On January 7 the manager of Norway’s sovereign wealth fund announced the fund would sell its $15 million holdings in Chinese telecom giant ZTE and make no future investment in the company because of the risk the company would become involved in corruption scandals. The decision to divest for reasons of corruption is a significant advance in the battle to curb global corruption. For while the investment community can be a powerful voice for change in corporate behavior, to now its efforts has been confined almost exclusively to entreaties to corporate management to make corruption prevention a priority (see pp. 1127-1130 of this article for a summary of recent efforts). Divestment puts teeth in these entreaties, particularly when wielded by an investor of the size and influence of the Norwegian fund.
The Government Pension Fund Global, the fund’s formal name, was established in 1990 to invest the nation’s petroleum wealth for the benefit of future generations. Its current holdings of roughly $825 billion make it not only the world’s largest sovereign wealth fund but one of the largest pools of investment capital in existence. For comparison, Pimco Total Return, which Forbes ranks as the world’s largest mutual fund, has assets of $263 billion while UK Business Insider reports that Millenium Partners $181 billion in assets make it the globe’s biggest hedge fund.
It is not only the fund’s size that makes it influential, but the careful process it follows to ensure its investments reflect the values of beneficiaries, the citizens of Norway. The fund’s investment guidelines provide that it may exclude any company where “there is an unacceptable risk that the company contributes to or is responsible for” activities that result in the violation of human rights, lead to severe environmental damage, or further “gross corruption.” To decide whether disinvestment is appropriate, the fund’s five member Council on Ethics reviews a company’s conduct and issues a recommendation to fund managers. In the case of ZTE, the Council’s June 2015 divestment recommendation was based on an extraordinarily damning report it prepared recounting ZTE’s conduct over the past decade, a report that leaves no doubt the company was responsible for an enormous amount of “gross corruption.”
The only question the report left open is why other investors aren’t fleeing the company’s stock as well. If not for social reasons — because the company’s repeated, flagrant violations of the corruption laws of so many countries has done so much harm to so many — for economic reasons. A business model seemingly bottomed on the wholesale corruption of public officials is sure to crash soon in this heightened era of anticorruption enforcement.
Just look at what the Council’s report says about ZTE activities —
* The company or its employees have been implicated in corrupt activities in 18 countries: Algeria, DR Congo, Ethiopia, India, Kazakhstan, Kenya, Kirgizstan, Liberia, Malaysia, Mongolia, Myanmar, Nigeria, Pakistan, Papua New Guinea, the Philippines, Tajikistan, Thailand, and Zambia.
* In 10 of the 18 countries the company’s activities have been or are the subject of a formal investigation.
* In Algeria two ZTE executives were convicted in June 2012 of corruption in connection with contracts awarded in Algeria between 2003 and 2006. ZTE’s representatives were sentenced in absentia to 10 years’ imprisonment and a fine of USD 65,000 and ZTE Algérie was banned from participation in public tenders in Algeria for two years.
* On September 13, 2012, Singapore’s Attorney General indicted ZTE’s country manager for Papua New Guinea for unlawful activities related to bribes paid in connection with a $35 million contract to establish a virtual university network in PNG. An investigation by Singapore’s Corrupt Practices Investigation Bureau found the bribes had gone to several senior officials of the PNG government including its Prime Minister.
* In Kenya in 2013 the head of the Civil Service Commission reported to the Internal Security Ministry that several officials had received kickbacks to influence the award of a $17 million contract to ZTE to provide the police with communications equipment. The Commission cancelled the contract after finding it was overpriced by somewhere between $5 and $8 million.
* In July 2014 the Zambian Anti-Corruption Commission concluded that a 2011 contract ZTE won for the delivery and installation of surveillance cameras had been awarded corruptly. Contrary to national law, the $210 million contract was issued without a public tender.
* In the Philippines the 2007 award of $333 million contract to ZTE to contract a national broadband network has resulted in a rash of bribery investigations. Cases against several senior officials, as well as the husband of former President Gloria are proceeding.
The report also provides fodder to those who believe corporate compliance programs are nothing but eye-wash. The Council actually found that the company had an anticorruption compliance program in place but concluded, in what may go down as one of the great understatements of the decade that “the company has failed to demonstrate satisfactorily that internal anticorruption procedures are being effectively implemented in its business.”
How could investors not want to dump their holdings in ZTE after learning how the company operates? How could anyone with shares in a mutual fund or other investment vehicle not immediately demand the management divest ZTE stock?
With its decision to exclude ZTE stock from its portfolio, Norway’s Government Pension Fund Global has set two important precedents. First, its well-documented, public report of one company’s involvement in corruption across the entire range of countries in which it operates offers a model for other investment analysts, journalists, anticorruption activists, and even law enforcement agencies to follow. The internet is awash in reports on corruption in a particular country. Time to put some of those resources towards cataloging the worldwide corruption of a single company, for as the ZTE report shows, much can be gleaned by assembling all a company’s crooked activities is in one place.
The more important precedent the ZTE decision sets is that some companies are simply too corrupt to merit investment. In the case of ZTE, it is time anticorruption activists pushed ZTE’s other shareholders to follow Norway’s lead.