Lack of Transparency in Ethical Practice

(First published in Norwegian 06 Dec 2006)

By Pia Gaarder
Norwatch

On 4 December 2006 the Norwegian investor Kommunal Landspensjonskasse (KLP) announced that the American hotel chain Marriott International no longer is excluded from its investment universe. This giant chain had been excluded from KLP’s portfolio since 2003 because of gross breaches of the UN’s children’s convention.

For years the hotel chain turned a blind eye at the systematic sexual abuse of children at a Marriott hotel in Costa Rica. The corporate management was also reluctant to adopt guidelines to prevent child prostitution from occurring at their hotels.

Marriott has, however, now been accepted in from the cold by a series of fund managers. The company did in fact finally yield to strong pressure from international investors and is to have made serious moves to overcome and prevent child prostitution at the chain’s hotels. From having turned a deaf ear to the whole problem, Marriott has turned about and wishes to become one of the best hotel chains with regard to fighting child prostitution.

The effect on investor circles has not been long in coming. At the beginning of November the Swedish ethical screening agency Ethix delivered a press release to the effect that it no longer recommended its customers to exclude Marriott. On 4 December KLP published its press release, and on 6 December the Swedish ethical screening agency GES Investment Services delivered its own press release – together with several of its customers who had utilized their ownership execution actively to force Marriott to change its policy: DnB NOR Asset Management, First AP Fund, Boston Common Asset Management, and Interfaith Center on Corporate Responsibility.

We shall here describe some of the background reasons for Marriott’s turn-about and serious efforts to solve the problem. It was not until some of these investors in 2005 prepared a resolution on the case for Marriott’s general assembly that the corporate management changed its attitude (read press release here).

What about the Petroleum Fund?
The Norwegian Petroleum Fund (officially called the Government Pension Fund – Global), for its part, never withdrew from Marriott, and it is doubtful whether the ethical guidelines have been in effect at all in this case. Anyhow, the lack of transparency makes it impossible to ascertain with certainty whether the case has been discussed by the Advisory Council on Ethics and whether the managers of the oil assets have brought pressure to bear on Marriott.

The ethical screening agency CaringCompany recommended already in the summer of 2003 that the Pension Fund should divest from the Marriott chain. The Swedish ethical screening agency – the direct predecessor to GES Investment Services – had examined the Pension Fund thoroughly on assignment from the Ministry of Finance to find companies that violated Norway’s commitments to international law. This ended in full confrontation between CaringCompany and the then existing Council on International Law (Folkerettsrådet), which slaughtered CaringCompany’s documentation as inadequately based and the method as unsuitable.

CaringCompany, on the other hand, claimed that the UN’s Convention on the Rights of the Child provided a basis for excluding Marriott already at that time – that is, before the ethical guidelines for administration of the oil assets were passed.

The ethical guidelines for the Government Pension Fund – Global were taken into use towards the end of 2004 and entailed that divestment could happen on a broader basis than in international law. But nothing happened with the Marriott investment. The Advisory Council on Ethics never recommended divestment.

Active Ownership
It is not possible to ascertain whether the Advisory Council on Ethics did discuss Marriott and recommended that The Bank of Norway exercise active ownership to influence Marriott in the right direction. This information is not made public.

The leader of the Council, Gro Nystuen, told Norwatch that she could not comment on to what extent the Council discusses individual cases.

The Advisory Council on Ethics publicizes recommendations sent to the Ministry of Finance but not which companies are discussed when the conclusion is not one of divestment. It is therefore impossible to ascertain whether the Council reconsidered the case after the old international law council slaughtered CaringCompany’s recommendations.

Norwatch has also asked The Bank of Norway about the case, but there too it is impossible to ascertain whether The Bank has utilized its ownership power with regard to Marriott. Henrik Syse, the Head of Corporate Governance in The Bank of Norway’s investment management, informed Norwatch that they, on principle, do not discuss how The Bank acts with regard to individual companies in the execution of ownership.

“This has nothing to do with share prices but is connected with the fact that our dialogue in most cases would be affected if we were to discuss publicly what we do, since we always wish to retain the possibility of further dialogue with the company(ies). This is a practice followed by many large pension funds”, Henrik Syse wrote in an e-mail.
As far as Norwatch is aware, The Bank of Norway is not part of the investment group that worked actively at Marriott’s shareholders’ meeting to make the hotel chain take child prostitution on the chain’s premises seriously.

In this connection, Syse amplified, “I am of course aware of the Marriott proceedings, which have been going on for several years, and we are always interested in learning from such proceedings so as to best be able to exercise our own ownership – especially now that we also to a greater extent than earlier initiate our own active proceedings against individual companies”.

But it is impossible to ascertain whether this entails that The Bank of Norway has worked actively to influence Marriott.

So long as all communication between The Bank of Norway and the companies is kept secret, it will in principle be impossible to ascertain what kind of investment policy the Government Pension Fund – Global carries out in practice.