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 — Continue reading →