Tuesday, December 10, 2013

Article Published: "Sovereign Investing and Markets-Based Transnational Legislative Power: The Norwegian Sovereign Wealth Fund in Global Markets"

My article, "Sovereign Investing and Markets-Based Transnational Legislative Power: The Norwegian Sovereign Wealth Fund in Global Markets" has just been published and will appear in the American University International Law Review 29(1):1-122 (2013).  My thanks to Mary Grinton, the Volume 29 Editor in Chief for an excellent volume.

(Enda Curran, "Norway’s Oil Fund Doubles Up Down Under," Moneybeat Wall Street Journal, March 13, 2013)

This article builds on earlier work both on the Norwegian sovereign wealth fund architecture and on  sovereign investing more generally.  It suggests that states, like corporations and civil society actors, are turning to social norms and societally constituted governance frameworks to effect changes to the behavior norms and customs of business enterprises, and that sometimes this form fo governance may be more effective than traditional lawmaking.  Norway appears to mean to transpose international norms into state policy, and to transpose state policy into the governance cultures of corporations.  This may represent an important new means of extending state power extraterritorially without invoking legal regimes and in furtherance of a coherent international framework for business behavior.

The abstract and introduction of my article follow. A pre-publication version of the article may be accessed HERE.

Abstract: States, like non-state actors, are increasingly participating in markets. In the form of sovereign wealth funds (SWFs), states project economic power beyond their borders. But some states also use private market activities abroad to transform the way they can project their own legal regimes beyond their territories, and in the process, contribute to a fundamental re-orientation of the relationship between state, market, and law. This study considers the way in which SWFs seek to govern (rather than the way in which they may be regulated), by closely examining the Norwegian sovereign wealth fund (NSWF), one of the most comprehensive of such projects. Part I provides an introduction, introducing the concept of “responsible investing” in the context of sovereign investing, and its implications for coordinated governance between traditionally public and private regulatory (and market) zones. Part II turns to a description of the legal and regulatory framework within which the NSWF is organized. Parts III and IV explore the two forms in which “responsible investing” is structured and applied by NSWF. Part III examines the development and use of “active ownership” principles as an important element of responsible investing, and the functional consequences of using share ownership as a basis for advancing public policy one enterprise at a time. Part IV turns to the use of “responsible investing” as a basis for influencing rules for access to capital markets by constraining the NSWF’s investment universe. The focus here is on the construction of a legal code of investment (the NSWF Ethics Guidelines) within which investment decisions assume a political as well as economic character, the application of which is overseen by a quasi-judicial body — the NSWF Ethics Council constituted to interpret and apply it. The emerging jurisprudence of the Ethics Council is then considered as a reflection of the legalism and juridification of responsible investing. Part V then considers the governance implications of the market activities of the NSWF. Norway has provided an architecture of governance that sits astride the borders of market and state, of public and private and of national and international. Undertaken through its sovereign wealth fund, Norway is seeking not merely to project public wealth into private global markets, but also to construct a complex rule-of-law centered framework that blends the imperatives of a state based public policy with a rules based governance system that incorporates domestic and international norms. To this Norway adds a policy-oriented use of traditional shareholder power to affect the behavior and governance of companies in which the Fund has invested. The object is not merely to maximize the welfare of the funds ultimate investors, the people of Norway (through its state apparatus), but also to use the NSWF to advance public policy in the international sphere and within the domestic legal systems of other states. Private power is deployed toward the ends of public governance; public power is deployed in turn toward the ends of private governance across the global marketplace for corporate ownership; markets become sites for legislation. The NSWF is evidence of a new form of complex and cooperative regulation, one in which the state itself serves as a nexus point for the domestication of international norms and its internationalization through projections of governance power in private markets. Sovereign investing through the NSWF is helping to develop two-way engagements between international public and private institutional law and private norm making that conflates public governance and private value maximization in new and flexible ways. The effects on the legal and governance landscape beyond the state may be considerable.

I. Introduction

Sovereign investing has become an important element in emerging patterns of governance in this century.[1] It represents efforts by states to manage and project their authority in accordance with changing realities of power and governance forms in a world defined by the logic of economic globalization. Sovereign Wealth Funds (“SWFs”) also provide host states with an important source of revenue for undertaking projects these states may no longer be able to afford, “[c]reditors are also beginning to govern outright.”[2] Sovereign investing takes a number of forms. Two of the most innovative and dynamic are those of the People’s Republic of China[3] and of the Kingdom of Norway.[4] Both have changed fundamental assumptions about the ways in which states regulate internally and project power externally.[5] Each seeks to use the logic of globalization, and its markets, as a means of extending its authority beyond its borders and engaging in development of international normative standards for public and private conduct under hard and soft law frameworks. Of the two, the Chinese approach is more creative in its use of market-oriented transformation, which focuses on state participation in private market activities.[6] In contrast, the Norwegian approach is more aggressive and political in its blending of national and international governance as well as public and private governance mechanisms through interventions in private markets.[7] Sovereign investing thus points to a form of cooperative governance that has been emerging in the global regulation of markets and finance primarily over the last half-decade.[8] But it remains a controversial practice, even as its allure remains powerful.[9] Recent work on the emerging “law” of SWFs[10] increasingly describes the way that these instruments “replicate the collisions between two tectonic forces that are grinding their way to a new normative framework of governance and power.”[11] SWFs constitute a new form of private organization operating in global space beyond the state while simultaneously involved in activities within the territories of several states. At the same time, SWFs remain very much instruments of the state and tightly bound up in the formal structures of the state and legal systems grounded in respect for territorial borders.[12]

This collision is possible only as a result of the structural changes resulting from globalization, and specifically, its role in producing porous national borders.[13] The most important consequence of this collision is governance fracture and, as a result, the diffusion of regulatory authority between public and private bodies within and between states.[14] The more these forces work toward harmonization, the more relentlessly they illuminate the resulting fracture of governance. Yet they also point to the possibility of creating a framework for understanding the way in which SWFs are governed and can be managed through regulation.[15]

This study, then, does not consider the way in which SWFs ought to be governed;[16] rather it focuses on the emergence of governance systems through which SWFs can themselves govern.[17] For that purpose, it considers in some detail a critical aspect of the organization of the sovereign investing project of Norway.[18] Undertaken through its SWF, the Government Pension Fund-Global (for the purposes of this study the “NSWF”), [19] Norway seeks not merely to project public wealth into private global markets, but attempts to construct a complex rule-of-law-centered framework that blends the imperatives of a state-based public policy with a rule-based governance system that incorporates both domestic and international norms. To this framework, Norway adds a policy-oriented use of traditional shareholder power to affect the behavior and governance of companies in which the NSWF has invested. The object is not merely to maximize the welfare of the fund’s ultimate investors, the people of Norway, but also to use the fund to advance Norwegian public policy in both the international sphere and the domestic legal systems of other states to achieve a measure of horizontal harmonization of corporate governance.[20]

Norway has developed a toolbox to effectuate its policy-centered investment strategy, which consists of both the traditional forms of regulatory governance and a policy-centered invocation of shareholder power. The shareholder power operates both within the corporation and, for a large investor, as an advocate for change within those foreign states where those companies are domiciled. In effect, Norway acknowledges three intertwined but autonomous governance realms.[21] The first is the traditional territory-based state. The second is the governance sphere of the corporation—affecting not only relationships within the corporation’s operations but also the rules that reflect the choices it makes when interacting with others. The third is the international governance sphere, where common traditions are developed that have a direct and indirect effect on both domestic legal orders and corporate behavior choices. Norway has sought to operate within and between these three governance realms, and to some extent affect their content, through the investment strategies of the NSWF. This intertwining suggests a unique inter-systemic governance project.[22]

Understood generally within the rubric of “responsible investing,”[23] the NSWF takes part in global financial markets as both a participant and as a regulatory stakeholder. First, as a regulatory stakeholder, the NSWF determines the range of enterprises in which it may invest, it investment universe. That determination is based on the NSWF’s governing documents. The NSWF investment program is grounded in the application of a set of Ethical Guidelines. The most important of these is a set of Ethical Guidelines. [24] These Ethical Guidelines, adopted by the Norwegian legislature and enforced through an Ethics Council, [25] reflect Norwegian public policy that itself blends domestic and international law as interpreted by the Norwegian state. The Ethics Council is then charged with determining whether a company should be excluded from investment by the NSWF through the “active ownership” strategy[26] utilized by the Fund Manager in harmony with responsible investment principles. These principles are also grounded in Norwegian domestic law, international law, and norms selected by the Norwegian Ministry of Finance.[27] Second, the NSWF’s “active shareholding” or “active ownership” policy[28] also has a private regulatory dimension. Active ownership commits the NSWF to attempt to use its position as a shareholder to change individual corporate behavior to conform to Norwegian policy touching on corporate governance and conduct.[29] Active ownership obligations can be applied by the Fund manager but may also be invoked through application of the Ethics Guidelines observation powers.

Investment activity with legislative effect, undertaken through the framework of responsible investing, provides the foundation for the thesis of this study: SWFs embody a new and important form of cooperative governance, one that (1) bridges public and private government spheres, (2) blends law, custom, contract, and non-state governance regimes, and (3) mediates between the national and international systems. The functionally-directed governance activities of the NSWF do not serve as a convergence of law project undertaken by Norway. Rather, its objective is to position Norway as a nexus for the mediation of governance polycentricity inherent in globalization. As a consequence, the state assumes the role of a chameleon,[30] adopting actions and objectives in line with the role it plays in each governance system.

This two-fold set of techniques for state intervention in private markets, with the purpose of securing both economic and regulatory returns on its investment, represents the most innovative part of the NSWF framework.[31] Norway’s SWF project may provide a window into governance frameworks for the coming century. It embraces a set of governing parameters incompatible with traditional assumptions of the operation of the law-state system from the last century;[32] here, neither the state nor the law occupies the central position. The NSWF governance regime acknowledges three simultaneously operating governance regimes: the law-state system, the social-norm system of private actors, and the international law-custom system of the community of states (and their partner-constructs). It seeks to both navigate between these governance systems and to actively participate within and impact them. The NSWF is created and operated as an instrumentality of the state, a fund controlled through the Norse Ministry of Finance. As a state instrumentality, is it used to generate income for Norway; yet its income production also produces governance effects through the use of shareholder power to effectuate Norwegian public policy in the enterprises in which the NSWF owns shares. The public policy that is reflected in the NSWF investment activity as a shareholder and investor in turn reflects the internalization of international law and governance within the Norwegian domestic legal order. These ideas contribute to the development of international law and custom that are then applied to the law or social-norm systems of the other two governance regimes.

The distinctions between law and norm, between public and private spheres, between hierarchy and polycentricity, thus collapse within the operational universe of the NSWF. I am reminded of the vision of the future of governance suggested by Michel Foucault nearly a generation ago: “A right of sovereignty and a mechanics of discipline. It is, I think, between these two limits that power is exercised. The two limits are, however, of such a kind and so heterogeneous that we can never reduce one to the other.”[33] The Norwegian experiment, like that of its Chinese counterpart, represents contemporary efforts to institutionalize a sustainable ‘normalizing society’ that is compatible with emerging global power systems. It is in this sense that the NSWF can be understood as a regulatory chameleon, balancing conventional economic profit maximization with long term strategic political and policy goals.[34]

Part II will briefly examine the legal and regulatory framework within which the NSWF is organized, introducing the principal institutional actors and the regulatory framework within which they operate. Parts III and IV then turn to consider responsible investing. Part III considers the private market interventions of the NSWF through its active ownership framework. Part IV then turns to the more public aspects of NSWF governance by considering the structures and operation of NSWF investment universe rules. The NSWF governance framework tends to frame the rules for companies’ access to capital and is grounded in the application of the Ethics Guidelines as the gateway to that portion of the capital markets in which the NSWF will participate. These access rules, though only applicable to NSWF investment decisions, are expected to pressure companies into conforming to access NSWF investment. This Part first examines the substantive provisions framing investment exclusion, centering on the NSWF Ethical Guidelines, and the structure and operations of the Ethics Council itself.[35] Part V then turns to the decisions of the Ethics Council, organized around substantive issues, the purpose of which is to discuss the way juridification of exclusion decisions has brought a very public element into economic investment decisions of the NSWF. Part VI suggests a generalizable analytical framework for framing the market as both a space for regulatory interventions and as an economic transaction space. This framework and its consequences will be explored, especially for its implications for emerging inter-systemicity of governance, principally in the context of financial regulation of markets.

The article concludes that the state has returned as a center of transnational regulation, but it is doing so in part through global private markets. That return to the market is transforming both the market as a center of lawmaking and the state as a stakeholder in regulatory governance beyond its borders. Market power now substitutes for public legislative power, and the techniques of market behavior now serve as the vehicle for the implementation of law and norms. The distinctions between public and private—i.e. between public regulation and market behavior—distinctions that are grounded in a well developed formal system of state and market, give way to the rise of a system best characterized as functional and hybrid. This hybrid system will substantially impact international regulations, the regulatory context of SWFs, the development of transnational standards for corporate social responsibility, and the emergence of substantive standards for corporate behavior consonant with emerging human rights standards.


[1] See, e.g., Gordon L. Clark et al., Symposium: Sovereign Fund Capitalism, 42 Env’t & Plan. A 2271, 2272 (2010); Ronald J. Gilson & Curtis J. Milhaupt, Sovereign Wealth Funds and Corporate Governance: A Minimalist Response to the New Mercantilism, 60 Stan. L. Rev. 1345 (2008).

[2] Matt Stoller, The Housing Crash and the End of American Citizenship, 39 Fordham Urb. L.J. 1183, 1207–17 (2012) (observing the encouragement from the White House and leaders from both parties for foreign SWFs to invest in a variety of U.S. industries); see also, Mark E. Plotkin, Foreign Direct Investment by Sovereign Wealth Funds: Using the Market and the Committee on Foreign Investment in the United States Together to Make the United States More Secure, 118 Yale L.J. Pocket Part 88 (2008) (explaining how sovereign investing can be used as a political weapon because some countries invest for geostrategic goals instead of political gains); Michael S. Knoll, Taxation and the Competitiveness of Sovereign Wealth Funds: Do Taxes Encourage Sovereign Wealth Funds to Invest in the United States?, 82 S. Cal. L. Rev. 703 (2009) (noting that SWFs benefit host states by decreasing their domestic cost of capital and giving them the primary right to tax investors).

[3] See generally Larry Catá Backer, Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State-Owned Enterprises, and the Chinese Experience, 19 Transnat’l L. & Contemp. Probs. 3 (2010) [hereinafter Backer, Sovereign Investing in Times of Crisis] (explaining how China integrates important aspects of sovereign investing to achieve both commercial and political aims to maximize the welfare of the Chinese state).

[4] See generally Larry Catá Backer, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment, 41 Geo. J. Int’l L. 425 (2010) [hereinafter Backer, Sovereign Wealth Funds as Regulatory Chameleons].

[5] See Steve Schifferes, Lifting the Lid on Sovereign Wealth Funds, BBC News, June 13, 2013, http://news.bbc.co.uk/2/hi/business/7430641.stm (noting that China is a more passive investor, seeking only good financial returns, while Norway has followed a more political course for private market interventions by embracing a responsibility to avoid human rights violations).

[6] See, e.g., Willy Kraus, Political Power and the Power of Market-Dynamics in China, in The Study of Modern China 93 (Eberhard Sandschneider ed., Tobia Schumacher & Petra Dreiser trans., 1999) (discussing the importance of legal regulatory framework in China’s state-participation-focused market transformation).

[7] See, e.g., Simon Chesterman, The Turn to Ethics: Disinvestment From Multinational Corporations for Human Rights Violations—The Case of Norway’s Sovereign Wealth Fund, 23 Am. U. Int’l L. Rev. 577, 594–605 (2008); Gordon L. Clark & Ashby H. B. Monk, The Legitimacy and Governance of Norway’s Sovereign Wealth Fund: The Ethics of Global Investment, 42 Env’t & Planning A 1723, 1735–37 (2010).

[8] See, e.g., Larry Catá Backer, Private Actors and Public Governance Beyond the State: The Multinational Corporation, the Financial Stability Board, and the Global Governance Order, 18 Ind. J. Global Legal Stud. 751, 755 (2011) [hereinafter Backer, Private Actors and Public Governance].

[9] See, e.g., Vivienne Bath, Foreign Investment, the National Interest and National Security – Foreign Direct Investment in Australia and China, 34 Sydney L. Rev. 5 (2012) (explaining how Australian public perception recently influenced the rejection of a proposed corporate takeover that would have increased Australia’s governance in the foreign entity).

[10] See, e.g., Fabio Bassan, The Law of Sovereign Wealth Funds 55 (2011).

[11] See Larry Catá Backer, Review Essay: Taking a Step Toward a Law for Sovereign Wealth Funds 101, 103 (Consortium for Peace and Ethics, Working Paper No. 2012-9/1, 2012), available at http://ssrn.com/abstract=2143452.

[12] Id.

[13] See, e.g., Andreas Fischer-Lescano & Gunther Teubner, Regime-Collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law, 25 Mich. J. Int’l L. 999, 1005–06 (2004).

[14] Larry Catá Backer, The Structural Characteristics of Global Law for the 21st Century: Fracture, Fluidity, Permeability, and Polycentricity, 17 Tilburg L. Rev. 177, 182–84 (2012) [hereinafter Backer, The Structural Characteristics of Global Law].

[15] Bassan, supra note 11, at 39–40.

[16] For a discussion of this topic, see id.; see also Yvonne C.L. Lee, The Governance of Contemporary Sovereign Wealth Funds, 6 Hastings Bus. L.J. 197 (2010); Efraim Chalamish, Global Investment Regulation and Sovereign Wealth Funds, 13 Theoretical Inq. L. 645 (2012).

[17] See infra text accompanying notes 39–41.

[18] See, e.g., Benjamin J. Richardson, Sovereign Wealth Funds and the Quest for Sustainability: Insights from Norway and New Zealand, Nordic J. Com. L. 1 (2011) (explaining how the Norwegian SWF has been imitated by others); see also, Glens Yago & Yuan-Hsin (Rita) Chiang, Financial Innovations Lab Report: Structuring Israel’s Sovereign Investment Fund – Financing the Nation’s Future, Milken Institute 17 (2011) (acknowledging the success and effectiveness of Norway’s SWF structure and legal framework).Though the Norwegian fund is an “industry leader” it is not unique.It has been imitated by others.See, e.g., Benjamin J. Richardson, Sovereign Wealth Funds and the Quest for Sustainability: Insights from Norway and New Zealand, 2011(2) Nordic Journal of Commercial Law . The Israeli investment fund may also borrow some of the structures and objectives of the Norwegian fund.See, e.g., Milken Institute, Financial Innovations Lab Report, Structuring Israel’s Sovereign Investment Fund.

[19] See The Management of the Government Pension Fund in 2011, Norwegian Ministry of Fin. 9 (2012) [hereinafter Management of the Government Pension Fund in 2011] (explaining the composition of the Government Pension Fund, which encompasses the Government Pension Fund Global and Government Pension Fund Norway, which are managed by the Norges Bank under the auspices of the Ministry of Finance).

[20] See discussion infra Part II.

[21] See discussion infra Part II.B.

[22] Larry Catá Backer, Inter-Systemic Harmonization and Its Challenges for the Legal-State, in The Law of the Future and the Future of the Law 427, 428–31 (Sam Muller et al. eds., 2011) [hereinafter Backer, Inter-Systemic Harmonization].

[23] Management of the Government Pension Fund in 2011, supra note 20, at 98; New Guidelines for Responsible Investment Practices in the Government Pension Fund Global (GPFG), Norwegian Ministry of Fin. (Mar. 2, 2010),  [hereinafter New Guidelines].

[24] Guidelines for the Observation and Exclusion of Companies from the Government Pension Fund Global’s Investment Universe, (adopted by the Ministry of Finance on Mar. 1, 2010 pursuant to Act no. 123 of Dec. 21, 2005), Styrer, Råd og Utvalg (Norwegian Boards, Councils, and Committees)  [hereinafter Ethics Guidelines].

[25] Ethics Guidelines, supra.

[26] See The State Will Be an Active Owner, Norwegian Ministry of Trade and Indus. (Apr. 4, 2011); Active Ownership—Norwegian State Ownership in a Global Economy Norwegian Ministry of Trade and Indus. (2011).

[27] On the Management of the Government Pension Fund in 2008, Norwegian Ministry of Fin. 109 (2008–2009) [hereinafter Management of the Government Pension Fund in 2008] (explaining that fund management must take into account national norms “precluding the Fund from having investments that conflict with Norway’s obligations under international law”).

[28] Management of the Government Pension Fund in 2011, supra note 20, at 95–98.

[29] Id. (asserting that active ownership then becomes a method of ensuring the compliance with the NSWF’s ethics guidelines).

[30] Backer, Sovereign Investing in Times of Crisis, supra note 4.

[31] See generally Gralf-Pater Calliess & Pewer Zumbansen, Rough Consensus and Running Code: A Theory of Transnational Private Law (2010) (theorizing the way in which regulation through state intervention in private markets has become a variant on the emerging mechanics of law).

[32] I have discussed this term elsewhere. See, e.g., 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 (Günther Handl and Joachim Zekoll Editors, Leiden, Netherlands & Boston, MA: Brill Academic Publishers, 2012) (law state refers to the conventional understanding of the state in the early 21st century as a territorial unit with its own domestic legal order regulated by a constitution which is tin turn constrained by an international system created by consensus among the community of states and in which there is a strict divide between public law, legitimated by democratic and rule fo law principles and the social norms of non-state actors in markets and other communities)..

[33] Michel Foucault, Society Must Be Defended: Lectures at the Collège de France 1975–1976, 37 (Mauro Bertani et al. eds., David Macey trans., 2003).

[34] Backer, Sovereign Wealth Funds as Regulatory Chameleons, supra note 5, 494–500 (2010); accord Benjamin J. Richardson, supra note 19, at 22–23 (asserting the Norwegian and New Zealand SWFs resemble institutional chameleons because they are similar to private investment instruments in that they maximize shareholder value, but are also tasked with the public responsibility to realize their states’ ethical policies).

[35] See infra Part IV.

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