Ethics and Corporate Social
responsibility
Alexander Cappelen
210405
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Ethics and decision making
• Ethics – a tool for decision makers.
• In the different social roles we occupy we all
make decisions that have consequences for a large
number of different agents.
• These agents have different interests and might
disagree about what the best decision is.
• A decision maker has to balance conflicting
demands from different groups.
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Example: business managers
Suppliers
The public
Costumers
Employees
Managers
Owners
Government
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The need for ethics
• We need ethics in order to handle these types of
trade-offs.
• Ethical theories are well-founded answers to the
question of what is good and what is bad.
– What is the best decision all things considered.
• Three fundamental questions:
– Towards who do we have obligations?
– What type of obligations do we have?
– How do we handle conflicting obligations?
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Towards who do we have
obligations
•
Some important answers :
1. Other people that we have certain relation to
- family, our friends, our colleagues or our fellow
citizens
2. All human beings – independent of our
relationship to them.
3. Other life forms and the environment.
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Different obligations
• Vi can have different obligations towards different
groups, for example:
– An obligation to share our economic resources
with our fellow family or fellow citizens.
– An obligation to respect the human rights of all
human beings.
– An obligation not to inflict unnecessary pain on
animals.
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Who should managers care
about?
• Two competing answers:
1. Managers should only care about the interest of
their owners – shareholder perspective.
- The contractual relationship gives rise to special
obligations.
- Managers are unable to meet other obligations due to
competition in the market.
- Other agents are better suited: division of labour
between the market and the government.
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Cont.
2. Managers should care about all stakeholders
(the stakeholder perspective).
- Also other relations give rise to obligations.
- Who are the stakeholders?
- Those who are affected by our decisions?
- The market does not necessarily punish the
ethical firm.
- The division of labour does not always work.
- Weak states.
- Lack of information.
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What type of obligations do we
have?
Three answers:
1. Consequentialism: We are obligated to choose the
‘best’ alternative – influence in å positive direction.
- Theory: utilitarianism/welfarism
- Illustration: cost-benefit analysis, profit
maximization, social welfare functions
-
-
Case: Ford Pinto
Focus: forward looking.
Question/problem:
-
What consequences should we care about?
Can any action be justified if the consequences are good?
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Cont.
2. Duty ethics: we have an obligation to choose the
‘right’ action – to avoid unethical conduct.
-
Theory: Kant’s duty ethics
Illustration: human rights (corruption?)
-
-
Case: Statoil in Angola
Focus: on the nature of the action.
Question/problem:
-
When do we contribute to an action?
Is there any actions that can never be justified?
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Cont.
3. Desert ethics: We are obligated to reward or
punish.
-
Theory: Libertarianism.
Illustration: Rewarding effort, hiring the most
qualified.
-
-
Case: Just income distribution
Focus: backwards looking.
Question/problem:
-
What are we responsible for?
What is an appropriate reward/punishment?
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How should we handle
conflicting obligations?
1.
Identify situations in which there is no conflict.
a.
b.
2.
Evaluate what obligations that one is best suited to
take care of.
a.
b.
3.
Corporate social responsibility as reputation management.
Exploit opportunities for collaboration
What obligations can we take care of?
Are other agents better suited to take care of certain
obligations?
Weight the remaining obligations.
a.
b.
Give absolute priority to one type of obligation.
Trade-off between different obligations.
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Conclusion
• Corporate social responsibility is a question
of when, not whether.
– Companies have special obligations to other
stakeholders than the owner
• Their business operations potentially have important
effects on the vital interests of other stakeholders.
• When these stakeholders have few alternatives and
lack information.
• The company is better suited to take care of the
interest of these stakeholders than other agents.
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Ethical guidelines for the
Norwegian Petroleum fund
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National resources and ethical
obligations
• The existence of large petroleum reserves and
substantial petroleum revenues in Norway puts
this country in a unique position and give rise to
two important ethical questions:
– (1) To what extent do Norwegian’s have an ethical
obligation to share these resources with others?
• Poor people in other countries
• Future generations of Norwegians
– (2) How should we manage a large petroleum fund?
• Important to distinguish between: ‘how should we
spend?’ and ‘how should we invest?’
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Ethical management of the fund
• In this talk I will be concerned with the second
question – ethical management of the fund.
• This question is important if the answer to the first
question is that we should save at least some of the
petroleum revenues for future generations of
Norwegians and that this should be done by
establishing a fund.
– There are other ways to save resources for future
generations, e.g. to invest the resources so as to
increase the productive capacity of the economy.
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Why is the management of the
fund an ethical concern?
• There are two main reasons why we should be
concerned with the management of the fund
should be an ethical concern:
– (1) The management of the fund affects the return on
the fund’s investments. The management of the fund
thus affects prosperity of future generations of
Norwegians.
– (2) The fund, as a shareholder, affects the management
of large corporations and these companies in turn affect
the lives of the individuals in the countries in which
they operate in important ways.
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Background
• The The Norwegian Government Petroleum Fund
fund was established in 1990 in order to:
– Reduce uncertainty by acting as buffer to smooth shortterm variations in the oil revenues.
– Reduce the pressure in the Norwegian economy.
• By making the spending of petroleum revenues more visible.
– Finance future pension expenditures and a growing
need for nursing and care services.
• Smooth long-term consumption.
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Background
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How the fund works
• The income of the Fund consists of the net cash
flow from petroleum activities plus the return on
the Fund’s capital and net financial transactions
related to petroleum activities.
• The expenditures of the Fund are the transfers to
the Fiscal budget to finance the non-oil budget
deficit.
• The use of petroleum revenues over the
Government budget is gradually phased into the
economy approximately in pace with an estimated
4 pct. real return on the capital of the Petroleum
Fund.
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The management model
• Division of labour between the Ministry of
Finance and the Bank of Norway
• Ministry of Finance
– Makes the strategic investment decisions (the
benchmark portfolio)
– Determines the the risk limits.
• Norges Banks tasks are:
– To carry out the investment strategy,
– Aim to maximize return
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The benchmark portfolio
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Important aspects of the fund
• It is only allowed to invest in foreign stocks and
obligations.
• It is a financial investor. Is not allowed to own
more than 3% of the stocks in any individual
company.
– A highly diversified portfolio
– Does not take strategic positions
• Limited degree of active management
• Increasing degree of in-house management (today
80%)
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The size of the fund
• The first transfer to the Petroleum Fund was made
in 1995.
• Stocks was included in 1998
• The fund is today invested in approximately 2500
companies
– Only 10% of the total number of companies in which
the fund could be invested in. But these companies
constitute 90% of the total value of the companies
registered.
– The number of companies are likely to increase
considerably.
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The size of the fund
• The value of the fund is today 1100 billion
NOK (100 billion dollars) or app. 50% of
GDP.
– App. 250.000 NOK per capita.
• The size will more than double by 2010.
• The fund owns app. 0.3% of the worlds
stocks.
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Ethical consideration in the
management of the fund
• Ethical guidelines have been discussed since the
introduction of stocks in 1998.
• Substantial resistance from the Ministry of
Finance, Norges Bank and some political parties.
– Concern about reduced rate of return and increased risk.
– Concern about reduced accountability.
– Concern about the possibility that the fund would turn
into an ‘alternative budget’.
– Concern about inconsistency with other parts of public
policy.
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Ethical consideration today
• Two ‘concessions’:
– The environmental fund.
• Limited in size – only 2 billion NOK.
– The Petroleum Fund Advisory Commission on
International Law.
• Has only resulted in the exclusion of one company.
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Committee appointed to propose
ethical guidelines
• Several ‘scandals’ and pressure from different
NGO’s, combined with the experience from other
funds prepared the ground for the ‘ethicscommittee’.
• Mandate: To propose ethical guidelines for the
fund.
– ”fremme forslag om et sett av etiske retningslinjer for
Petroleumsfondet. Det er naturlig at spørsmål knyttet til
miljø, menneskerettigheter, arbeidstakeres rettigheter
samt styre og ledelse av selskaper blir vurdert i denne
sammenhengen.”
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Main elements of our work
•
Main goal: to propose a set of methods that
would enable the fund to meet its ethical
obligations.
• Three ethical questions
1. Who do we have ethical obligations towards?
2. What type of obligations do we have?
3. How do we handle situations in which
different obligations come in conflict?
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Who do we have ethical
obligations towards?
• We focused on:
– Distributive obligations towards future
generations of Norwegians.
– Obligation to respect the human rights of all
humans.
• When do we contribute to human rights violations?
– Obligation to preserve the environment
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What type of ethical obligations
do we have?
•
Primarily two types of ethical obligations:
(1) An obligation to maximize the funds return.
(2) An obligation to avoid contributing to certain
types of actions.
(3) NOT an obligation to punish or reward.
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How do we handle conflict
between different obligations?
1. Identify situations in which there is no
conflict.
2. Evaluate what type of obligations the fund is
best suited to meet.
3. Weigh different obligations against each other
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Identify
• There is not always a conflict between the
obligation we have towards future
generations and the other obligations we
have.
• Long-term returns on a broadly diversified
financial portfolio are dependent on
sustainable economic development.
– Might be conflict of interests between different
shareholders.
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Evaluate
•
Two questions:
a. What obligations is it possible for the fund to meet?
– Important that the ethical guidelines do not weaken
the criteria for the verifiability of the fund’s financial
performance.
– Do we have the necessary information?
•
Often difficult to get information about human rights/labour
rights violations.
b. Can others meet these obligations in a better way?
– Some obligations can better be met by other parts of
the government, e.g.:
•
•
Some distributive obligations
Obligations to punish or reward
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Weigh
•
Our priorities
(1) We give absolute priority to some types of
human rights violations etc.
(2) Beyond this the goal is to maximize the long
term return on the portfolio.
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The proposal (1)
• The following three methods was proposed and
later adopted by Stortinget - as a basis for the
ethical guidelines:
• Negative screening
– Negative screening of companies from the investment
universe that produce, either themselves or through
entities under their control, weapons that cause
particularly widespread civilian suffering
• chemical weapons, biological weapons, anti-personnel mines,
non-detectable fragments, incendiary weapons, blinding laser
weapons, nuclear weapons and cluster bombs.
– Investment in companies that are involved in the
production of some of these weapons is already
prohibited under international law
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The proposal (2)
• Exclusion of companies
– The fund should exclude companies from the
investment universe that pose an unacceptable risk that
the Fund might contribute to unethical actions or
omissions.
• Violation of fundamental humanitarian principles, grave
violations of human rights, gross corruption or severe
environmental degradation.
– The Ministry of Finance should establish a council on
ethics and international law to investigate individual
companies and make recommendations to the Ministry
on the exclusion of companies.
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The proposal (3)
• A corporate governance policy
– Ministry of Finance should draw up guidelines
for Norges Bank’s corporate governance
policy.
– These guidelines should be based mainly on the
UN Global Compact and the OECD Guidelines
for Multinational Enterprises.
– Norges Bank shall be responsible for the
implementation of this policy.
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Ambition
• The hope is that Norway, with these
guidelines, will have made significant
progress in the effort to promote the ethical
accountability of major institutional
investors and ensure that they use their
influence to promote sustainable
development.
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