On 7 January 2016, the Norges Bank decided to exclude the Chinese company ZTE Corporation, one of the world’s five largest producers of telecommunications equipment and network solutions, from the investment universe of the GPFG. The company is excluded based on an assessment of the risk of severe corruption and is grounded in a Council on Ethics Recommendation of 24 June 2015.
The recommendation reflects the growing importance of corruption in investment decisions. But it may also suggest a distinction in treatment between European companies which in the past have been subject to observation the use of shareholder power by the Norwegian SWF and this company for which divestment appeared to be the better option.
Please find Norges Bank’s decision here and below
Please find the Council on Ethics’ summary of its recommendation here and the full recommendation here and below.
In February, 2009, ZTE Corporation has formally become a member of the United Nations Global Compact. ZTE will take this as a new starting pointing to bring the Global Compact and its Ten Principles into its corporate culture and business concept to make great effort to promote the harmonious development among economy, environment and society, thus committing itself to become the paragon of the Global Corporate Citizenship. . . . ZTE’s CSR strategy is to pro-actively develop, implement and improve CSR compliance throughout ZTE and its supply chain based on industry best practices, continuous learning and improvement efforts. Its objective is to develop into a global CSR leader long-term. (see Company Responsibility here)
The Central Commission for Discipline Inspection published the criticism in an article on its website yesterday. It is the first of a series on "pushing SOEs to strictly follow party discipline", as the watchdog continues cracking down on corruption.
The CCDI has identified state-owned enterprises as its focus this year. Twenty-six such businesses were visited in the agency's first round of inspections this year, and another 17 are currently under inspection. (China's state-owned enterprises slammed for 'entrapping' officials into corruption)
The UN anti-corruption portal TRACK (Tools and Resources for Anti-Corruption Knowledge), Global Compact: A guide for anti-corruption risk-assessment (2013), and the OECD’s Good Practice Guidance on Internal Controls, Ethics and Compliance (2010), provide useful guidance in these matters. In Business Principles for Countering Bribery, Transparency International (TI) has listed a number of general recommendations for building robust compliance systems. (Ethics Council Recommendation, pp. 12).
In September, the Council had a telephone meeting with an employee from ZTE’s Security & Investor Relations Department and an employee from the company’s legal department. The company also subsequently replied to an email containing follow-up questions. In its replies, the company did not comment on any of the specific corruption allegations, discussing only its internal compliance and anti-corruption systems. (Ethics Council Recommendation, pp. 13-14).
The former Ethics Council recommended the exclusion of China Railway Group Ltd because of an unacceptable risk that the company is involved in gross corruption. The issue of corruption has been a sensitive one for the Ethics Council. It's most well known efforts in this regard touched on the corruption and bribery scandals of Siemens. See, Siemens AG: Ministry of Finance Press release 24/2009; The recommendation from the Council on Ethics; The letter from the Council on Ethics; discussed HERE. See also Alstom, SA HERE (standard for gross corruption). The most interesting part of the recommendations was the recognition by the Ethics Council of the Chinese government's recent anti corruption campaigns. Indeed, the corruption allegations arose out of the Chinese government's investigation of a disastrous accident that occurred on its high speed rail lines in 2011. The Chinese government's efforts to deal with the corruption that may have contributed to the accident were noted with approval, but those efforts did little to aid CRG in avoiding exclusion (Recommendation pp. 8-10). More interesting still was that evidence relied on by the Council included "information relating to legal rulings and internal disciplinary processes in the Communist Party published in the Chinese Press." (Recommendation pp. 1). This might have raised eyebrows in the West, because the Council specifically referenced the Chinese Communist Party's system of shuanggui (Recommendation pp. 9), a practice that has been criticized in the West. But see discussion here. For the Council on Ethics’ recommendation and subsequent correspondence with the Ministry of Finance see HERE. (Change Comes to the Norwegian Sovereign Wealth Fund Global).
In effect, Siemens permitted the Norwegian state to become an important monitor and standard setter for the scope, content and operation of its monitoring and surveillance regimes. This marks a substantial departure form the traditional arrangement in which corporations, subject to the legal constraints of the state of incorporation, at least with respect to its internal organization, operation and management, now subjects those core organizational features to regulation by a foreign state through interventions in private markets. What once was the province of the state through law has now become the province of the state through market interactions producing governance principals with the functional effect of law. (Backer, Larry Catá, "Governance Without Government: An Overview and Application of Interactions Between Law-State and Governance-Corporate Systems," in Beyond Territoriality: Transnational Legal Authority in an Age of Globalization 87-123 (Günther Handl, Joachim Zekoll, Peer Zumbansen, editors, Leiden, Netherlands & Boston, MA: Martinus Nijhoff, 2012). )
Norges Bank Decision
The Executive Board’s decision on exclusion was made on the basis of the recommendation of the Council on Ethics. The Executive Board has not conducted an independent assessment of all aspects of the recommendation, but is satisfied that the exclusion criteria have been fulfilled (see § 3, subsection d, of the Guidelines for observation and exclusion from the Government Pension Fund Global).
Before deciding to exclude a company, Norges Bank shall consider whether the use of other measures, including the exercise of ownership rights, may be better suited. The Executive Board concludes that it is not appropriate to use other measures in these cases.
Hovedstyres beslutning om utelukkelse ble tatt på bakgrunn av tilrådninger fra Etikkrådet. Hovedstyret har ikke på selvstendig grunnlag vurdert alle enkeltheter i tilrådningen, men finner det tilstrekkelig godtgjort at kriteriene for utelukkelse er oppfylt, jf Retningslinjer for observasjon og utelukkelse fra Statens pensjonsfond utland § 3 bokstav d).
Før utelukkelse skal banken vurdere om andre virkemidler, herunder eierskapsutøvelse, kan være bedre egnet. Hovedstyrets vurdering er at det ikke er hensiktsmessig å bruke andre virkemidler i disse tilfellene.
Ethics Council Recommendation 24 June 2015 to exclude ZTE Corp.
The Council on Ethics recommends the exclusion of ZTE Corporation (ZTE) from the Government Pension Fund Global (GPFG) due to the risk of gross corruption. In its assessment, the Council has emphasised the company’s involvement in corruption allegations in 18 countries, as well as the fact that it is currently or has previously been under investigation in a total of 10 of these. Weight has also been given to the fact that the company has been convicted of corruption in one instance, that a corporate penalty was imposed and that the company has been temporarily barred from public competitive tenders. The Council has concluded that the company has failed to demonstrate satisfactorily that internal anti-corruption procedures are being effectively implemented in its business. In conjunction with previous corruption cases and the fact that the company operates in a sector and in many countries associated with a high risk of corruption, this finding indicates that there is an unacceptable risk that the company may once again become involved in gross corruption.
Etikkrådet Tilrådning 24. juni 2015 om utelukkelse av ZTE Corp.
Etikkrådet tilrår å utelukke selskapet ZTE Corporation (ZTE) fra SPU på grunn av risikoen for grov korrupsjon. I sin vurdering har rådet lagt vekt på at selskapet er involvert i korrupsjonsanklager i totalt 18 land, og at det er og har vært under etterforskning i totalt 10 av disse. Det er også vektlagt at selskapet ved ett tilfelle er domfelt for korrupsjon, at det er ilagt foretaksstraff, og at det har vært midlertidig utestengt fra offentlige anbudskonkurranser. Rådet er kommet frem til at selskapet ikke i tilstrekkelig grad har godtgjort at interne korrupsjonsforebyggende prosedyrer implementeres effektivt i virksomheten. Dette, sett i sammenheng med tidligere korrupsjonssaker og at selskapet har virksomhet i en sektor og i mange land hvor risikoen for korrupsjon er høy, gjør at det foreligger en uakseptabel risiko for at selskapet på nytt kan bli involvert i grov korrupsjon.