Embassy of the United States

speeches

Pension Fund Disinvestment: Meeting Norwegian Fairness Standards?

Remarks by Ambassador Benson K. Whitney
Norwegian Institute of International Affairs (NUPI)
Oslo, Norway
September 1, 2006
(as prepared for delivery) 

(click here to download speech in MS Word format)

Good morning, ladies and gentlemen.

I want to say what a pleasure it is for me to be here at this podium for the first time since I became ambassador to Norway. I’m aware how many accomplished people have spoken here at NUPI and I hope I can live up to their standard. Thank you so much for having me.

The title of my speech gives you a good idea of what I will talk about today, and I hope in the next half hour or so to convey to you some concerns that have been on my mind in the last couple of months. What I will say has to do with shared values and expectations in a good relationship -- the expectation of friends to do right by each other, the unspoken obligation of one friend to tell another when something is not sitting right in the relationship, and the hope that friends will listen to each other and try to make things better with care and respect.

I’ll mention words like fairness, transparency, justice, dialogue, ethics - all core values of the Norwegian and the American people, forming the very foundation of the special relationship between our nations. That both our countries strive to live up to these values makes me especially proud to represent the United States in Norway.

But today I will also mention words like disappointment and surprise. Because I believe that when either country fails to measure up to the values we share, we owe it to each other to respectfully let each other know our feelings and challenge that failure. That’s why I am here today.

One way that Norway expresses its core values is through the Ethical Guidelines established for investments by the country’s $200 plus billion dollar Pension Fund. I believe the point of these guidelines is to make sure that the 4,000 plus international companies invested in by the fund don’t violate the collective ethical beliefs of the Norwegian people. Companies in the portfolio believed to pose an unacceptable risk to those beliefs are publicly identified as violating ethical standards and “divested” or sold by the fund. The basic grounds for divestment fall into several categories, including weapons manufacture, environmental harm, and the broadest category, serious or systematic human rights violations.

I want to be absolutely clear on one point: I fully recognize the right of the Norwegian people to adopt ethical guidelines and apply ethical principles to screen their investment decisions for their national endowment. My concern is this, and this only: that in applying its ethical screen, Norway should use procedures that are fair to everyone involved. I’m here today because, after research and discussions with the Ethics Council, Norges Bank, and the Finance Ministry, I believe that the current ethical investment process is inconsistent with what I have come to know as the fair, just, and transparent values of the Norwegian people. In my opinion, this process doesn’t live up to the high standards of Norway and it needs reform.

You have every right to ask what business is it of the American ambassador to make this claim.

Let me start by saying that as the representative of the U.S. in Norway, it is my job to see that my countrymen and, by extension, their commercial interests, are treated fairly and ethically, with the same standards of conduct applied to them as to the rest of the world. Through divestment the Norwegian government has accused a number of American companies of failing to meet its ethical standards. I want to repeat it is the government of Norway, through the Finance Ministry, making these allegations; this is important, because the duty of fairness is far greater when it is a government, and not just a private person, making accusations of bad ethics. It’s one thing for an individual Norwegian to get up one morning, read the paper, decide they don’t like a company for some reason, and sell their stock. This is a private decision with limited impact. It’s quite another thing for a sovereign government – particularly one like Norway - to take an official and very public action to accuse a foreign company of severely unethical conduct and sell its stock. And this is what has happened most recently to the American firms Wal-Mart, Freeport-Mason, and earlier to Kerr-Mcgee.

I respectfully ask the Norwegian government and people to fully recognize the seriousness of what Norway is doing with divestment decisions like these. Norway is not just selling stock – it is publicly alleging profoundly bad ethical behavior by real people. These companies are not lifeless corporate shells. They represent millions of hard working employees, thousands of shareholders, managers and Directors, all now accused by Norway of actively participating in and supporting a highly unethical operation. The stain of an official accusation of bad ethics harms reputations and can have serious economic implications, not just to the company and big mutual funds, but to the pocketbooks of workers and small investors.

As I read the government’s decisions, I was reminded of the original meaning of the word “ostracism.” In Ancient Greece -- the paragon and cradle of democracy -- there was a practice of voting certain citizens out of a city by their peers secretly casting shards of broken pottery into a “yes” or a “no” pot. The broken shards were called “ostraka.” What came to mind was the fact that the person who was “ostracized” got little in the way of protections in the process and could mount little defense on his own behalf – a very curious practice in a society priding itself on its democratic process and even-handed justice. When I thought of this and the process by which the government decided to “ostracize” these companies from its portfolio, I found surprising, disturbing parallels.

Because these flawed procedures have mainly resulted in accusations against American companies, I feel that it’s appropriate for me as my country’s ambassador to raise my concerns publicly in the hope of starting a constructive dialogue on the government’s ethics process that might lead to positive change.

Now, let’s compare how the ethical investing process for the Pension Fund matches universally accepted standards of fair process for public decisions. These standards include unbiased application, well defined standards for judgment, transparency, use of credible evidence, and getting a fair chance for defense, among others.

To begin, I think the Norwegian people would be surprised to know, as I was, that the Ethics Council and the Finance Ministry do not systematically review all the companies in the portfolio to make sure that the fund’s investments comply with the Ethical Guidelines. There is no comprehensive review of the fund’s holdings for ethics problems. Instead, the council may initiate an examination of an individual company for divestment. But there is no set standard on how and why it picks a certain company for review among the 4,000 choices, so the process really is arbitrary. The council primarily reacts to individuals, outside organizations, and government entities who challenge the ethics of a particular company. It’s clear how this ad hoc approach could lead to serious bias in the process. Naturally, the louder or more persistent the complaining, the more likely it is that the council will take action.

By using this ad hoc approach no one knows how the companies accused of violating human rights or causing environmental damage compare to the rest of the portfolio. They may be the worst or may be the best.

This ad hoc approach also means that companies about which there is more public information are more likely to be scrutinized. We in the U.S. conduct our public and business affairs as a completely open, free society that allows the world to see how we behave – and the world does not hesitate to call us to task for our mistakes. Norway, too, prides itself on openness. Other societies, however, are protected by secrecy, so their misbehavior is not visible to entities like the Ethics Council. Because no one knows how ethical or not companies from these societies are, it is very likely that no one will ever bring a complaint against them to the Norwegian Ethics Council. Is this fair to open societies or to companies that operate there?

The worst result of this reactive approach, however, is that it will, strangely enough, punish companies from countries with real human rights protections but ignore companies from countries with the least protections. Right now, two-thirds of all companies “blacklisted” by the Finance Ministry are American. I’ve heard that this is because most are defense firms that fall under the ban on certain weapons. But even in the non-defense cases, one hundred percent of those found guilty of serious or systematic human rights violations, guilty of desecrating the environment, of violating fundamental ethical norms, are American. I ask you, is it reasonable to believe that among the Pension Fund’s 4,000 plus companies, from all over the world, the process has revealed that only American companies are unethical?

Of course not. What is happening is that my country, like Norway, has freedom of the press, developed and fair judicial and regulatory systems, strong labor and environmental laws, and other systems to protect human rights. This means there are more sources free to complain and more information available, and as a result the Pension Fund becomes more likely to disinvest. As a result, U.S. companies are more likely to be blacklisted than companies in parts of Asia or the Middle East, where repressive societies predominate.

For example, Norway found Wal-Mart unethical for allegedly discouraging unions, but the government’s Pension Fund stands silent about firms in its portfolio from countries in which no unions, or only state unions, are allowed. In these countries, the workers can’t complain, there is no free news media to report violations, and no regulations to violate, so the Norwegian ethics process now ignores them. Strangely enough, by this approach, the Pension Fund currently encourages unethical companies and discourages ethical ones. This is a perverse result which I think would surprise and disappoint the Norwegian people.

Let me here make the very important point that I am not questioning, in any way, the integrity of the members of the Ethics Council, Norges Bank, or the Finance Ministry. I have the utmost respect for them and recognize that their job is not easy. My suggestion here is only that the effect of their actions has not been carefully enough considered and the consequent need for careful procedures not adequately recognized.

For example, accepted standards for procedural fairness demand that a government base its decisions on comprehensive and reliable evidence. Fundamental fairness permits the accused to have meaningful input and provide contrary evidence in his defense. Here again, I believe the current ethics process fails. To begin with, the council’s original screening does not appear to gather much positive information about a suspect company to balance against a complaint. When I asked the council how it gathered evidence opposing divestment at this stage, the answer was that it looked at the company’s web site. I very much doubt that the makers of the web site knew that their information needed to defend the company from an accusation of serious human rights violations.

Once the council decides to investigate a company for unacceptable ethics, it never contacts the company until the draft recommendation and report advising divestment is completed by the council’s secretariat. The first notice that a company receives is a 20- or 30-page indictment of it as an unethical operation. Technically, the company has the right at that point to respond to the draft, but not having participated in the process at all, a company may understandably be justified in thinking that real engagement is not wanted or that it will not have any meaningful impact. For a company, this is the equivalent of getting tried without being present and then being brought to court and merely asked for a comment before judgment and sentence. To me, this seems inconsistent with the Norwegian values of dialogue, engagement, and justice.

The Ethics Council has told me that that it operates on a confidential basis without notice to the companies to avoid violating insider trading laws that prohibit investors from acting on important information that the whole market doesn’t have. This restriction, however, is self-imposed because all the Pension Fund has to do is to announce that it is considering divestment and there is no more inside information. Perhaps the Pension Fund would rather not do this since the announcement could hurt the company’s share price before it actually sold the stock, but that would place fund profits over basic fairness, a tradeoff that I am not sure the Norwegian people would accept.

A related problem is the credibility of the type of information being used by the government to base its divestment decisions. As a lawyer, I’m surprised and disappointed to see the kind of information relied on much of which would not be permitted in any fair regulatory or legal proceeding. These sources include: highly political web sites, media stories, letters of complaint, and information from lawyers suing the company, and anonymous sources. More troubling, there is heavy use of unsubstantiated allegations from legal complaints – not decisions of fact by independent judicial or regulatory bodies judging the validity of those complaints, but merely the complaints themselves. Please understand that, for a $100 filing file, anyone in the U.S. can file a lawsuit alleging almost anything against anyone. I could easily file a suit accusing the country of Norway of exporting toxic fish. What would Norwegians think if my complaint alone – not a decision by some independent, fact finding body -- was used by U.S. public officials as evidence to decide that Americans should not buy fish from Norway? Such unsubstantiated complaints should never be a basis for government action in any fundamentally fair process, yet they are in Norway. The government even relies repeatedly on completely anonymous or unpublished sources, a practice that offends any notion of justice.

I am also troubled by a statement by the Ethics Council in the Wal-Mart case that it “does not consider it necessary to prove the veracity of each individual claim” to take action. If the council doesn’t have to find each claim truthful, then it follows that it can accuse a company of unethical conduct and recommend divestment without finding any claim truthful. Thus, not only can the government use un-credible information, it doesn’t even have to believe it is true in order to divest. I realize that the ethical screening process probably cannot operate with the strict procedures of an official court. But fundamental fairness for such serious action demands far more careful consideration of credible evidence and higher standards of review and judgment.

The final problem I will address is the lack of transparency in the process. From beginning to end, there is no evidence of public notice, public participation or input. From my understanding, no one witnesses any part of the deliberations of the Ethics Council or the subsequent review by Norges Bank, the Finance Ministry, or the other ministries. Public meeting laws are common in free societies for the good reason that they give integrity to a process. In this vein, I find it troubling that after the Ethics Council makes its recommendation, the Ministry of Finance asks the other ministries for comment, and then makes a final determination. This political review carries dangers at least in appearance. No one knows why one recommendation is accepted or another rejected by the ministries. Tell me, what if a ministry did not wish to offend a company for political or financial reasons? Would the Ministry of Finance then decide that it was not in the national interest of the Norwegian people to divest? This lack of transparency means that no one can be sure whether or not such decisions are politically driven and, if so, why.

In the spirit of constructive dialogue I want to offer a few suggestions that in my view would greatly improve the ethical screening process in Norway.

One, I believe the Ethics Council and the Finance Ministry should take a more systematic review of the Pension Fund portfolio and adopt a clear set of standards for the minimal level of evidence needed to start an investigation.

Two, I believe the council should set crystal-clear evidentiary standards for what it will consider credible information and stop the use of anonymous parties, unsubstantiated allegations in legal complaints, and politicized web sites.

Three, I hope the council will engage a company when an investigation begins and give it a meaningful opportunity to participate in the process from the beginning.

Four, I think the whole process should become more transparent to increase public confidence and remove opportunities for political considerations creeping into the process. If the council needs to publicly announce each investigation to avoid insider trading restrictions, then it should.

And finally, I hope legislators might consider making some of the standards for divestment clearer and to require greater procedural protections so that everyone involved in the process can operate with greater certainty and fairness.

These are merely suggestions, and I hope the Norwegian government will find them constructive and engage with us and others in an effort to ensure the ethical investing process works in the fairest manner. And I am, as always, eager to hear the ideas of my Norwegian friends.

Here let me repeat once again that it is up to the Norwegian people to determine what they own in their Pension Fund and to establish policies and procedures to implement its goals. I am not criticizing the Ethics Guidelines. However, in implementing them, Norway must recognize that this represents an official government action and therefore the process must meet universal standards of fairness and justice.

In conclusion, let me say that in my eight months in Norway, I have certainly heard criticism of the U.S. – as do most American ambassadors posted around the world. I’ve heard a few calls to ostracize us. But I’ve always believed that, from friends like Norway, criticism is always well intentioned, and I accept it in that spirit. And so it is that I raise this issue with the best intentions and with respect. As an outsider who has come to love Norway, I hope to start a constructive dialogue on this issue. I hope my remarks, although at times critical, will be interpreted as, in fact, testimony to Norway’s admirable system of values which Norwegians try to live up to and express every day and which, I believe, they would want reflected in their ethical investing process.

Thank you for your attention.