David Yin

BlackRock & the Government Pension Fund of Norway

Corporate Governance

This paper serves to highlight the differing style of investment of BlackRock

and the Government Pension Fund of Norway. This is including the details of
investment targets and the reasons behind them, as well as the comparisons
in corporate governance.
BlackRock is an American investment management corporation with global
interests. Founded in 1988 to, BlackRock has since become the largest asset
management firm in the world. They operate on a multinational scale in 30
countries, from individual to governmental levels, and have investments in
over 100 countries across the world. As of September of 2015, BlackRock
manages $4.5 trillion in assets. This is much more than any other asset
management firm, with The Vanguard Group, of the United States, with $3.15
trillion in assets under management.
The Government Pension Fund is a fund controlled by the government of
Norway, and commonly referred to as The Oil Fund. The surplus from state
petroleum is deposited into the Oil Fund, thus the name. It was established in
1990 and is managed by Norges Bank Investment Management, a branch of
the Norwegian Central Bank. While it is called a pension fund, it is not one in
the traditional sense. Its sole purpose is to invest profits while oil revenue is

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at a peak or in a stable condition, in anticipation of future oil price declines

and instability. As of July of 2015, the value of the fund was $79 billion.
The style of investment of the two entities differs in many ways. The first is
that BlackRock is an institutional asset management corporation and uses
institutional investors. Institutional investors usually do not use their own
money to invest and instead invest for other people. They have a burden of
responsibility to their clients to make their financial decisions for them. They
are considered more financially knowledgeable than the average citizen who
would invest, and thus are subject to fewer regulations or constraints that
the SEC implements. The Government Pension Fund is considered a
sovereign investor. In fact, it is the single largest sovereign investor in the
world. The Oil Fund has a consolidated wealth that they use to invest for
Norway and do so for the benefit of the country.
Another difference is in ethics. The Oil Fund established the Ethical Council to
promote more responsible investing. The fund cannot invest any money in
companies that directly or indirectly contribute to killing, torture, or
deprivation of freedom, amongst other human rights or ethical violations.
Companies that engage in the production and sale of tobacco are also
excluded from investment. Notable examples of companies that have been
blacklisted include: Boeing Company for maintenance of intercontinental
ballistic missiles for the U.S. Air Force; Barrick Gold Corporation for extensive
environmental degradation in Papua New Guinea; and Wal-Mart for breach of

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human and labor rights. The Oil Fund applies not only a sense of
responsibility to its citizens while investing, but also the environment and the
global society as a whole. BlackRocks main responsibility is to its clients;
however they do have a Corporate Governance and Responsible Investment
team (CGRI) that takes on environmental, social, and corporate governance
issues (ESG). $252 billion of the assets under management at BlackRock
have specific ESG mandates that must be met before investment.
Given that the majority of voting stock of publicly traded companies in the
USA is owned by institutional investors, there is a lot of influence that they
have on these companies that they are invested in. Thus, they come under
heavy pressure from all kinds of lobbyist organizations, social movements,
and political groups protesting companies decisions on a variety of subjects.
For most decisions made by these investors, the final deciding factor will be
related to the companys stock price. However, many of these issues may
not affect the stock price directly and thus a deeper analysis must be made
to deal with these concerns. This is where corporate governance comes into
play. At its most basic definition, corporate governance is the system of
laws, rules, and factors that control operations at a company (Gillan and
Starks). To balance the influence of the shareholders and the knowledge of
the companys governing body for the good of the company, good corporate
governance must put into practice.

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BlackRock has a very transparent and thorough approach to corporate

governance, since it responsible for many clients of different backgrounds
and statures all over the world. They employ a Board of Directors, whose
members must meet the listing standards of the New York Stock Exchange.
The Board of Directors, which is a separate entity from the corporate
leadership within the company itself, establishes committees with members
of the Board to govern the company. There is an Audit Committee,
Management Development & Compensation Committee, Nominating and
Governance Committee, Executive Committee, and Risk Committee. The
Nominating and Governance Committee annually reviews new members of
The Board of Directors as well as the Board as a whole. The Board has agreed
to appoint the CEO of BlackRock as the Chairman of the Board. In addition to
the governing body, the Corporate Governance and Responsible Investment
team engages with portfolio companies that BlackRocks clients are invested
in. The term engagement in this sense means direct communication with a
portfolio company. They meet these companies so that both parties may
gain mutual understanding of each others objectives and become better
informed. Following this, they can vote by proxy for their clients shares at
annual general meetings each company holds.
The fund has a different management style, with the Norges Bank
Investment Management (NBIM or The Bank as referred to in its
management mandate) in charge of its investments. NBIM is a branch of the
Norwegian Central Bank and carries out this duty as directed by the

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Norwegian Ministry of Finance. The Ministry of Finance is the ultimate

director of the fund, with the ability to issue rules to NBIM on procedures
regarding the fund. Here are the three provisions for the management
objective they have in place: The Bank shall seek to achieve the highest
possible return after costs measure in the investment portfolios currency
basket; The Fund shall not be invested in companies excluded pursuant to
the provisions in the Guidelines for observation and exclusion from the GPFG;
The Bank shall integrate its responsible management efforts into the
management of the Fund. A good long-term return is considered dependent
on sustainable development in economic, environmental and social terms, as
well as well-functioning, legitimate and efficient markets (GPFG
Management Mandate). The mandate goes on to require a provision on
responsible management. The Ethical Council was established by the NBIM
and serves this purpose by excluding certain companies that engage in
behavior not consistent with their guidelines.
In terms of institutional activism, the Government Pension Fund sets a strong
precedent as an investor with self-regulated activism. In terms of
environmental, human rights, and social issues, the Fund invests responsibly
by excluding those companies that overly exploit natural resources, violate
human rights or eschew global agreements. BlackRock does have anything
similar in its overall regulations, but a large portion of its assets under
management do follow certain mandates that concern environmental, social,
and governance issues. As a whole, the CGRI team decides on a case by case

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basis on whether to invest in certain companies, taking into account risks

such as exposure to companies that are more likely to face litigation or
reputational harm as a result of poor management of the impact of their
operations on the environment or society (BlackRock).
The two entities are very different, in terms of structure, intent, and function.
The Government Pension Fund is government owned and operated and
works to supplement the Norwegian pension system through responsible
investment. Meanwhile BlackRock is a corporation that manages money for
its many clients, but also with responsible corporate governance and
responsible investments. Both have the same aim, as any financial
institution, of a high ROI and achieve it through similar means. However, this
is the only similarity that the two share. It is difficult to say which investment
style is better because of the inherent differences between the two. The
Government Pension Fund is the more ethical investment method, with its
Ethical Council filtering out investments that do not meet its moral
standards. BlackRock may be more profitable, investing not as a single entity
but rather as an intermediary for its clients, which can mitigate the risk
posed to the corporation itself.
Sources
A Survey of Shareholder Activism: Motivation and Empirical Evidence
By: Stuart L. Gillan; Securities and Exchange Commission; Office of
Economic Analysis

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and Laura T. Starks; Department of Finance; University of Texas

Government Pension Fund Global- Management Mandate
Norwegian Ministry of Finance
BlackRock Website