from China are sold in Walmart stores, targetting the retail company will actually improve the conditions of Chinese workers, as well as those of Americans. But, this only raises new questions: Has Walmart, by being China’s seventh largest trade partner, not helped raise millions out of poverty?

Whatever the pros and cons, Walmart took notice of the fund‘s decision. “Walmart contacted us after being excluded and asked what they could do to be taken back in,” Nystuen says. So far, the criteria seem too strict for the retailer: Walmart is still not part of the fund’s portfolio.

Of the 8,000 companies the fund owns, 30 have so far been excluded. “We work slowly,” Nystuen says.  “Since we have to make our decisions public, we have to build a very strong case. This is very time consuming.”

The council gets many of its leads from the Ethical Investment Research Services (Eiris), a UK screening company that investigates the companies in the fund’s portfolio by searching for negative keywords. Every month Eiris sends the council the names of 40 to 60 possible offenders. The council also gets tips from non-government organisations and journalists. “Often it is simply rumours, or poorly documented claims,” Nystuen says.

However, Nystuen is concerned about the portfolio’s growth in emerging markets such as China and India. “I do not think we hear about everything. A lot probably happens under our radar. The system is by no means waterproof, and we are routinely criticised by the media for being too small for our assignment. I would not mind a staff of 2,000 people, but our current size is in fact larger than most other similar funds. Our system is considered among the best out there,” she says. She cites Professor John Ruggie of Harvard’s Kennedy School of Government, who,  as special representative of the UN secretary general on human rights and business, has on several occasions held up the Norwegian Council on Ethics as an example to follow.

When the council has finished its work, it advises the ministry of finance, which then decides whether to exclude a firm. Ultimate responsibility lies with the finance minister. Until October that person was Kristin Halvorsen, the leader of the Socialist Left Party (SV), who was involved in a number of difficult cases.

In 2005, critics wanted the fund to disinvest from the French oil company Total due to its activities in Burma. But Halvorsen refused, following the council’s guidelines, which say that if it expects a company to behave according to the guidelines in the future, negative conduct in the past can be ignored. “There was no reason to expect Total to continue with its practice involving serious human rights abuse in Burma, so the council advised against exclusion, based on the low risk of future violations,” says Nystuen. “It was not easy for a finance minister from SV to follow that advice. Total was almost expecting to be excluded since SV controlled the finance ministry.”

She believes this decision strengthened the Council on Ethics as an institution. “It was the evidence needed to demonstrate that we make independent judgments,” she says.

The finance minister today is Sigbjørn Johnsen, a Labour Party veteran, who is widely expected to use his position to make unpopular adjustments to the state’s budget in the coming years. Nystuen does not expect the change of leadership to result in a new course for the exclusion process. “I do not think so. In 2001-2005 the finance minister was Per-Kristian Foss of the Conservative Party and that did not make much of a difference. I think Foss would have excluded Walmart as well. There is political consensus to adhere to the guidelines,” she says.

Shuffle the boardrooms

The fund also aims to make a difference in the boardroom. “Boards should be led by an independent chairman who can set strategy and remuneration policy and hire executives,” says Anne Kvam, NBIM’s global head of Ownership Strategies.
    She argues that an independent chairman is better able to oversee and give guidance to executives,  defusing conflict and protecting the interests of shareholders.
    “The roles of chairman of the board and chief executive are fundamentally different and should not be held by the same person. There should be a clear division of the responsibilities between these positions to ensure a balance of power and authority on the board. Separation of the roles is based in the principle of separation of power. How can the board watch over the executive, if the executive leads the board? NBIM has systematically voted against a chairman if that person is also chief executive of the company. Holding both positions is forbidden in Norway.”
    Kvam is preparing to battle with the boards of American and French companies, where it is normal for the chief executive to also be chairman. But she senses a change in attitude. “The proposals are gaining more and more support,” she says.

The proposals made by NBIM on the boards it is present in are getting an average of 40% of the votes this year, up ten points from last year. It is still not the necessary 50% needed to actually make any changes, but one proposal went through for the first time in April when chairman Ken Lewis of Bank of America had to resign.

On average, the fund owns 0.7% of a company in the US and about 1.75% in EU countries. “We are a minority shareholder, so we cannot dictate,” Kvam says, “but we can achieve a lot by engaging the companies in dialogue. Our strongest card is being insistent, persistent, patient and never giving up. We use arguments based on the companies’ own premises: change is going to be profitable in the long run.”

Active – passive-aggressive

Another source of controversy, in Norway at least, is how to manage the investments. Critics, some prominent investors themselves, have made the point that the fund should not be managed actively, but rather passively, by weighting the portfolio according to a specified index. The fund’s top management made a joke of that argument by suggesting investing in only companies beginning with the letter “A”. The debate has spurred a hearing in the finance ministry and is expected to lead to a set of updated rules in January.

However, active management is not going away any time soon. Anne Kvam’s 11-strong team attends over 8,000 general assemblies and casts about 70,000 electronic votes a year. Active management is crucial to her work. “Expert knowledge about the companies is an immense strength for us. You really have to know the companies if you want to have an impact on them. Active ownership and corporate governance is an exceptional combination to meet these ends,” she says.

For the moment, the critics have been silenced, thanks to the fund‘s recent record results. In its third quarter report, released in October, the fund managers could boast a record 13.5% return, the best quarterly result ever, 1.5% points above the benchmark. The value of the fund increased to 2.549 billion crowns, or 455 billion dollars.  It remains to be seen, however, if this will impact the ongoing work on the new rules, scheduled to be unveiled in January.

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Joakim Birkeli Jacobsen (joakim@mandagmorgen.no)