Ethics and ownership
By Knut N. Kjær and Henrik Syse, Norges Bank Investment Management
Article in Dagens Næringsliv, Wednesday 15 March, 2006
Norges Bank has given high priority to corporate governance, in keeping with the guidelines laid down by the political authorities. The ethical dimension has a prominent role and will continue to do so, write Knut N. Kjær and Henrik Syse, Norges Bank Investment Management.
A conspicuous feature of the annual report of the Government Pension Fund – Global, recently published by Norges Bank, is the emphasis given to the active exercise of ownership rights – and to the role of ethics in this field. This is in accordance with the mandate from the Norwegian parliament and government. This article provides a description of our work and plans for the future. We will focus in particular on the relationship between ethical principles and financial return.
The ethical guidelines for the Fund were established in autumn 2004. The section on ethics in the annual report does not imply that Norges Bank has finished its work in this field – quite the opposite. It has taken the Bank eight years to build up investment management to a level that has earned the recognition of the international community, and it will probably take years to develop corporate governance to a level that will provide real influence in international business and industry.
In accordance with the ethical guidelines, the exercise of ownership rights should promote long-term financial returns and be based on the UN Global Compact and the OECD Guidelines for Corporate Governance and for Multinational Enterprises. The regulation for the management of the Pension Fund states that the primary objective of Norges Bank’s exercise of ownership rights is to safeguard the Fund’s financial interests, although under the assumption that the interests of ethics and business are the same in the long term — not least because the field of ethics includes long-term social and environmental sustainability.
In this early phase, Norges Bank has to set priorities in relation to resources. How much should we focus on issues concerning shareholders’ rights vis-à-vis human rights and sustainable development issues?
The guidelines, and the Graver Commission’s report (NOU 2003:22) on which they were based, provide sound guidance on these issues. This commission highlighted the importance of basing the guidelines on the UN and OECD principles. However, the commission also emphasised the importance of corporate governance that is focused on fundamental ownership themes: “The aim of the exercise of ownership rights is not that the owner should tell the company management how to run the company. Financial owners buy this expertise when they appoint company executives. The aim is to guide strategic choices and ensure that the company is being operated in the best interests of all the shareholders. Proposals that will obviously detract from a company’s return are not likely to gain acceptance.” A list is then given of themes that often appear in corporate governance contexts internationally: shareholders’ rights, equitable treatment of shareholders, responsibility and composition of the board of directors, reporting and pay structure for top executives.
In most markets, there is still a long way to go before financial owners exert any adequate degree of influence. Even something as basic as choosing board members is often made difficult. The “insiders” in a company – the executives – hold considerable power; minority shareholders such as the pension fund are often outsiders with little influence. It is not realistic to believe that we can exert adequate influence in issues involving important ethical and environmental dimensions without establishing governance structures and dialogues where owners are actually listened to.
The Bank’s new corporate governance group has decided on thorough strategic planning as its first priority. Since we are in the middle of this process, we have chosen to employ a general, theoretical approach to ethics and corporate governance in the annual report. There is nonetheless a great deal to report, not least with regard to voting. It is important to make active and conscious use of our voting rights in order to make our voice heard and to build up knowledge and expertise about the latest developments in companies and markets.
One important issue is whether Norges Bank should promote ethics through the exercise of ownership rights irrespective of the connection with financial interests. These issues were discussed thoroughly before the guidelines were laid down. The Graver Commission, for example, stated the following: “Because of the need to balance resource use against expected long-term gains, it is likely that issues where the aim of protecting the long-term interests of shareholders seems to be clearest will be given priority. In cases where the connection between ethics and long-term return is either unclear or negative, the exercise of ownership rights will not be an appropriate instrument for promoting ethical considerations.” The guidelines include the statement that the primary objective of Norges Bank’s exercise of ownership rights for the Government Petroleum Fund is to safeguard the Fund’s financial interests.
Norges Bank has begun a long-term process of building networks with other investors to lay down principles for and establish the content of a corporate governance strategy in which the ethical dimension is given a more prominent role than has been the case in other comparable funds. This has already attracted international attention. Our objective is to gain influence. For a fund with average ownership shares of around 0.4 per cent, influence will only be possible with the support of other investors. Isolated actions that do not serve to build a bridge between ethics and finance as part of a well planned strategy will only be ineffectual gestures, even though they may receive some popular support in Norway. At worst, this kind of approach will have a negative effect on the process of building networks with other investors.