Thursday, August 25, 2011

Norwegian SWF Excludes Grupo Carso SAB de CV From Its Investment Universe

Today, the Norwegian Ministry of Finance announced the exclusion of the Mexican company, Grupo Carso SAB de CV from the investment universe of the Norwegian Sovereign Wealth Fund--Global. 

 (From Yahoo Finance, Grupo Carso SAB-A1 (Aug. 24, 2011 )

The determination was straightforward, involving application of the settled rule that the Fund would not invest in companies that produce tobacco either directly or indirectly. 
According to the guidelines for observation and exclusion of companies from the Pension Fund Global, Section 2 (1) b), “The assets in the Fund shall not be invested in companies which themselves or through entities they control: […] produce tobacco”. The Council has assessed Grupo Carso and the company has made it clear that it owns 69.94 percent of the company Compañia Mercantil de Productos de Tabaco S.A de CV, which produces tobacco products. The company has also stated to the Council that it owns 20 percent of Philip Morris S.A de CV, which produces cigarettes. Against this background, the Council has recommended that Grupo Carso be excluded from the Fund’s investment universe.(From Norway Ministry of Finance, Press Release: Tobacco producer excluded from the Government Pension Fund Global, Aug. 24, 2011).

The Ministry action was based on a recommendation of the  Council of Ethics (Recommendation on the exclusion of Grupo Carso SAB de CV from the GPFG, 15 February 2011),  which itself was straightforward in it application of settled principles.  It reads substantially as follows:

1 Introduction

The GPFG’s ethical guidelines’ paragraph 21 states,
The Fund’s shares shall not be invested in companies which, themselves, or through entities they control, produce tobacco.”

The Council on Ethics continuously monitors the Fund’s investment portfolio in order to identify companies which carry out activities that may be inconsistent with the ethical guidelines. This review has shown that the Mexican company Grupo Carso SAB de CV2 could be involved in the production of tobacco.

2 Contact with the company

In September 2010, the Council on Ethics sent a letter to Grupo Carso SAB de CV to enquire as to whether the company produces tobacco3, either itself or through entities under its control. The company responded to the inquiry and made it clear that it owns 69, 94 percent of the company Compañia Mercantil de Productos de Tabaco S.A de CV, which produces tobacco products. The company further informs that it owns 20 percent of Philip Morris S.A de CV, which produces cigarettes.4

3 The Council on Ethics’ evaluation

The Council on Ethics considers that the company’s ownership of Compañia Mercantil de Productos de Tabaco S.A de CV falls within the ethical guidelines’ criterion of control. Consequently, Grupo Carso SAB de CV produces tobacco through a company it controls.

4 Recommendation

Based on the information above, the Council on Ethics recommends the exclusion of the company Grupo Carso SAB de CV Ltd. from the investment universe of the Government Pension Fund Global.

Gro Nystuen Dag Olav Hessen Ylva Lindberg Ola Mestad Bente Rathe Chairman

1 The guidelines for the observation and exclusion of companies from the investment universe of the Government Pension Fund Global
2 Sedol: 2393452
3 Letter from the Council on Ethics to Grupo Carso SAB de CV, 16 September 2010 4 Letter from Grupo Carso SAB de CV to the Council on Ethics, 22 October 2010

The Ministry's decision and the Council's recommendation are made publicly available when Norges Bank has divested in the relevant securities. The decision has not had an immediate impact on share prices which continue to trade near their 52 week low.  See Grupo Carso SAB de CV (GCARSOA1.MX). More interesting will be the effects several days out from the action. 


The decision, of course, is a welcome extension of the work of the Council. It does emphasize, however, several points that bear significantly on the work of the Council, its mission, and its effectiveness.  

First,  the amount of time needed to take action, even with respect to routine application of the Guidelines, continues to be significant.  That time lag built into the process may contribute adversely to the ability of the Ethics Council to perform efficiently.  The initial letter of inquiry was sent to Grupo Carso dated September 16, 2010.  Grupo Carso's response was delivered promptly, dated October 22, 2010.  The recommendation of the Ethics Council was dated February 15, 2011, and Ministry of Finance action occurred almost half a year later (August 24, 2011).  The process leading to exclusion appears designed to slow rather than speed decision making. One important consequence might be to slow  or limit the ability of the Council to investigate companies.  That limitation, in turn, might reduce the effectiveness of the Council.

Second, this decision suggests the potential value to routinization.  Where, as in this case, the rules are clear, and the only issue is factual, it ought to be possible to streamline the process from investigation to recommendation and action by the Ministry of Finance.  Even if the ultimate decision of the Ministry is effectively political--in routine cases, like this one involving the production of tobacco with respect to which there is little controversy in Norway, the time to decision could be reduced by simple techniques.  For example, in cases like tobacco, it would be a simple matter to institute a rule that recommendations of the Council will be automatically adopted unless, within 30 days of receipt, the Ministry  either stays the exclusion or reveres it.  Moreover, routine cases might also be easier to transmit to the Ministry in the form of summary proceedings. The Council comes close in the form of recommendation adopted in this case. 

Third, the absence of any discernible routinization and the time lag between initiation and decision leads to the issue of monitoring.  It is not clear how long Grupo Carso shares were held in the investment universe before the monitoring process suggested the need for investigation.  It is also not clear whether there are ways in which non-compliance triggers can be built into the Secretariat's monitoring algorithms. .  

Fourth, with the largest conglomerates, it is sometimes possible to avoid the effects of exclusion through reorganization.  Though there is no present indication fo plans to effectuate such a reorganization to ameliorate the effects of exclusion, the complex of companies of which Grupo Carso is a part, has been known to engage in such actions for the aggregate welfare of the enterprise.  For example, a month aft the Ethics Council sent its letter of inquiry to Grupo Carso representatives, the company filed a notice of reorganization with the U.S. Federal Securities and Exchange Commission (Oct. 20, 2010), the illustration of which suggests the complexity of modern multinational enterprises.  The action consisted of a multi-part spin off a sections of the company.

The broadest question, of course, touches on the institutional role of the Ethics Council and its work.  There is a hint of that from the procedures within which it operates.  That procedure suggests a more modest role for the Ethics Council within the complex of stakeholders involved in the management of the Fund's investment universe.  Yet, it might also suggest a more important role of the Council and perhaps especially of its Secretariat, behind the scenes.  The long road from initiation of action to Ministry determination may have been devised consciously to provide a temporal space within which Fund stakeholders might reach consensus on action.  And, additionally, it suggests a ceremonial or symbolic role for the Council.  Ethics Council recommendations, then, might be meant to signal standards to the Ministry and NBIM which they might then use in managing the investment universe directly, rather than serve as a critical enforcement node for the composition of that universe. 

No comments: