4 Ethics and exercise of ownership rights

4.1 Ethical considerations in the management of the Government Pension Fund

4.1.1 The integration of ethical considerations in the management of the Government Pension Fund

The Government Pension Fund is owned by the Norwegian people and coming generations of Norwegians. It is an ethical responsibility for an investor to ensure that the owners of the Fund achieve a favourable return over time. A favourable return on the Fund over time represents an important contribution to safeguarding the welfare state. In addition, investors should also share responsibility for how the companies in which they invest are conducting themselves, for what they are producing and for how they are treating the environment. The Government deems it important to integrate this type of responsibility into the management of the Government Pension Fund, because it promotes values that are important to the Norwegian people, and because it represents an important contribution to raising awareness amongst investors and companies domestically and abroad.

The Ministry of Finance laid down Ethical Guidelines for the Global part of the Government Pension Fund on 19 November 2004, based on the report and proposal of the Government-appointed Graver Committee (NOU 2003: 22 Green Paper). The same year, the Executive Board of Folke­trygdfondet (also known as the National Insurance Scheme Fund) introduced Ethical Guidelines for the management of the Government Pension Fund – Norway. The guidelines for the two parts of the Government Pension Fund are largely built on a joint ethical platform. At the same time, the tools deployed in integrating ethical considerations are somewhat different in view of the different sizes, different investment strategies and different investment universes of the funds.

Responsibility for exercising ownership rights for the Fund lies with Norges Bank and Folketrygdfondet. The overall objective of the ownership effort is to safeguard the financial interests of the Pension Fund. This means that the capital shall be managed in such a way that it generates a favourable return over time and creates lasting value for current and future generations. The Ministry takes the view that there is a linkage between sustainable economic development and sustainable social and environmental development. This means that the Government Pension Fund in the long run will benefit from companies respecting fundamental ethical norms. This basic perspective is reflected in the UN Global Compact and in the OECD Guidelines of Corporate Governance and for Multinational Enterprises, cf. Box 4.1. The ownership principles of the Government Pension Fund – Global and the Government Pension Fund – Norway are primarily based on these international principles. Norges Bank and Folketrygdfondet will, in line with this, seek to, inter alia , influence companies in which they invest to respect fundamental ethical norms.

On 8 December 2006, the Ministry of Trade and Industry submitted Report No. 13 (2006–2007) to the Storting, “Active and Long-Term Ownership”. The Report examines companies that are partly or fully owned directly by the ministries, and discusses, inter alia , the responsibility of the owners for contributing to the long-term growth and development of the companies. There are important differences between the potential influence of the State in its capacity as large, long-term owner of Norwegian companies and that of the State in its capacity as financial investor through the Government Pension Fund, which is mainly invested abroad. At the same time, it is a shared characteristic that the State has to emphasise, both in its capacity as owner and in its capacity as investor, good corporate governance and corporate management, as well as environmental and social concerns. This is necessary in order for the companies to be well run and in order to create lasting value for the owners.

4.1.2 Tools used to integrate ethical considerations

The Government Pension Fund – Global is in its entirety invested in securities abroad. The investment strategy of the Fund is reflected in a benchmark portfolio comprising broad equity and bond indices. As per yearend 2006, the Fund held equity investments in about 3,400 companies. Norges Bank’s average ownership stake in these companies is about 0.4 pct.

The tools used in the integration of ethical considerations are adapted to the Fund’s investment strategy, hereunder the fact that its capital is broadly invested across many companies, with small ownership stakes in each company. The Ethical Guidelines of the Fund prescribe two policy instruments, exercise of ownership rights and exclusion of companies, as tools to promote the ethical commitments of the Fund, cf. the more detailed discussion in Sub-chapter 4.2.

The Government Pension Fund – Norway is primarily invested domestically. The benchmark index for the equity investments of the Government Pension Fund – Norway comprises the main index of the Oslo Stock Exchange and the Nordic equity index VINXB 1 . As per the end of last year, the Fund held ownership stakes in a total of 41 companies listed on the Oslo Stock Exchange and 32 companies in Denmark, Finland and Sweden. Folketrygdfondet’s average ownership stake in Norwegian companies is about 5 pct. Last year, its average ownership stake in other Nordic companies was about 0.3 pct. As from 2007, its average ownership stake in the Nordic region is considerably less since its investments will from now on be spread across more companies.

In its management of the Government Pension Fund – Norway, Folketrygdfondet emphasises positive selection of the companies in which its capital is to be invested, and thereafter the exercise of ownership rights in the same companies. This has to do with the fact that the investment universe is well-defined and comprised of a relatively limited number of companies.

Exercise of ownership rights

The basic principles governing their ownership efforts are the same for the Government Pension Fund – Global and the Government Pension Fund – Norway, cf. Box 4.1. Norges Bank and Folketrygdfondet have formulated their own principles for the exercise of ownership rights, which are founded on these basic principles. The ownership efforts of Norges Bank and Folke­trygdfondet are discussed in more detail in Sub-chapter 4.2.

Exclusion of companies

Companies shall be excluded from the investment universe of the Government Pension Fund – Global, pursuant to the Ethical Guidelines for the Fund, if they are involved in production or undertakings that imply an unacceptable risk that the Fund contributes to grossly unethical activities. The Ministry of Finance has excluded 21 companies from the Government Pension Fund – Global pursuant to the Ethical Guidelines, based on recommendations from the Council on Ethics for the Fund. See Box 4.4 for a more detailed description of the mechanism for exclusion of companies.

Folketrygdfondet may also exclude companies as part of its management of the Government Pension Fund – Norway, but has not done so thus far.

4.2 Application of the ethical guidelines

4.2.1 Introduction

Figure 4.1 shows the distribution of responsibility between the Ministry of Finance, Norges Bank and the Council on Ethics in their work relating to the Ethical Guidelines for the Government Pension Fund – Global. The Council on Ethics has no formal role as far as Folketrygdfondet is concerned. Nevertheless, the Ministry of Finance would require a Nordic company held by both the Government Pension Fund – Norway and the Government Pension Fund – Global to be removed from the investment universe of both funds if the Ministry renders a decision for the exclusion of such company.

Source Ministry of Finance

4.2.2 Norges Bank’s exercise of ownership rights

The Ethical Guidelines for the Government Pension Fund – Global stipulate that the exercise of ownership rights shall primarily be based on the UN Global Compact and the OECD Principles of Corporate Governance and for Multinational Enterprises, cf. Box 4.1. These represent the fundamental principles governing the exercise of the Fund’s ownership rights. Norges Bank has adopted internal guidelines for its active ownership in line with these fundamental principles. The companies are subject to a number of requirements relating to their objectives, strategies and transparency. Furthermore, there are requirements as to the companies’ form and structure of governance, as well as to their long-term sustainability, inasmuch as the companies need to take into account the effects of their own activities on the environment and on society in general. The principles also include a discussion of ownership tools, as well as on Norges Bank’s own reporting on their ownership activities.

Norges Bank has devoted considerable resources to establishing robust and targeted ownership activities. During an initial phase, particular weight has been attached to accumulating expertise, leadership capacity and an international network. The objective for the coming four-year period is to become acknowledged as one of the world’s most prominent and professional active owners. This is in line with the Government’s objective that the Government Pension Fund shall be the best-managed fund in the world, also in terms of ethics and exercise of ownership rights. In order to succeed in this, Norges Bank has deemed it necessary to prioritise certain selected areas of commitment.

Norges Bank has sought to identify areas of commitment where ethics are aligned with long-term financial returns. Weight has been attached to ensuring that the themes will be of relevance to investors in general and to the Fund’s portfolio in particular; that the themes will be suitable for dialogue with companies and/or regulatory bodies and offer prospects for real results; and that the themes will be financially justifiable.

Areas of commitment over the period 2007–2010

Norges Bank’s key areas of commitment in its exercise of ownership rights are:

• good corporate management, with a main emphasis on owners’ rights to nominate and appoint directors, to exercise their voting rights, to trade in their equities, and to receive transparent and timely information;

• children’s rights and health, hereunder the battle against child labour, with a main emphasis on the value chain of multi-national companies;

• corporate lobbying in relation to long-term environmental problems, hereunder climate changes.

Good corporate management lies at the heart of all corporate governance activities. Norges Bank will, in the context of this effort, have a special focus on (1) The right to cast votes at the shareholders’ meetings of the companies, and the safeguarding of predictable voting rules in all markets in order that the rights of minority shareholders will also be protected; (2) The right to nominate and appoint directors, and thus hold the boards of directors accountable; (3) The right to trade freely in the equities and to have a saying in relation to any poison pills; (4) The right to receive transparent and timely reporting from the companies. Norges Bank believes that it is important to ensure that the ownership rights may be exercised effectively. This will be a prerequisite for safeguarding the financial interests of the Fund, but also for being able to prevail in prioritised areas like the environment and human rights.

Norges Bank deems the battle to safeguard the rights and health of children to be of financial importance for an investor with a long-term horizon, because exploiting children and depriving them of opportunities for education and schooling are not sustainable in the long run. Moreover, such conduct on the part of a company may jeopardise the reputation of the company and the legitimacy of the market as a whole. Norges Bank’s main objective within this area of commitment is to improve the situation of children employed in, or directly affected by, the value chain of companies in the Fund’s portfolio. The Bank will seek to influence the companies to observe the requirements in the UN Global Compact, the ILO Convention on Child Labour and other relevant international standards. One shall also, where realistic, seek to influence the companies to go beyond such minimum standards in order to thereby safeguard the rights of children within the spheres of activity and influence of the companies.

Norges Bank will be focusing on environmental factors that may influence the long-term sustainability of the markets. The risk of climate changes is, for example, such an environmental factor. Political initiatives and market regulations will be of crucial importance to the battle against major climate changes. The Bank is of the view that investors are in a position to supplement this effort by exercising their influence. Norges Bank will in this context be working with individual companies and business sectors in order to create improved transparency as far as corporate environmental lobbying is concerned. Furthermore, the Bank wishes to promote responsible and transparent lobbying as an area where investors may contribute to responsible environmental protection measures. This same approach may also be of relevance to other environmental issues, hereunder the reduction in biodiversity of long-term importance to entire ecosystems, the unsafe handling of nuclear waste and the long-term destruction of potable water sources.

The Ministry is supportive of Norges Bank’s ownership strategy and it believes that the rights of children and the protection of the environment are amongst the important, fundamental ethical norms that the ownership influence should contribute to safeguarding.

Tools for exercising ownership rights

Norges Bank deploys different tools in its ownership effort. Voting rights are of key importance in this context. The Bank exercises the voting rights associated with most of the companies in the equity portfolio of the Government Pension Fund – Global, for purposes of promoting key themes within the areas of corporate management, human rights and the environment. Norges Bank regularly contacts companies before and after their shareholders’ meetings, to ensure that the companies are appraised of the Bank’s views, and to influence the companies. Voting behaviour is an important platform for various parts of Norges Bank’s active ownership, because company liaising outside the shareholders’ meetings becomes more credible if based on well-planned voting behaviour.

In 2006, the Bank voted on 26,826 matters, in a total of 2,928 shareholders’ meetings. In accordance with the ownership principles, Norges Bank has supported matters that promote:

• the company having a clearly defined business strategy, vested in its board of directors;

• the company disclosing sufficient information respecting its economic and financial position, and other relevant circumstances;

• the establishment of internal management and control systems that are tailored to the business, and the board of directors of the company attending to the interests of all shareholders;

• the board of directors comprising a sufficient number of directors holding relevant and sufficient qualifications, the majority of whom are independent;

• the board of directors being accountable for its decisions.

Proposals submitted by shareholders accounted for almost 3 pct. of the matters on which Norges Bank voted in 2006. Box 4.2 discusses cases where Norges Bank has supported proposals submitted by shareholders.

Norges Bank also approaches companies directly outside their shareholders’ meetings, in relation to the key areas of commitment. The Bank has approached, and will continue to approach, the boards of directors of individual companies, for example to discuss working conditions on the part of their subcontractors and the challenges involved in engaging in business in areas where there is a risk that human rights may not be respected.

Norges Bank participates in formal and informal networks with other investors for purposes of ensuring that its interests carry more weight, and to familiarise co-investors with the interests of Norges Bank. At the invitation of the then Secretary-General of the UN, Kofi Annan, Norges Bank in 2005 participated in a process where a group of institutional investors jointly prepared principles for responsible investment activities – “The Principles for Responsible Investment”. This process has resulted in six principles based on the premise that environmental and social factors, as well as corporate management systems, may influence portfolio returns. The principles were launched on 27 April 2006, and have enjoyed broad support amongst investors worldwide. It is often necessary to cooperate with other shareholders to get the undivided attention of a company. Norges Bank therefore cooperates with other investors on a case-by-case basis. The need for investor cooperation will to some extent determine what cases the Bank is able to prioritise.

As part of its ownership efforts, Norges Bank also approaches regulatory bodies. The Bank has contributed comments to hearings before, inter alia , the US Securities and Exchange Commission (SEC), concerning disclosure of managerial salaries in the annual reports of US companies. In cooperation with three other investors, Norges Bank has through letter and meetings requested the SEC to facilitate real and effective shareholder influence over the appointment of directors of US companies.

Furthermore, the Bank participates in the public and academic debate on ownership influence, with a main emphasis on good corporate management and key social and environmental standards.

4.2.3 The efforts relating to the exercise of ownership rights on the part of Folketrygdfondet

The Executive Board of Folketrygdfondet has laid down guidelines for the exercise of ownership rights on the part of the Government Pension Fund – Norway. The guidelines are based on the Norwegian Code of Practice for Corporate Governance, as well as on the UN Global Compact and the OECD Principles of Corporate Governance and for Multinational Enterprises, cf. Box 4.1. 2

The overall objective of the ownership effort is to safeguard the financial interests of the Fund. To ensure that the portfolio contributes, to the maximum possible extent, to promoting long-term growth, Folketrygdfondet has defined ethical principles for its investment activities as an integrated part of the guidelines for Folketrygdfondet’s exercise of ownership rights.

Key areas for the exercise of ownership rights

Good corporate governance and corporate management shall promote the rights of owners and other stakeholders as against the companies, as well as ensure that the management mechanisms of the companies work appropriately. Important principles underpinning Folketrygdfondet’s ownership effort are:

• Ensuring the establishment of clear ethical principles and ethical guidelines;

• Ensuring equal treatment of the shareholders;

• Safeguarding the rights of shareholders and their scope for ownership influence;

• Ensuring that the appointment of directors is well prepared, related to defined competency requirements and vested in the shareholders;

• Ensuring the establishment of remuneration models that are goal-oriented and prudent, and which do not impair shareholder value.

In following up the ethical principles it shall be specifically examined whether the company does itself, or through entities controlled by it, produce weapons that violate fundamental humanitarian principles through their normal use. Furthermore, it shall be examined whether the company bases its business on actions or omissions that involve the violation of human rights, child labour, environmental damage, corruption or the violation of fundamental ethical norms. During such examinations one looks at, inter alia , which products are manufactured, which production methods are used, where the production takes place, the company’s customer relations, the company’s corporate culture/management culture, the company’s ownership structure and the company’s ownership interests.

The assessments made are based on information available in the public domain and on information disclosed by the company itself. Through its ownership activities, Folketrygdfondet aims to increase the companies’ awareness of these themes.

In order to safeguard shareholder value, Folketrygdfondet deems it important to follow-up the managerial salary policies of the companies. This involves, inter alia , an evaluation as to whether managerial salary schemes are structured in such a manner as to actually contribute to more effective and result-oriented management. Incentive-based salary schemes shall be premised on results achieved beyond what could normally be expected, and shall not be based on developments in the equity price alone. The managerial salary principles pertaining to businesses in which Folketrygdfondet has invested through its management of the Government Pension Fund – Norway are discussed in Box 4.3.

Tools for exercising ownership rights

Folketrygdfondet may be represented on the boards of representatives, corporate assemblies and appointment committees of companies, but shall not be represented on their boards of directors. Folketrygdfondet seeks to exercise its voting rights in the shareholders’ meetings of the companies. In those cases where Folketrygdfondet itself is unable to participate in shareholders’ meetings, representatives of the company or others may be appointed as proxies.

If situations arise to suggest that the conduct of a company in which Folketrygdfondet is invested may be put into question, the issue shall be raised with the company. If appropriate, Folketrygdfondet will also cooperate with other investors to attend to its interests and ensure that its views prevail, with the company being influenced to rectify any unacceptable practises. Alternatively, Folketrygdfondet may dispose of its holdings in the business if necessary changes are not made. 3

The companies in Folketrygdfondet’s portfolio will be evaluated against the established principles at least once a year, and new companies will be subjected to a corresponding evaluation process before any investments are made. Folketrygdfondet will perform ongoing assessments of individual companies on the basis of any relevant issues that may catch its attention.

Folketrygdfondet will report annually on its exercise of ownership rights. The report will detail the activities carried out by Folketrygdfondet for purposes of attending to its ownership interests, and will, inter alia , address:

• special matters deliberated in shareholders’ meetings;

• relevant matters raised by Folketrygdfondet with companies;

• the number and type of offices held by employees of Folketrygdfondet.

4.2.4 The Council on Ethics’ work on recommendations for the exclusion of companies from the Government Pension Fund – Global

Companies may be excluded from the Fund pursuant to the Ethical Guidelines for the Government Pension Fund – Global through:

• negative screening to identify companies producing weapons that through their normal use violate fundamental humanitarian principles

• ad hoc exclusion of individual companies if an investment entails an unacceptable risk of contributing to actions or omissions that are deemed grossly unethical.

The Council on Ethics for the Government Pension Fund – Global renders recommendations on screening and exclusion, but the decision as to whether a company shall be excluded lies with the Ministry of Finance. The Ministry of Finance bases its decision on the Council’s assessment, but will also attach weight to Norges Bank’s views as to whether the Bank may, through ownership influence, reduce the risk of complicity in grossly unethical conduct.

The Council on Ethics deliberates matters of its own accord or at the behest of the Ministry of Finance. When the Ministry of Finance requests the assessment of a matter, the Council will always render a recommendation for or against the exclusion of the relevant company. Matters assessed at the Council’s own accord will as a main rule only be subjected to final deliberation if there are grounds for recommending that the company be excluded from the Fund.

The Council on Ethics maintains its own secretariat, which comprised five persons as per the end of last year. The secretariat researches and prepares matters for the Council.

Negative screening

The Revised National Budget for 2004 includes a list of which types of weapons the Fund shall not contribute to the production of. These include weapons that are prohibited pursuant to international law, as well as cluster munitions and nuclear arms. The Council on Ethics has commissioned the British consultancy firm Ethical Investment Research Services Ltd (EIRiS) to continuously monitor whether the companies in the portfolio produce such weapons. In addition, the Council carries out its own searches in open sources and in databases of Jane’s Information Group, which is one of the world’s largest information sources on defence materials. When the Council deems it likely that a company produces weapons that would merit screening, the company is approached and asked to comment on the Council’s assessment. If the company confirms the information invoked by the Council, the Council will render a recommendation to the effect that the company be excluded. Companies that do not reply when approached are recommended for exclusion if the documentation in the possession of the Council shows that there is a high probability that the company produces weapons that violate the screening criterion.

This working method offers a reasonable assurance that companies producing weapons that violate the screening criteria will be excluded from the Fund. Nevertheless, one cannot guarantee that all companies will at all times be correctly screened through the Council’s monitoring. The screening criterion and companies that are excluded pursuant to such criterion are discussed in more detail in Box 4.4.

Ad hoc exclusion

Whilst screening relates to the products of companies, exclusion relates to the production methods and conduct of companies. There exists no single overview of companies’ complicity in human rights violations, environmental damage, corruption or other infringements of ethical norms, and companies will not normally disclose such information themselves. The Council therefore conducts its own investigations to identify companies that may be in violation of norms.

Following international competitive tendering in 2005, the Council has also commissioned EIRiS to monitor all the companies in the Fund’s portfolio for purposes of uncovering possible violations of norms. EIRiS conducts daily searches on a number of Internet sources, and provides the Council with a monthly summary of cases that may be of relevance under the Fund’s Ethical Guidelines. Matters are also brought to the attention of the Council through requests from national and international voluntary organisations, or through research reports, media coverage or its own Internet searches. Nevertheless, it is probably not possible to identify, at all times, all companies that are complicit in serious violations of norms worldwide.

In its selection of cases, the Council on Ethics will, inter alia , attach weight to how serious the violations of norms are, whether a company is accused of several counts of unethical conduct, whether it is likely that such conduct will continue, as well as the scope for documenting the conduct of which the company is accused. The intention is to identify companies where there is an unacceptable risk that violations of the Ethical Guidelines are taking place, and where these are likely to continue in future.

Many cases will be closed already after preliminary investigations. Information that does not suffice for a full evaluation of a company the first time round may nevertheless be used later if one subsequently becomes aware of additional circumstances. The Council on Ethics prioritises those cases that are the most likely to result in a recommendation of an exclusion of a company.

There is often a need for supplementary information to shed light on cases beyond what is available from public access sources. In this work, the Council makes use of consultancy firms, research institutions or voluntary organisations, often in the country where the company in question is alleged to violate ethical norms. This may involve fieldwork, assessments of the environmental reporting of companies and other documentation. The Council attaches considerable weight to ensuring quality and confidentiality in this work.

A company that the Council on Ethics considers for exclusion will, in accordance with the guidelines, be asked to comment on the grounds on which the recommendation for an exclusion is based. The companies may also be invited to reply to specific questions. The Council on Ethics emphasises detailed description of the grounds, and as thorough documentation thereof as possible. Any allegations made are supported by specific source references, normally to several different sources. When approached, the company will also be informed of the Ethical Guidelines, and of the fact that such company is considered for exclusion pursuant thereto. The companies are invited to reply within a specific deadline. The secretariat of the Council has on several occasions attended meetings with companies that have wished to provide additional information. The ad hoc exclusion criterion and companies that are excluded pursuant to such criterion are discussed in more detail in Box 4.4.

Process and time use

The process involved in recommending a company for exclusion consumes considerable time and resources. In 2006, the Council on Ethics estimates that it conducted a preliminary review of about 80 companies. Only a limited number of these will result in a recommendation to exclude a company. It will normally be many months from a case is first opened until the Council submits a final recommendation to the Ministry of Finance. The Ministry will carry out its own independent assessment as to whether the company should be excluded, cf. the discussion in Sub-chapter 4.2.5. If the Ministry decides to exclude a company, such a decision, and the attendant recommendation from the Council on Ethics, will only be made public after the Fund has sold its securities in the company. The assessment carried out by the Ministry implies, together with the disposal period, that it will usually be several months from a recommendation has been made until the exclusion of a company is made public. This is discussed in more detail in Sub-chapter 4.2.6.

The Council on Ethics will routinely examine whether the reasons for an exclusion still apply, and may on the basis of new information recommend that the Ministry of Finance revoke a decision to exclude a company.

4.2.5 The Ministry’s assessment

Coordinated use of policy instruments and the realisation of objectives

The Ministry of Finance believes that it is important for the policy instruments to be used in such a way as to complement each other in the best possible manner, and such as to serve the intent behind the Ethical Guidelines for the Government Pension Fund.

This intent is two-pronged. Firstly, the Fund shall achieve favourable returns over time. Secondly, the companies in which the Fund is invested shall respect fundamental ethical norms. These two partial objectives are linked, because it is assumed that favourable returns over time will depend on sustainable development in economic, ecologic and social terms. The main objective of the exercise of ownership rights is to safeguard the financial interests of the Fund. In order to realise such objective, it will be appropriate to use active ownership to seek to influence companies in which the Fund invests to respect fundamental ethical norms. Exclusion of companies is also a matter of respect for fundamental ethical norms, not for purposes of contributing to positive change, but to avoid contribution to grossly unethical activities. The underlying premise is that there are certain activities in which one is not prepared to contribute, irrespective of the consequences thereof.

The exercise of ownership rights is broad in scope and may in principle be applied to any company in the Fund’s portfolio. In this sense, the ownership effort is the key policy measure available under the guidelines. Exclusion of companies shall only take place for purposes of preventing contribution to grossly unethical conduct. It follows from the report of the Graver Committee that the assessment as to whether the Fund runs an unacceptable risk of contribution to grossly unethical conduct will depend, inter alia , on whether one exercises one’s ownership rights for purposes of bringing such conduct to an end. If the Fund excludes a company, its scope for ownership influence is lost. A possible consequence is that those harmed by the activities of the company continue to be harmed or, in the worst case, become even worse off. The exclusion of companies should, against this background, only take place on an exceptional basis.

It is challenging to render the ownership activities visible because, inter alia , it may be difficult to demonstrate a clear causality between influence from an owner and positive changes on the part of a company. It may also be appropriate to report on ownership efforts in retrospect, and not along the way when a process is being pursued against a company. Such processes will be time consuming and will often last for several years.

There may arise occasions on which the exercise of ownership rights is not, for some reason or another, a suitable approach, or where it has to be concluded that the company does not wish to engage in any form of dialogue with, or accept any influence from, the investor. In such cases it may be appropriate, under the guidelines, for the Fund to exclude the company if such company is involved in an activity covered by the exclusion criteria under the guidelines.

In its report, the Graver Committee pointed out that the policy measures may to some extent overlap. The assessments of the Council on Ethics may, for example, be of use to Norges Bank in its exercise of ownership rights. Correspondingly, it may be useful for the Council on Ethics to draw on Norges Bank’s reporting from ownership activities as a source of information for its purposes. The system also encourages an interaction between the policy instruments in the sense that companies may themselves wish to change their behaviour if they know that there is a risk of being excluded from the Fund. The Ministry of Finance will emphasise the interrelationship between ownership influence and the evaluation of companies for possible exclusion. Ownership influence aimed at ensuring respect for fundamental ethical norms form part of a range of policy instruments, wherein which the exclusion of a company is the last resort.

The Ministry of Finance carries out an independent assessment of whether to exclude individual companies. In its assessment, the Ministry will look to the recommendation of the Council on Ethics, but will also have to take into account the scope for reducing the risk of contribution to grossly unethical activities through ownership influence in the relevant case. Usually, the Ministry will therefore request Norges Bank to outline its plans for influencing the company in respect of the relevant matter. If the prospects for prevailing through ownership influence are deemed to be sufficiently good to considerably reduce the risk of contribution, one may wish to postpone a final decision to exclude the relevant company until having observed what results may be achieved through the exercise of ownership rights.

Folketrygdfondet has made a positive selection of the Norwegian companies in the portfolio of the Government Pension Fund – Norway. This means that Folketrygdfondet has already before making the investment checked whether the company has introduced strategies and systems to ensure good corporate management, in addition to systems attending to environmental and social concerns. This makes it unlikely that one should need to exclude companies. However, the policy instruments may interact in this context as well, inasmuch as the risk of exclusion may influence companies to change their behaviour.

The quality of the basis for decision-making

The Ethical Guidelines and the administration thereof are noticed by other managers as well as by companies. This implies that their effect goes beyond the actual work carried out through the Government Pension Fund. This is one of the reasons why the Ministry is attaching considerable weight to ensuring the high quality of work relating to active ownership and the exclusion of companies. All decisions shall be based on thorough and robust preparatory work. The Ministry emphasises, in this context, that the recommendations from the Council on Ethics shall be thoroughly backed up by source references in line with the practise adopted by the Council. The Public Administration Act is not directly applicable to this effort, but the Ministry requires codes of conduct for good public administration to be complied with in the various work processes.

Evaluation of the Ethical Guidelines for the Government Pension Fund – Global

The Government Pension Fund – Global invests the capital of the community, and the Ethical Guidelines should enjoy broad support. In the report from the Graver Committee, which was submitted in June 2003, considerable weight was attached to ensuring that the ethical standard defined by the guidelines should enjoy the general support of the Norwegian people. All parties represented in the Storting have expressed their support for the current guidelines, which were introduced on 19 November 2004.

The Government has decided that the Ethical Guidelines for the Government Pension Fund – Global shall be evaluated in the current Storting period, to ensure that they function as intended. The Ministry aims to initiate the evaluation process at the end of 2007/beginning of 2008. A broad process is being planned, with as many institutions as possible contributing their comments. The evaluation will be presented to the Storting in the spring session 2009.

The Government deems it important to maintain the broad political support for the Ethical Guidelines in the context of the impending evaluation. However, this is an area undergoing constant development, and the Government wishes to harness any input that may contribute to the reinforcement of the ethical profile of the Government Pension Fund – Global.

The Government is supportive of the emphasis Folketrygdfondet places on active ownership in its management of the Government Pension Fund – Norway. It would be appropriate for the evaluation of the Ethical Guidelines for the Government Pension Fund – Global to also examine the need for additional harmonisation of the ethical principles governing the two parts of the Government Pension Fund.

4.2.6 Public disclosure in relation to the Ethical Guidelines

The Ministry of Finance is committed to transparency and public access to information relating to the Government Pension Fund. This reinforces the credibility of the Fund, as well as general support for the Fund. In drafting the Ethical Guidelines for the Government Pension Fund – Global, the Ministry has facilitated public access to information pertaining to the decisions of the Ministry of Finance. It has been decided, inter alia , that recommendations from the Council on Ethics shall be made public, and that Norges Bank shall account for its ownership activities in its annual report. The Ministry notes that Folketrygdfondet is also planning to report annually on its exercise of ownership rights in the Government Pension Fund – Norway.

Reporting of the work of the Council on Ethics

The Ministry shall, pursuant to the Ethical Guidelines for the Government Pension Fund – Global, make public all decisions to exclude companies from the Pension Fund, as well as the grounds therefore. The thorough disclosure of the grounds for excluding a company offers the general public good insight into how the exclusion tool is practised.

If, on occasion, the Ministry of Finance should decide not to adopt a recommendation from the Council on Ethics, the Ministry will also make public such decision, together with the relevant recommendation. Such a decision would normally be based on the premise that ownership influence is deemed suitable for reducing the risk that the Fund will be complicit in grossly unethical activities. In such cases, the Ministry will make public the fact that there is an ownership effort in process within a certain area, and that the Ministry has received a recommendation for the exclusion of a company within that area. However, it is necessary to make a specific assessment as to when the actual recommendation should be made public, in view of the need for ensuring that the process of influencing a company is carried out in a productive and orderly fashion.

The public announcement of a decision to exclude a company will, as a main rule, be postponed until Norges Bank has completed the sale of securities in the company. Disposal will normally take place over a period of two months. The Ministry introduced this procedure in line with the Ethical Guidelines to ensure, inter alia , a financially prudent disposal.

The Ministry may, pursuant to the Freedom of Information Act, exclude documents that have been prepared for purposes of internal preparation of cases from public disclosure. The process leading up to any exclusion of a company from the Government Pension Fund – Global will constitute internal preparation. The Council on Ethics examines and evaluates the activities of companies. Thereafter, the Ministry of Finance carries out an independent assessment, and makes a final decision in the matter.

There are several reasons why the Ministry should not inform the general public of the processes and assessments taking place prior to a decision being made as to whether a company shall be excluded. Generally speaking, the Ministry needs to ensure that all decisions are underpinned by robust assessments and grounds. In addition, it is important for the Government Pension Fund – Global to be perceived as a professional and structured player by other investors as well as by companies. If information respecting the assessments made internally on the part of the Council on Ethics is disclosed to the general public prior to a final decision, it may give rise to confusion as to the differing roles of the Ministry, as the final decision maker, and the Council on Ethics, as its advisor. Preliminary assessments from either the Council on Ethics or the Ministry prior to a final decision may also be misunderstood if disclosed. This may result in the general impairment of the market’s confidence in the Fund, whilst at the same time potentially undermining the reputation of companies.

There may under some circumstances arise a statutory confidentiality obligation in respect of certain documents or details accessed or generated by the Council on Ethics or the Ministry. It may, for example, be that the Council receives information pertaining to a company that is classified as a trade secret that government authorities are obliged to keep confidential. Moreover, it is conceivable that the assessments and recommendations of the Council on Ethics may constitute insider information pursuant to foreign securities trading legislation, and have to be kept confidential for that reason.

The Council on Ethics will often be working on matters that do not result in a recommendation for the exclusion of a company. The Ministry is of the view that the abovementioned considerations suggest that documents and information relating to such matters should not be made public. The Ministry assumes that the Council on Ethics will refrain from disclosing preparatory assessments that do not result in a recommendation for an exclusion of a company. The Ministry may nevertheless request an assessment of specific companies, and in such cases the reply from the Council on Ethics to the Ministry will be made public, although said reply may not necessarily be in the form of a final recommendation for the exclusion of a company.

Reporting on Norges Bank’s corporate governance effort

Norges Bank shall, pursuant to the Ethical Guidelines for the Government Pension Fund – Global, account for its exercise of ownership rights in connection with its regular annual reporting. The annual reporting requirement is reflected in the Bank’s own principles for the exercise of ownership rights. The principles also state that, as a main rule, no information will be disclosed respecting informal contact with individual companies or other investors.

In its annual reporting, the Bank will, inter alia , disclose information about input to hearings, etc., and other communications intended to contribute to government bodies, exchanges and other regulatory bodies developing and monitoring regulatory frameworks that safeguard, to the best possible extent, the exercise of ownership rights in accordance with the principles of Norges Bank. Furthermore, the Bank will report on its voting behaviour. Thus far, the reporting of voting behaviour has been general in nature, specifying the type of cases prioritised by the Bank without any company-level details. Norges Bank is in the process of expanding its reporting of voting behaviour to encompass post-voting details pertaining to individual companies.

Norges Bank’s direct contact and dialogue with companies aims to contribute to changes. In some cases, in particular in the context of informal contact with companies and other investors in individual matters, one can achieve the maximum impact when those involved are confident that no details from the dialogue will be made public. This is also the experience of other investors with whom Norges Bank compares itself. Where a process towards an individual company has been brought to an end, the Ministry assumes that Norges Bank will make both its effort and the outcome public in a suitable manner.

The Ministry is of the view that the importance of achieving positive outcomes from ownership activities will normally take precedence over the importance of public access to information during a process. Exceptions from this main rule are conceivable. In cases where the Ministry has requested Norges Bank to examine the scope for achieving results through active ownership towards a specific company, the Ministry will in each individual case consider the trade-off between the importance of increased public access to information and the importance of the prospects for completing a productive and well-organised process to influence a company.

Reporting on Folketrygdfondet’s corporate governance effort

Folketrygdfondet will be reporting on its ownership activities as from 2007, in the context of the semi-annual reporting on its management performance. The reports will account for the activities carried out by Folketrygdfondet for purposes of attending to its ownership interests. As far as the reporting of contact and dialogue in individual cases is concerned, diligence and discretion will have to be exercised out of concern for the importance of achieving positive results. As is the case in respect of the Government Pension Fund – Global, the Ministry is of the view that the importance of achieving positive outcomes through active ownership will normally take precedence over the importance of public access to information during a process.