The Secretariat of the Norwegian Pension Fund Global has just circulated
the recommendation, taken in August 2016 by the Norwegian Ethics Council, to
revoke the exclusion of Raytheon Company from the Government Pension Fund Global.
The unofficial English translation follows and may also be accessed HERE.
The original recommendation for exclusion may be accessed HERE.
The revocation suggests both the strengths and weaknesses of current forms of state use of their shareholder power where they seek to implement national and international norms of corporate governance and the responsibility to respect human rights and pursue goals of sustainability and avoidance of corruption. Brief Comments follow.
On its face, the Ethics Council's recommendation does not appear to suggest much that is out of the ordinary course. But there are two exceptions that are worth further consideration. The first is the curious language used to describe the way that knowledge of Raytheon's change in product universe was communicated. It is possible to read the Recommendation as suggesting that Raytheon never bothered to notify the Ethics Council (and there was certainly no legal obligation for it to do so). That might also suggest the disinterest of Raytheon in lifting the exclusion. If that is the case, that should be worrisome for the political project of the Fund--or perhaps better put, a signal of the scope of the influence of the Fund relating to its ability to affect the price of capital of excluded companies (and thus the effectiveness of exclusion as a tool).
On its face, the Ethics Council's recommendation does not appear to suggest much that is out of the ordinary course. But there are two exceptions that are worth further consideration. The first is the curious language used to describe the way that knowledge of Raytheon's change in product universe was communicated. It is possible to read the Recommendation as suggesting that Raytheon never bothered to notify the Ethics Council (and there was certainly no legal obligation for it to do so). That might also suggest the disinterest of Raytheon in lifting the exclusion. If that is the case, that should be worrisome for the political project of the Fund--or perhaps better put, a signal of the scope of the influence of the Fund relating to its ability to affect the price of capital of excluded companies (and thus the effectiveness of exclusion as a tool).
The second is the curious language used by Raytheon's lawyers to answer the Ethics Council's query. The most important part of Raytheon's response was not what it had done (something already on its web site and readily available worldwide. Rather it was on the hedging language that came before the confirmation of its website statements ("While we cannot provide detailed responses on specific products and
customers due to legal constraints and customer relations issues and
other policy considerations"). This is good lawyer language, to be sure; it be be less satisfactory to a large institutional investor thinking about taking a potentially substantial equity position in the company. The dissatisfaction does not arise from Raytheon's unwillingness to disclose information that might negatively impact its contractual obligations and market calculations; rather it should come from the unwillingness to disclose or point to those "issues" and "policy" on which it bases its nondisclosure stance. A company that is already this unwilling to be transparent at the most general level is one that might be more difficult to embed within a system of investment grounded in the application of principle some of which Raytheon already has a history of dismissing as unimportant to its own business. One should keep that in mind when, perhaps inevitably, the Council will have to consider whether future action might require observation or exclusion yet again.
Both of these observations produce a third, and perhaps the most ambitious. It has become clear over the course of the last half century that--whether in the context of managing markets in securities by states, or incorporating soft law provisions into corporate governance--disclosure and transparency appear to play a vital role (e.g. here). That is an insight that ought not to be lost on the managers of the Norwegian Pension Fund Global. In their case it speaks to the potential and the under-utilization of the observation status mechanisms with which it has been empowered. Observation status provides the Pension Fund Global with the ability to monitor companies, and in that way to more effectively employ their shareholder power in an institutionally powerful way. For enterprises that see a value in inclusion within the Pension Fund Global investment universe, observation status also provides a necessary incentive to submit to monitoring, an incentive that might be related to its costs of capital. There is something less than positive to see in the Ethics Council little more than a small group within a powerful Fund that must go chasing about for information of companies. A greater use of the observation mechanism might provide a useful means of developing processes for the receipt of information that is specifically tailored to the needs of the Fund--and to the fulfillment of its public mandate. But the suggestion here isn't merely for the more aggressive use of the observation status power. rather it is the intuition that observation stratus itself might be built into the everyday activities of the Pension Fund Global as a shareholder. That is, that the essence of observation--the acquisition of targeted information on which judgement about an enterprise with respect ot spec ific conduct can be made--would make the mandate of the Pension Fund Global much easier to fulfill and more effectively so.
Both of these observations produce a third, and perhaps the most ambitious. It has become clear over the course of the last half century that--whether in the context of managing markets in securities by states, or incorporating soft law provisions into corporate governance--disclosure and transparency appear to play a vital role (e.g. here). That is an insight that ought not to be lost on the managers of the Norwegian Pension Fund Global. In their case it speaks to the potential and the under-utilization of the observation status mechanisms with which it has been empowered. Observation status provides the Pension Fund Global with the ability to monitor companies, and in that way to more effectively employ their shareholder power in an institutionally powerful way. For enterprises that see a value in inclusion within the Pension Fund Global investment universe, observation status also provides a necessary incentive to submit to monitoring, an incentive that might be related to its costs of capital. There is something less than positive to see in the Ethics Council little more than a small group within a powerful Fund that must go chasing about for information of companies. A greater use of the observation mechanism might provide a useful means of developing processes for the receipt of information that is specifically tailored to the needs of the Fund--and to the fulfillment of its public mandate. But the suggestion here isn't merely for the more aggressive use of the observation status power. rather it is the intuition that observation stratus itself might be built into the everyday activities of the Pension Fund Global as a shareholder. That is, that the essence of observation--the acquisition of targeted information on which judgement about an enterprise with respect ot spec ific conduct can be made--would make the mandate of the Pension Fund Global much easier to fulfill and more effectively so.
_ _ _ _ _ _
To Norges Bank
August 22, 2016
UNOFFICIAL ENGLISH TRANSLATION
Recommendation to revoke the exclusion of Raytheon Co. from the Government Pension Fund Global
1. Introduction
The Council on Ethics recommends revoking the exclusion of Raytheon Company («Raytheon») from the Government Pension Fund Global. The company has been excluded since 2005 due to its production of cluster munitions. This activity has ceased, and there are no longer grounds to maintain the exclusion of the company.2. BackgroundThe Council recommended the exclusion of Raytheon in 2005 on the grounds of the company’s production of cluster munitions.1 The exclusion of the company has been upheld until now.In accordance with section 5(5) of the Guidelines for observation and exclusion from the Government Pension Fund Global, the Council may, in light of new information, recommend that the Bank revoke an exclusion decision.3. Information from the companyRaytheon has issued the following statement on its website:«Raytheon does not manufacture or sell cluster munitions (as defined in the 2008 Convention on Cluster Munitions), land mines, nuclear warheads, or biological or chemical weapons.»2The company confirms this in an email to the Council:«While we cannot provide detailed responses on specific products and customers due to legal constraints and customer relations issues and other policy considerations, we can still state that Raytheon does not manufacture or sell cluster munitions, nuclear warheads, biological or chemical weapons.»3
4. The Council on Ethics’ assessmentOn the basis of the information referred to above, the Council finds that there are no longer grounds to maintain the exclusion of the company.5. RecommendationThe Council on Ethics recommends to revoke the exclusion of Raytheon Company from the Government Pension Fund Global.***
Johan H. Andresen
Chair
Hans Christian Bugge
Cecilie Hellestveit
Arthur Sletteberg
Guro SlettemarkNOTES:1 The Council’s recommendation to exclude cluster munitions producers, June 2005:
http://etikkradet.no/files/2014/12/Tilr%C3%A5dning-klasev%C3%A5pen-ENG2005.pdf
2. Company’s website:
http://investor.raytheon.com/phoenix.zhtml?c=84193&p=irol-faq.
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