Part XI: Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme.  The Ruminations Series in 2009 produced a series of aphoristic (ἀφορισμός) essays, meant to provoke thought rather than explain it. The hope was that, built up on each other, the series would provide a matrix of thoughts that together might lead the reader in new directions. Ruminations continue to be produced form time to time.  For 2010, this site introduced a new series--Business and Human Rights.  The series took as its starting point the issues and questions raised by John Ruggie, the United Nations Special Representative of the Secretary-General (SRSG) on business and human rights, in a global online forum. 

For 2011, this site introduces a new series of integrated essays--Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model.  The object of this series to to consider the work of the Ethics Council of the Norwegian Sovereign Wealth Fund.  The thesis of this series is this:  The Norwegian Sovereign Wealth Fund (NSWF) )investment program is grounded in the application of a set of Ethical Guidelines adopted by the Storting (the Norwegian Legislature) and enforced through an Ethics Council charged with determining whether a company should be excluded from investment by the NSWF.  The work of the Ethics Council has produced the beginnings of a coherent jurisprudence of ethics for corporate investment.  That jurisprudence may contribute significantly both to the development of transnational social norm standards and  affect the way domestic corporate law is understood. This is Part XI of the series.

 

(From Norway to Wal-Mart: Drop Dead, The Magpie, June 7, 2006  ("The Norwegian government has excluded Wal-Mart's stock from its Petroleum Fund — a US$ 240 billion investment fund that pays for health and pension benefits for the country's citizens. According to Norway's finance ministry, Wal-Mart is unsuitable for investment beause of its 'serious/systematic violations of human rights and labour rights.' As a result of that finding, the Petroleum Fund has sold off Wal-Mart stock worth US$ 414 million.").

Part XI: Ethics and a Jurisprudence of Responsible Investment:  The Cases--

II.  Conduct--Complicity
    1.  Serious or systemic human rights violations

To many farmers, Monsanto is the devil incarnate. (Photo: ©Greenpeace/Melvyn Calderon) From Brett Wilkins, WIKILEAKS RELEASE: U.S. Planned Retaliation Against France Over Ban on Dangerous Monsanto Corn, Moral Low Graound, Dec. 21, 2010

There are three principle determinations:

1.  Recommendation of November 20, 2006, on exclusion of the company Monsanto Co , [09.09.2008]

2. Recommendation of November 15, 2005 on exclusion of Wal-Mart Stores Inc, [15.11.2005]

3.  Recommendation of 14 November, 2005, concerning whether investments in Total, due to the company’s operations in Burma, are contrary to the Petroleum Fund’s ethical guidelines
Recommendation concerning whether investments in Total, due to the company’s operations in Burma, are contrary to the Petroleum Fund’s ethical guidelinesMade public: 5 January 2006, [14.11.2005]

Summary:  As an important thing to note when it comes to exclusion based under what the Council states is human rights, currently there are only two companies excluded on those grounds, Monsanto and Wal-Mart (with the subsidiary Wal-Mart de Mexico), but the Council does state that it excluded various other companies for human rights factors because of their involvement with Israel in the West Bank region. The Israeli companies are excluded under type “other” and the most significant difference between them and Wal-Mart and Monsanto is the Israeli companies were working under contract for and their products were being used for the Israeli war effort where as Wal-Mart and Monsanto are directly responsible for atrocities under their control.The cases also suggest a broad reading of the notion of company.  In the Monsanto redetermination, the Ethics Council specifically bnroadened the scope of its inquiry not merely to the company and its controlled subsidiaries but to a larger group of entities within Monsanto's supply chain:  "The Council on Ethics’ assessment refers to the risk of the company’s complicity in violations and is not necessarily limited to the company’s legal entities, but may also apply to the conditions at the company’s suppliers, licensees and others over whose operations the company must be considered to wield influence." (Monsanto Redetermination 2008, 1).

    The basis for the exclusion of both Wal-Mart and Monsanto were based widely held criticism around the world and much attention to what these companies were doing in third world countries. The foundation for their exclusions was actually based on the work of the Council's predecessor. The Council grounded their interpretation of the Ethics Guidelines on their application of domestic law, international law, law of the host nation.  The Council applied an evidentiary standard: "The Council accordingly assumes that actions or omissions that took place in the past will not, in themselves, provide a basis for exclusion of companies under this provision. However, earlier patterns of conduct might give some indications as to what will happen ahead.”" (Monsanto Ch. 5.1; interpreting Para. 4.4). The evidence was adduced from their own investigations (including the results of studies commissioned by the Secretariat) and information provided by NGOs. (Monsanto Chp. 4; Monsanto Redetermination, 2). The international law most commonly used is Article 32 of the UN Convention of the Child for atrocities committed against children through the ILO, additionally the company looks at other labor organizations and NGO’s for applicable customary international law. Especially in the Wal-Mart case the Council examines numerous standing court cases in the U.S. for discrimination, unfair wages, child labor, employment of illegal immigrants, and anti-union policies, while they look at numerous other states around the world for how Wal-Mart conducts its business practice. Over a dozen states are mentioned where accusations are standing against the company for, in many of these states nothing is being pursued because the local government is subordinate, and the Council finds in the states that are pursuing actions against Wal-Mart very little is being accomplished due to the sheer size of the company.

 Cornelius Poppe/Scanpix, From Norway Keeps Nest Egg From Some U.S. Companies

New York Times, May 4, 2007 ("The American ambassador to Norway, Benson K. Whitney, accused the administrators of Norway’s Government Pension Fund of a sloppy screening process that unfairly excluded United States companies.)

In the Monsanto case, precedent plays a critical role in the application of the Ethics Guidelines: "In previous recommendations the Council has taken as its basis that even if States, and not companies, are obliged by international human rights conventions, companies may be said to contribute to human rights violations. The Council has not deemed it necessary to evaluate whether States are responsible for possible human rights violations, even if it accepts as a fact that companies may be complicit in such violations: 'It is sufficient to establish the presence of an unacceptable risk of companies acting in such a way as to entail serious or systematic breaches of internationally recognised minimum standards for the rights of individuals.'" (Monsanto Ch. 5.1, applying the Wal-Mart determinations).  The unaccepotabke risk standard was derived from the determination in Total, SA:

-- There must be some kind of linkage between the company’s operations and the existing breaches of the Guidelines, and these must be visible to the Fund.
-- The violations must have been carried out with a view to serving the company’s interests or to facilitating the conditions for the company.
-- The company must either have contributed actively to or had knowledge of these violations without seeking to prevent them.
-- The violation must either be ongoing or there must be an unacceptable risk that they will occur in the future. Previous violations may indicate future patterns of conduct. (Monsanto Ch. 5.1, "decisive elements in the overall assessment of whether there is an unacceptable risk of the Fund contributing to human rights violations").

The Council finds that the company is in violation of Indian law (the only country where violations are accused), but India is not doing enough to enforce law against Monsanto. Under NOU 2003:22 the Norwegian Parliament has stated that the Fund cannot be used to contribute to any unethical practice which is knowingly in violation of human rights (by what the Council sees fit), and this was used for the exclusion of Monsanto. Unlike the Wal-Mart cases there is little note of domestic law being used, this is largely because the court cases being cited in Wal-Mart were held in American courts and the law of India has yet to prevail over Monsanto in any substantial instance and when Indian law is enforced it is only marginally applied with few instances of much coming out of the judicial system. 

But the cases also suggest the way in which the active ownership principles of Fund investment, vested in the Norges Bank, is harmonized through the mediating role of the Finance Ministry, with the ethical investment guidelines under the jurisdiction of the Ethics Council.  This is particularly evident in the saga of the Monsanto determination. The Ministry of Finance appeared to be unwilling to accept the initial determination of the Ethics Council to exclude Monsanto.  "The Ministry of Finance deemed it opportune to attempt the exercise of ownership rights during a limited period of time in order to see if this would reduce the risk of the Fund contributing to serious violations." (Monsanto Redetermination 2008).  The Ethics Council then undertook further evidence gathering exercises.  For the redetermionation, the Council announced a more narrow, and quasi-judicial, standard for the characrer of their determinations:  "The Council on Ethics’ mandate is limited to a concrete evaluation of whether the company’s operations fall within or without the scope of the Fund’s Ethical Guidelines."  (Monsanto Redetermination, 5). It also noted the potential effect of Norges Bank's efforts to effect change from within through its energetic use of the active ownership principle.

The Council on Ethics is aware that Norges Bank, through its exercise of ownership rights, has taken an initiative aimed at influencing Monsanto to step up measures designed to reduce the occurrence of child labour in hybrid seed production. Moreover, Norges Bank has proposed a sector-wide programme encompassing various companies within the industry, and Monsanto has endorsed this initiative. (Id.).

This, along with other efforts at company initiated and industry based changes served as a basis for a reconsideration of the original determination to exclude Monsanto.  Though the Ethics Council was unwilling to concede that Monsanto's conduct did not violate the Ethics Guidelines, it relented on its determination that such violation should lead to a recommendation of exclusion.  There were two principles rationales with significant potential for application to future cases.  The first is that an exclusion recommendation may not follow from a violation of the Ethics Guidelines where such a determination might undermine the Norges Bank's application of its active ownership procedures.

"The Council on Ethics is not aware that other investors have established a dialogue with Monsanto regarding the issues raised in this case. The role of Norges Bank in the improvement efforts are thus even more essential, and it seems clear that a possible exclusion of the company may undermine the ongoing process initiated by Norges Bank." (Monsangto Redetermination, 7).

The second is that Monsanto had instituted an adequate system of monitoring "through independent third-party audits evaluating the occurrence of child labour in the supply chain, that the factors leading to children’s harmful exposure to pesticides are eliminated, and that the child labour rate in the company’s own production and licence production is drastically reduced." (Monsanto Redetermination, 7).

Hugh Wheelen, Norway vetoes ethical ban on Monsanto over child labour links, Responsible Investor.com, Sept. 9, 2008 ("Kristin Halvorsen, Norwegian Minister of Finance, said this week: “We take the view, based on new assessments of the Monsanto case from both the Council on Ethics and Norges Bank this spring, that there is reason to believe that Norges Bank’s continued exercise of ownership rights in Monsanto will be an important contribution to achieving actual improvement in conditions. I therefore want Norges Bank to continue, as an active owner, to continue to engage with Monsanto for purposes of combating the worst forms of child labour within the company’s hybrid cotton seed production in India.”").

Case Summaries:

1.  Recommendation of November 20, 2006, on exclusion of the company Monsanto Co , [09.09.2008].

1.  Company subject to investigation
    a. Name: Monsanto http://www.monsanto.com/Pages/default.aspx
b. form of organization (corporation, Partnership, etc.):  Public Company
    c. home country: U.S.
    d. countries (exchanges) where shares are traded:  NYSE
e. largest shareholders (individual, state owned enterprise, etc): PRIMECAP MANAGEMENT COMPANY, MARSICO CAPITAL MANAGEMENT, LLC, VANGUARD GROUP, INC. (THE), STATE STREET CORPORATION, PRICE (T.ROWE) ASSOCIATES INC
    f. form of investment by the Norway SWF fund: Equity

2.  Chronology
    a. Date complaint filed: 31 December 2005
    b. Date complaint resolved by the Ethics Council: 6 November 2006

3.  Complainant
a.  If the state, the office from which the reference was made:  The Council does not say, but they do state that there had been numerous investigations by NGO’s into the matter.
b.  If not the state the name and affiliation and home state of the complainant entity: Look into the possibility of NGO involvement.

4. Complaint
a. Action constituting violation: “Contributing to the worst forms of child labour” (Para. 4 Pg. 3)
b.  “Legal” basis of violation: Numerous, the Council starts off by saying that the four criteria for exclusion on the basis of human rights was formed by the Council which it states was formed under the Total SA case with involvement in Burma. On Paragraph 2 on Page 19 the Council cites Article 32 of the UN Convention on the Rights of the Child for international law on the matter. There are currently no cases in Indian or American Court being noted in the Council’s decision.

5  Determination
    a.  Council recommendation (for example divest, retain, wait): Exclude
    b.  Legal basis for the determination: Human Rights (Child Labor)
c.  Underlying legal basis (Norwegian law, international treaty, customary international law principle, soft law standard, etc.): companies, are obliged by international human rights conventions, companies may be said to contribute to human rights violations. The Council has not deemed it necessary to evaluate whether States are responsible for possible human rights violations, even if it accepts as a fact that companies may be complicit in such violations: ”It is sufficient to establish the presence of an unacceptable risk of companies acting in such a way as to entail serious or systematic breaches of internationally recognised minimum standards for the rights of individuals.” In two of its previous recommendations (re Total andWal-Mart), the Council has referred to companies’ complicity in human rights violations in the following way:

“Not all human rights violations or breaches of international labour rights standards fall within the scope of the provision. Point 4.4 states that human rights violations must be ‘serious or systematic’. The Graver Committee recommends ‘fairly restrictive criteria for deciding which companies should be subject to possible exclusion …’ The Council assumes that a determination of whether human rights violations qualify as serious or systematic needs to be related to the specific case at hand. However, it seems clear that a limited number of violations could suffice if they are very serious, while the character of a violation need not be equally serious if it is perpetrated in a systematic manner. The acts or omissions must constitute an unacceptable risk of complicity on the part of the Fund. This means that it is not necessary to prove that such complicity will take place – the presence of an unacceptable risk suffices. The term unacceptable risk is not specifically defined in the preparatory work. NOU (Norwegian Official Report) 2003: 22 states that ‘Criteria should therefore be established for determining the existence of an unacceptable ethical risk. These criteria can be based on the international instruments that also apply to the Fund’s exercise of ownership interests. Only the most serious forms of violations of these standards should provide a basis for exclusion. (Pages 17/18)

6.  Basis of Determination
a.  standard of decision (rule or test etc.): It appears that since Human Rights is largely vacant of many previous decisions, this set a foundation.  
b.  Use of prior Ethics Council recommendations as precedent or as persuasive: Total, even though the violations against Total were for Burma.
c.  Use of case law of other courts or bodies: The UN
d.  Reliance on other materials (identify): “Much information and several reports on child labour in India are available from governmental and non-governmental organisations” (Para 2 Pg. 4). “In order to extend its range of source material, the Council on Ethics decided to conduct its own research, commissioning an Indian consultancy firm, Global Research and Consultancy Services, to carry out field surveys in November and December of 2005. This company has also previously been engaged in mapping the scope of child labour in India’s hybrid cotton seed industry” (Para. 4 Pg. 4)

e.  Rationale: Based on Monsanto’s involvement with subsidiaries that employ child labor for extended periods of time as well as exposing them without protection to pesticides, the Council choose to exclude the company.

2. Recommendation of November 15, 2005 on exclusion of Wal-Mart Stores Inc, [15.11.2005].  

1.  Company subject to investigation
    a. Name: Wal-Mart Inc. & Wal-Mart de Mexico S.A.
b. form of organization (corporation, Partnership, etc.):  Public company
    c. home country: USA
    d. countries (exchanges) where shares are traded:  NYSE, DOW, BMV
e. largest shareholders (individual, state owned enterprise: VANGUARD GROUP, INC. (THE), STATE STREET CORPORATION, BlackRock Institutional Trust Company, N.A., WELLCOME TRUST LIMITED AS TRUSTEE OF THE WELLCOME TRUST, BERKSHIRE HATHAWAY, INC.
f. form of investment by the Norway SWF fund: Equities and Bonds
2.  Chronology
    a. Date complaint filed: 27 June 2005
    b. Date complaint resolved by the Ethics Council: 15 November 2005

3.  Complainant
    a.  If the state, the office from which the reference was made:  Unknown

4. Complaint
a. Action constituting violation: “Wal-Mart is alleged to run its business operations in a manner that contradicts internationally recognised human rights and labour rights standards, both through its suppliers in a number of countries in Asia, Africa and Latin America, and in its own operations. There are numerous reports alleging that Wal-Mart consistently and systematically employs minors in contravention of international rules, that working conditions at many of its suppliers are dangerous or health-hazardous, that workers are pressured into working overtime without compensation, that the company systematically discriminates against women with regard to pay, that all attempts by the company’s employees to unionise are stopped, that employees are in some cases unreasonably punished and locked up, along with a number of other allegations which will be subject to further discussion below under section 4” (Para. 4 Pg. 3).
b.  “Legal” basis of violation: “internationally recognized minimum standards for the rights of the  individual” (Para. 3 Pg. 7). Along with the violation of national laws (some enforced, others not, and other laws violated by the host nation) in Nicaragua, El Salvador, Honduras, Lesotho, Kenya, Uganda, Namibia, Malawi, Madagascar, Swaziland, Bangladesh, China, Indonesia, Canada, and the U.S. along with violations of Article 32 of the UN Convention on the Rights of the Child (Para. 4 Pg. 20), International Covenant on Civil and Political Rights, Article 9 (Para. 2 Pg. 21) and other organizations.

5  Determination
a.  Council recommendation (for example divest, retain, wait): Exclusion
b.  Legal basis for the determination (reference to the section of the Ethics Standard invoked). Standing national law, international law and custom, norms, and precedence.
    c.  Underlying legal basis: Domestic law

6.  Basis of Determination
a.  standard of decision (rule or test etc.): None
    b.  Use of prior Ethics Council recommendations as precedent or as persuasive: None
c.  Use of case law of other courts or bodies: Testimony from James Lynn, Does Vs. Wal-Mart Stores Inc., Dukes Vs. Wal-Mart Stores Inc., Zavala et al. Vs. Wal-Mart Stores Inc., various court cases involving the employment/overemployment of minors and illegal immigrants as well as discrimination against women, all in the U.S. There is also alligations at the time of the report that organizations are preparing a case against Wal-Mart for their part in not allowing unions.
d.  Reliance on other materials:  The company’s website and corporate reports, various NGO’s such as Oxfam International, the Graver Committee, press reports, NBS Dateline, Newsweek, ILO, LA Times, court cases, SwedWatch, CorpWatch, among others
e.  Rationale: Wal-Mart is grossly charged with numerous violations of domestic and international law including abuses, poor working conditions, child labor, human rights violations, systemic bribery and coaching of workers, poor wages, long work hours, violation of their own governance, physical, and mental harassment. 

3.  Recommendation of 14 November, 2005, concerning whether investments in Total, due to the company’s operations in Burma, are contrary to the Petroleum Fund’s ethical guidelines, Recommendation concerning whether investments in Total, due to the company’s operations in Burma, are contrary to the Petroleum Fund’s ethical guidelines Made public: 5 January 2006, [14.11.2005].

The determination in this case is discussed with the cases involving investment in Myanmar, at Developing a Coherent Transnational Jurisprudence of Ethical Investing: The Norwegian Sovereign Wealth Fund Ethics Council Model Part IX