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Gordon L.

Clark is the Halford

Mackinder Professor of
Geography at Oxford
University, a Professorial Fellow
at St Peter's College, Oxford
(United Kingdom), and Sir
Louis Matheson Visiting
Professor at the Faculty of
Business and Economics at
Monash University (Australia).
Ashby Monk is a Research
Fellow at the University
of Oxford (United Kingdom),
working on a Leverhulme
Trust funded project on the
governance and geopolitics
of Sovereign Wealth Funds.
Volume 3 Issue 1
Spring 2010
Gordon L. Clark and Ashby Monk
Rotman International Journal
of Pension Management
The Norwegian Government Pension Fund Global has an explicit mission to
integrate long-term investment return objectives with an ambitious ethical
commitment. This approach has drawn praise among Western policymakers.
However, we contend that the ethical investment policy of the Norwegian
Government Pension Fund Global presents a paradox, as the manner in which
the country applies its ethical criteria to investment management transgresses
best practice as we define it. As a result, we believe that Norway has chosen
to discount functional efficiency in favor of exerting a fundamental social
perspective. This may have unfavorable consequences in the long run.
Nonetheless, we recognize the current approach is the source of the public
and political legitimacy the Fund enjoys today.
Keywords: Democracy, Ethics, Investment, Norwegian, Pension Fund, Resources, Sovereign Wealth Fund
The Nor wegi an Gover nment Pensi on Fund:
Et hi cs over Ef f i ci ency
Volume 3 Issue 1 Spring 2010 10.3138/rijpm.3.1.14 14
Pri vate I nvestment and Publ i c
Responsi bi l i ty
In 1990, the Norwegian Government established
the Norwegian Government Petroleum Fund (GPF) through
an act of national parliament (Backer, 2009). Funded from
North Sea oil and gas revenues, the purpose of the Fund was
to prevent the sudden influx of wealth from distorting the
Norwegian economy and society. In addition, the government
viewed the fund as a mechanism to discipline budget planning
in a manner consistent with intergenerational equity. Over time,
the fund has become one of the largest sovereign wealth funds
(SWF) in the world.
The fund, renamed the Government Pension Fund Global
(GPFG) in 2006, is widely recognized as transparent and
well governed. By Trumans (2008) assessment, which he
based on publicly available information, GPFG was second
only to the Alaska Permanent Fund among the thirty-four
non-pension funds in his ranking of SWF best practices.
1, 2
As evidence of this, GPFG participated in the development of
the Santiago Principles, a set of SWF principles and practices
consistent with global best practice investment management.
Moreover, GPFG has been at the forefront of ethical and
socially responsible investment initiatives, drawing praise from
media around the world.
Indeed, the Ministry of Finance (2009) views the management of
GPFG as reflecting a fundamental social perspective. Since
inception, the Funds mission has thus evolved to include ethics
as a core component of investment policy, projecting Norwegian
beliefs around the world. This policy has two components. On
the one hand, the fund engages with corporations in an attempt
to foster accepted best practices for corporate governance. On
the other hand, it seeks to ensure that the fund is not associated
with companies that pose a risk to social and environmental
justice, naming and shaming corporations and industries that
breach ethical codes. As a result, GPFG appears to have
become both an instrument of long-term national welfare and
an expression of Norwegian commitment to global justice.
In this article, we argue that these policies challenge conventional
boundaries between private investment and public responsibility
(Backer, 2009). In our view, the ethical investment policy of
GPFG presents a paradox, as the process supporting the ethical
mandate actually constrains the funds functional efficiency.
Therefore, while there is widespread political and public buy-in
to the fund, thanks to the ethical policy, prioritizing ethics over
Volume 3 Issue 1 Spring 2010 15
T h e N o r w e g i a n G o v e r n m e n t P e n s i o n F u n d : E t h i c s o v e r E f f i c i e n c y
efficiency may be self-defeating in the long-term if it is associated
with substandard performance. Below, we justify these claims.
GPFG: Embedded i n Pol i ti cs
The Norwegian Parliament (Storting) established and set the status
and powers of GPFG. The purpose of the fund is to support
government savings to finance the pension expenditure of the
National Insurance Scheme (NIS) and long-term considerations
in the spending of government petroleum revenues (Ministry
of Finance, 2009). In contrast to other large state funds, such
as the Australian Future Fund or the Canada Pension Plan
Investment Board (Clark, 2009; Monk and Sass, 2009), GPFG
is enmeshed in the machinery of the government (see Figure 1).
Indeed, GPFG is simply a deposit account within the Norwegian
Central Bank. Moreover, the asset manager for GPFG is Norges
Bank Investment Management (NBIM), which is directly
accountable to the Banks Governor and Board and ultimately
to the Minister of Finance. As a result, NBIM employees are
actually employees of the Central Bank.
Also, the Ministry
of Finance has ultimate responsibility for the management of
the funds, including its investment strategy, the regulation of
investment, and its ethical guidelines.
Fi gure 1: Framework of Operati ons
Liberal political theorists hold that modern societies owe their
legitimacy to public participation in the process of decision-
making, whether on economic or social matters. In a similar
vein, Estlund (2008) suggests that states owe their legitimacy
to the process of representation of public interests. Nonetheless,
whereas democratic societies may value public participation in,
or at least public representation on, the institutions responsible
for financial management, there can be little doubt that policies
that favor participation over expertise come with considerable
costs (Clark et al., 2007); put simply, there are undeniable costs
resulting from financial ignorance.
Norwegian society appears willing to pay these costs. The
value attributed to ethical standards in the investment mandate
of GPFG is of moral value not financial value. That is, the
chosen ethical standards (described below) were conceived to
flag areas of investment that the public would not accept as part
of GPFGs investment universe. As such, these standards are not
subject to a profit and loss statement. Rather, they are part of a
governance framework that reflects a public commitment to
procedural democracy and, in particular, what Estlund (2008)
refers to as epistemic proceduralism: the notion that legitimacy
is a product of the procedure whereby decisions are reached
and not the correctness of those decisions.
This moral value is evident in Section 5 of NBIMs Guidelines
for the Management, which provide instructions as to how
the fund must include ethics in its investment policies:
1. The Fund is an instrument for ensuring that a reasonable
portion of the countrys petroleum wealth benefits future
generations and financial wealth must be managed with
a view to generating a sound return in the long-term,
which is contingent on sustainable development in the
economic, environmental, and social sense.
2. The Fund shall not make investments that entail an
unacceptable risk that the Fund is contributing to
unethical acts or omissions including violations of
humanitarian principles, human rights, gross corruption,
and severe environmental damage.
The Ministry identifies three mechanisms in which the fund
can mobilize these principles:
1. The fund should exercise ownership rights based on
international conventions.
2. The fund should use a negative screening of companies
that produce weapons whose use violates fundamental
humanitarian principles.
3. The fund should exclude companies from the portfolio that
constitute a considerable risk of corruption, environmental
degradation, and the violation of human rights.
In sum, the ethical policies of the Norwegian SWF are an
expression of the funds commitment to procedural legitimacy,
where procedures that give effect to moral beliefs are valued
higher than those that give effect to financial value. This
requires further explanation. In the next section, we provide
more details on the ethical investment governance and then
analyze how this discounts best practice fund governance.
Source: Norges Bank 2008 Annual Report (rev).
Storting (Norwegian Parliament)
Act relating to the Government Pension Fund
National Budget
Annual Report to Storting
Quarterly and Annual Report
Investment Strategy Advice
Suplementary Provisions
Management Agreement
Ministry of Finance
Norges Bank
Rotman International Journal
of Pension Management
Volume 3 Issue 1
Spring 2010
Volume 3 Issue 1 Spring 2010 16
Ethi cal I nvestment Gover nance
The Ministry of Finance oversees the activities of GPFG,
through an unusual model of investment management, in two
different ways:
1. Council on Ethics: The Council of Ethics exists within
the Ministry. It has five members appointed by the
Minister for fixed terms. With a staff of eight and an
annual budget of NOK9 million, the Ethics council
... provides evaluation to the Ministry of whether
potential investments in financial instruments issued
by specific issuers are inconsistent with the ethical
guidelines (Ministry of Finance, 2009). The government
originally established the Council to deal with the Funds
investment in Total, the French energy company that
was the subject of considerable controversy due to its
investments in Myanmar (Burma).
At the time, there
were claims that a Norwegian investment in Total made
the country complicit in the military regimes suppression
of human rights. As such, there was considerable political
pressure on the Minister to personally direct NBIM to
exclude Total from GPFG portfolio. The formation
of the Council, its mandate, and the appointment of
members with acknowledged expertise in ethics and
international law provided the Ministry with an
opportunity to postpone any decision and deflect
claims made on the Minister until such time as the
Council came to a decision.
To reach a decision, the Council has a multi-stage
process of review and assessment designed to identify
the crucial issues and apply a series of guidelines that
provide for robust and defensible recommendations.
In terms of generating targets, the Minister may ask
the Council to consider a specific case, or the Council
may identify an issue and company that it considers
significant. For the latter, the Council maintains a regular
scanning process conceived to keep members abreast
of the issues on a worldwide basis. The Council also
undertakes research to understand better the significance
of the items flagged by the scanning. Once targeted, the
Council limits disclosure of its deliberations to dampen
speculation and political maneuvering vis--vis issues
and companies. Subsequently, a factual case is developed,
which typically focuses on the extent to which the
company is directly involved in the ethical violation.
The last stage in the process normally involves contacting
the target company with a view to elicit a response.
Thereafter, the Council hears the formal case, and the
members determine whether a recommendation for
exclusion should go forward to the Minister. Most
importantly, the Council sees its recommendations as
an expression of the public interest in proper behavior,
according to the criteria set out in the ethical guidelines.
Once established, the Council has considerable influence
over the Minister and NBIM; the government that set
it up could hardly reject out-of-hand its recommendations.
Over the period 2005 to 2009, the Council recommended
that NBIM exclude a number of companies. In almost
all instances, the Minister accepted the Councils
recommendation. It is important to note, however, that
the Council has limited time, expertise, and institutional
capacity. It inevitably has to choose among a large
number of possible cases to prosecute. Large companies
with recognized names are attractive targets given their
public visibility (Clark et al., 2008). Moreover, the
Council seems to gravitate toward cases where it can
show that the target company has a direct connection
with the circumstances giving rise to the ethical problem.
In other words, other than when the Minister directs
the Council to investigate a target, the members of the
Council have leeway in selecting the companies on
which to focus. It should also be noted that, unlike NBIM,
the Council is not interested in changing corporate
behavior, except in the sense that naming and shaming
may prompt companies to reconsider their alliances
and management performance (Braithwaite, 1989).
2. NBIM: NBIM also has its own role to play in ensuring
ethical investment. It has a commitment to high standards
of corporate governance, which manifests itself in various
campaigns to augment the structure and performance of
its portfolio companies. Indeed, NBIM exercises GPFG
ownership rights through proxy voting, sponsoring and
supporting shareholder resolutions, and corporate
engagement. For example, the 2009 report by the Ministry
of Finance to Storting showed that NBIM took part in
7,871 general assemblies and voted on almost seventy-
thousand issues.
Given limited time, expertise, and
institutional capacity, NBIM tends to focus its voting
activities upon the worlds five-hundred largest companies,
representing approximately eighty percent of the market
value of the total equity portfolio of GPFG.
NBIMhas sought to influence not only individual companies
but also entire industries, especially those with distinctive
characteristics (e.g., seed producers). The goal is to safeguard
GPFG financial assets, and add value over the long-term.
There is recognition that diversified investment strategies
that rely on the performance of whole markets often
depend on effective regulation and investor vigilance. It
is widely accepted that well-governed firms are more likely
to enhance shareholder value (Bebchuk, 2005). Equally, it
is widely accepted that the reform of corporate governance
Volume 3 Issue 1 Spring 2010 17
T h e N o r w e g i a n G o v e r n m e n t P e n s i o n F u n d : E t h i c s o v e r E f f i c i e n c y
regulation in favor of global best practice is consistent
with the long-term efficiency of global capital markets
and the interests of large institutional investors (Gordon,
2004). As such, NBIM engagement is justifiable on
ethics as well as efficiency grounds.
Best Practi ce Fund Gover nance
While the above-mentioned policies are perhaps laudable from
an ethics point of view, they do have some deficiencies in terms
of best practice investment management. Essentially a political
process, it is clear that GPFG governance is not set up to
maximize functional efficiency (Clark and Urwin, 2008; 2009).
There are valid reasons for this, such as facilitating Norwegian
public and political legitimacy. Indeed, it is clear that the design
of the fund is based on a legitimate political choice to broaden
the funds objectives. Still, the fund may pay a high price for
its ethical policies over the long-term. While we are not arguing
that the efficiency of GPFG is necessarily impaired by its
ethical policies, we do want to point out that the preconditions
for an effective and efficient institution are not met.
Indeed, by comparing GPFG practices with those developed
by Clark and Urwin (2008), we can see the extent to which
the country discounts functional efficiency to ensure ethical
Mission clarity: GPFG does have certain well articulated
responsibilities. For example, the Minister sees the fund as
a vehicle for the sound, long-term management of Norways
petroleum wealth. The Minster goes on to say that this
should be done in such a way that this wealth can benefit
all generations in a manner consistent with macroeconomic
stability (Ministry of Finance, 2009). However, this mandate
does not offer a well-defined risk and return mandate. Rather,
it is a set of objectives that are more or less consistent with
one another, a set of golden-rules rather than operational
targets with well defined time horizons.
Leadership: An independent investment executive is a key
attribute in Clark and Urwins framework. However, the
funds Chief Executive Officer is a Norges Bank employee
directly accountable to the Ministry of Finance through the
Board of Norges Bank. Clark and Urwin also suggest that best
practice requires an explicit map of institutional authority
that distinguishes the responsibilities of trust boards,
executives, and service providers. GPFG seems to fall
short: there is a hierarchical map of authority in which
the Minister of Finance and NBIM hold the power, but
there remains some confusion as to the various roles and
responsibilities of advisers.
Resourcing: Clark and Urwin show that institutional
performance is sustained by resourcing each element in the
investment process and governance chain with an appropriate
time and budget. With respect to GPFG, it is unclear how
the fund does this. It is clear, however, that the Council on
Ethics is resource constrained (see above), which forces it
to make subjective decisions about ethical targets.
Excellence: With respect to Clark and Urwins exceptional
best practice characteristics, it is apparent that the fund once
again has difficulty. For example, GPFG is bound-up in a
hierarchical structure of political accountability. In addition,
decision-making is often formal rather than informal, given
the reporting structure, the layers of boards and advisory
councils, and the multiplicity of golden rules. Decisions are
based on the reporting process rather than on the imperatives
flowing from global financial markets. This is justifiable,
of course, by the edict that GPFG is a long-term investor.
Even so, decision-making should enhance the timeliness
of market plays.
At one level, GPFG is a transparent and accountable institution,
which scores highly on recognized governance criteria. On
another level, however, there are reasons to doubt the functionality
and efficiency of the process that makes this accountability and
transparency possible.
Ethi cs over Effi ci ency
Democratic societies may value their role in shaping institutions,
but when it comes to financial management, policies that privilege
participation over expertise tend to have efficiency costs (see
Clark et al., 2007). Undoubtedly, many view these costs as worth
paying, in particular with the Norwegian fund, where the ethics
policies applied to GPFG are of moral, not financial, value. For
example, while naming and shaming is a key part of GPFGs
ethical process (through the Council on Ethics and the Ministry
of Finance), there is no evidence that this practice increases the
long-term cost of capital for the affected companies. Nor is it
obvious that it improves the funds financial performance. Rather,
the Councils intention is deontological. Its recommendations
are meant to represent public values; whether or not these
recommendations exact a penalty on the targeted companies or
improve returns is less important. However, this ethical process
has clear efficiency costs, which are visible in the substandard
performance of GPFG against the Clark and Urwin best practice
framework for investment management.
Nonetheless, ensuring ethical investment is a crucial building
block of the public and political legitimacy of GPFG:
There is . . . broad support for the ethical framework for
responsible management of the Fund. Broad political
support for the investment strategy for the Fund provides
a democratic underpinning and represents an important
contribution to maintaining the investment strategy over
time, including in periods of major market fluctuations.
(Ministry of Finance, 2009)
In sum, GPFG governance is more about legitimizing the fund
through representation of public interest than about ensuring
efficiency and functionality. As such, the Norwegian case is a
classic example of Estlunds (2008) epistemic proceduralism:
The legitimacy of the institution is not grounded in the correctness
of the decisions, but on the procedures that produced them.
GPFG is not alone in this regard. As noted by Seo and Creed
(2002), one of the core premises of institutional theory is that
organizational success depends on factors other than technical
efficiency. Organizational conformity vis--vis the environments
expectations can improve reputation, increase resources, and
ensure survival chances. However, research also shows that
legitimacy is sometimes achieved at the expense of efficiency
(Zucker, 1987; Scott and Meyer, 1991). Indeed, Powell (1991)
argued that organizations adopt structures and practices that are
in some respects suboptimal in order to gain needed resources.
This, too, is clear in the case of the Norwegian GPFG.
However, Seo and Creed (2002) go on to illustrate that institutions
that discount their own efficiency in the name of legitimacy are
difficult to sustain over the long-term. Based on a broad reading
of the management and sociology literature, these authors view
any pursuit of legitimacy that undermines functional efficiency
as the source of institutional contradiction and, over the long-
term, illegitimacy.
An I nsti tuti onal Contradi cti on
GPFG is widely regarded as a transparent and rigorously
accountable SWF. Indeed, it scores highly on recognized
governance rankings and has been an important supporter of
the Santiago Principles. Moreover, it has an ethical mandate,
which is remarkable when compared with other SWFs around
the world. Indeed, the Norwegian Ministry of Finance views
GPFG as having a fundamental social perspective. This,
it argues, ensures public and political support during times of
market turmoil. In short, the ethical process that underpins the
funds investment decision-making is in large part responsible
for its public and political legitimacy.
However, while these processes have a valid political justification,
they are the source of an institutional contradiction, as there
is reason to doubt their functional efficiency. GPFG scores
poorly on the Clark and Urwin best practice investment
management framework. For example, it is not clear that those
involved in the funds decision-making can negotiate their way
through the political process in a resource- and time-efficient
manner. Nor is there the appropriate independent leadership to
guide strategy and tactics. Simply put, the process underpinning
the ethical commitment of GPFG constrains the efficiency of
investment decision-making.
To be sure, governments have a legitimate interest in affecting
the nature and scope of the investment of public assets, especially
as a means to give effect to the publics views. However, the
long-term sustainability of any public institutional investor
depends on its ability to reconcile democratic principles with
market fundamentals. No government or investor can ignore
functionality and efficiency with respect to investment
management over the long-term (Das et al., 2009).
In the case of GPFG, it is apparent that public and political
legitimacy currently trumps functional legitimacy. As such, the
fund still enjoys widespread support. However, at some point,
the Norwegian government fund may be forced to reconcile
its democratic principles of representation with its market
demands. If it does not, todays source of legitimacy may
become tomorrows source of illegitimacy.
18 Volume 3 Issue 1 Spring 2010
Rotman International Journal
of Pension Management
Volume 3 Issue 1
Spring 2010
1. The Leverhulme Trust made this article possible by supporting our project
to study the governance and performance of sovereign wealth funds. It
bears the imprint of the assistance of Olga Thnissen, and the views and
opinions of a number of respondents involved in the Norwegian Government
Pension Fund Global, including representatives from the Ministry of
Finance, Norges Bank Investment Management, and the Council on
Ethics. Early in the research, we benefited from intense discussion of
the issues with Knut Kjaer. Laura Parsons and Bill Dodwell from Deloitte
(London) generously provided data on the British tax benefits of North Sea
oil and gas. We are also grateful for the comments from three reviewers of
earlier drafts of this article. The views and opinions expressed in this final
version are those of the authors alone, and do not bear upon any institution
or its officials.
2. GPFG is not a pension fund in the traditional sense; its mandate is much
broader. Indeed, the Ministry of Finance (2009b) reports that there
is no requirement that the assets of the Pension Fund shall at all times
represent a certain share of the pension liabilities of the State under the
National Insurance Scheme.
3. The Chief Executive Office reports directly to the Governor of Norges
Bank and, according to the job description, is also directly accountable to
the Ministry of Finance.
4. Though the Graver Report was specifically responsible for the ethical
guidelines; see also Chesterman 2008.
5. This role is shared by a number of other, very large British, American,
Canadian, and Australian institutional investors. The most active
institutional investors tend to be pension funds rather than sovereign
wealth funds and are motivated, in part, by the fact that their investment
performance is dependent upon the efficient functioning of home and
global financial markets. See Clark and Hebb (2004), and Hawley and
Williams (2000) for historical accounts of this development.
T h e N o r w e g i a n G o v e r n m e n t P e n s i o n F u n d : E t h i c s o v e r E f f i c i e n c y
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New Zealand Superannuation Fund
The Second Swedish Pension Fund (AP2)
United Kingdom
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United States
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Editorial Advisory Board
Jack Gray - Sydney University of Technology
Wilson Sy - Australian Prudential
Regulation Authority
Leo de Bever - Alberta Investment
Management Corporation
Alexander Dyck - Rotman School of
Management, University of Toronto
Claude Lamoureux - Corporate Director
Ole Beier Srensen - Danish Labour Market
Supplementary Pension (ATP)
Sadayuki Horie - Nomura Research Institute
Rob Bauer - Maastricht University
Dirk Broeders - De Nederlandsche Bank
Jean Frijns - Corporate Director
New Zealand
Tim Mitchell - New Zealand
Superannuation Fund
Tomas Franzn - The Second Swedish
Pension Fund (AP2)
United Kingdom
Gordon L. Clark - Oxford University
Roger Urwin - Towers Watson and
MCSI Barra
United States
Don Ezra - Russell Investments
Brett Hammond - TIAA-CREF
Knut Kjaer - RiskMetrics
Unsolicited articles can be submitted to
icpm@rotman.utoronto.ca for consideration
by the Editorial Advisory Board.
Publisher and Editor
Keith Ambachtsheer
Associate Publisher and Editor
Ann Henhoeffer
Copy Editor
Emilie Herman
151 Bloor Street West, Suite 702
Toronto, Ontario Canada M5S 1S4
Tel: 416.925.7525
Fax: 416.925.7377