We are announcing today the Harvard Corporation’s decision to direct Harvard Management Company (HMC) to divest itself of stock held by HMC in PetroChina Company Limited (PetroChina).
This decision reflects deep concerns about the grievous crisis that persists in the Darfur region of Sudan and about the extensive role of PetroChina’s closely affiliated parent company, China National Petroleum Corporation, as a leading partner of the Sudanese government in the production of oil in Sudan. Oil is a critical source of revenue and an asset of paramount strategic importance to the Sudanese government, which has been found to be complicit in what the U.S. Congress and U.S. State Department have termed “genocide” in Darfur and what a United Nations commission of inquiry recently characterized as “crimes against humanity and war crimes . . . [that] may be no less serious and heinous than genocide.”
Although Harvard maintains a strong presumption against the divestment of stock for reasons unrelated to investment purposes, we believe that the case for divestment in this instance is persuasive, in view of the confluence of circumstances summarized below, under the heading “Recommendation to Divest from PetroChina.”
The Corporation, on our recommendation, has reached this decision in light of the advice of the University’s Advisory Committee on Shareholder Responsibility (ACSR) to divest from PetroChina. The ACSR is comprised of four faculty members, four students, and four alumni. We asked the ACSR to study the issue and offer its advice to us after concerns had been expressed by members of the Harvard community about PetroChina and the situation in Darfur. We are especially grateful for the efforts of an ACSR subcommittee chaired by Joseph Badaracco, Shad Professor of Business Ethics and former chair of the ACSR. The subcommittee, after hearing from representatives of the group urging divestment from companies doing business with Sudan and otherwise inquiring into the circumstances, prepared a report that thoughtfully addresses the relevant considerations, and we therefore quote from it at length below.
The Crisis in Darfur
The ACSR subcommittee report begins by describing the grave situation in Darfur: A grievous crisis exists in the Darfur region of Sudan. In March 2004, the United Nations humanitarian coordinator for Sudan described the situation in Darfur as an instance of “ethnic cleansing” and “the world’s greatest humanitarian crisis.” In July 2004, both houses of the U.S. Congress passed a resolution declaring the atrocities in Darfur to constitute genocide. In September 2004, U.S. Secretary of State Colin S. Powell similarly declared that genocide has been committed in Darfur, for which the Sudanese government and the so-called Janjaweed militia groups bear responsibility.
On January 25, 2005, a special United Nations commission of inquiry, while stopping short of declaring that “genocide” is underway in Sudan, concluded that “the Government of the Sudan and the Janjaweed are responsible for serious violations of international human rights and humanitarian law amounting to crimes under international law,” including “killings of civilians, torture, enforced disappearances, destruction of villages, rape and other forms of sexual violence, pillaging and forced displacement, throughout Darfur.” It stated that such acts have been “conducted on a widespread and systematic basis,” and that “the crimes against humanity and war crimes that have been committed in Darfur may be no less serious and heinous than genocide.”
Numerous other observers have condemned the Sudanese government for complicity in actions that have reportedly resulted in the deaths of more than 70,000 Sudanese civilians (some estimates are far higher) and the displacement of 1.5 million more. [See note below, regarding a more recent and much higher estimate of death toll.] There have also been reports linking oil production activities in Sudan directly to mass displacement of civilians and other human rights abuses. The grave situation in the Darfur region persists, notwithstanding the recent signing of a peace accord to end the longstanding north-south civil war in Sudan, and several rounds of negotiations concerning Darfur.
Note: On March 29, 2005, after the ACSR subcommittee had completed its report, a British parliamentary report stated that the death toll in Darfur may be as high as 300,000.
The importance of oil to the Sudanese government, and the involvement of CNPC
The ACSR report also discusses the central importance of oil to the governing regime in Sudan, as well as the extensive involvement of China National Petroleum Corporation, the parent company of PetroChina, in the production of Sudanese oil: Oil production is widely understood to be a crucial source of revenue for the Sudanese government, essential to the government’s capacity to fund military operations, and an asset of exceptional strategic importance to the regime. According to a recent report of the U.S. Department of Energy, “With the start of significant oil production (and exports) beginning in late 1999, . . . . Sudan’s economy is changing dramatically, with oil export revenues now accounting for around 73% of Sudan’s total export earnings.” [Energy Information Administration, U.S. Department of Energy, Sudan Country Analysis Brief, July 2004.]
As of January 2004, Sudan’s estimated proven reserves of crude oil stood at 563 million barrels, more than twice the 2001 estimate. As of June 2004, crude oil production had risen to 345,000 barrels per day, up from 270,000 barrels per day just a year earlier. [Ibid.] The China National Petroleum Corporation (“CNPC”) is wholly-owned by the Chinese Government. [CNPC] conducts oil operations in Sudan. CNPC is the largest single shareholder of the Greater Nile Petroleum Operating Company (“GNPOC”), a consortium that “dominates Sudan’s oil fields.” ["China Invests Heavily in Sudan's Oil Industry," The Washington Post, December 23, 2004 (Post article).] GNPOC was created by the Sudanese government and includes, among its joint venturers, the Sudanese state-owned oil company, Sudapet. (United States investors are prohibited by U.S. sanctions law from investing in the GNPOC joint venture.) CNPC recently reported that its production of crude oil in Sudan exceeded 16 million tons in 2004, which appears to account for a substantial fraction of its total foreign oil production.
It has also been observed that the production of Sudanese oil has been a matter of attention within the United Nations Security Council in discussions of possible international sanctions against Sudan based on the situation in Darfur, and that substantial revenue from Sudan’s oil production has gone toward the purchase of weapons.
CNPC and PetroChina
The ACSR report also addresses the relationship of CNPC to PetroChina: In April 1999, CNPC announced its plans to sell $10 billion shares on the New York Stock Exchange. Human rights groups and others objected to the initial public offering, contending that the deal would be tantamount to U.S. support for genocide in [southern] Sudan. In response, CNPC restructured the transaction. It created a new subsidiary, PetroChina, which would operate only inside China, to be owned 90% by CNPC and 10% by private investors.
On April 6, 2000, $2.9 billion dollars of shares in PetroChina were sold on the New York Stock Exchange to private investors. At that time, CNPC’s investment bankers from Goldman Sachs asserted to investors that none of the money raised in the IPO would be used to fund CNPC’s projects in Sudan. [Post article; China's Involvement in Sudan: Arms and Oil, Human Rights Watch, November 2003 (Human Rights Watch Report).]
Despite CNPC’s assurances, several potential investors viewed with considerable skepticism CNPC’s firewall strategy. Opponents of the IPO pointed out that when PetroChina was created, it incurred $15 billion in debt from CNPC, some of which was incurred in connection with the GNPOC project. [Human Rights Watch Report.] Fund managers were skeptical that PetroChina could make independent business decisions because CNPC owned 90% of its shares. As a result of these concerns, several major institutions, including such pension funds as TIAA-CREF and Calpers, elected at the time of the IPO not to invest.
Within the past few months, there have been further complaints that “[t]ransparency in the relationship between PetroChina and CNPC is so poor that investors are often in the dark about potential cross-subsidies.” ["Assets Plan for PetroChina in Global Drive," The Standard, October 25, 2004.]
In an effort to determine whether PetroChina can exercise independence from CNPC despite CNPC’s 90% ownership interest in it, the subcommittee examined the management of the two companies. The results of that review were striking. The chairman of PetroChina is the president of CNPC; PetroChina’s legal counsel is CNPC’s president; PetroChina’s vice chairmen, executive directors, and non-executive directors are also CNPC’s vice presidents; and the four subcommittees of PetroChina’s board of directors contain substantial representation from CNPC. Indeed, the investment and development subcommittee of the board of PetroChina is comprised solely of two vice presidents of CNPC.
Against this background come new reports that suggest the two companies are contemplating the integration of their operations. According to The Standard, “Beijing plans to create an integrated oil giant capable of competing on the global stage with the likes of Exxon-Mobil and Royal Dutch Shell by restructuring PetroChina and its parent China National Petroleum Corp. (CNPC).” [Ibid.] As a result of this contemplated corporate restructuring, PetroChina itself may become the direct owner of substantial oil assets in Sudan now owned by CNPC, or CNPC and PetroChina may establish a joint venture through which they would jointly own such assets.
The Recommendation to Divest from PetroChina
Finally, the ACSR report recommends that Harvard divest itself of PetroChina stock, recognizing the strong presumption against divestment for reasons unrelated to investment purposes, but also pointing to the unusual combination of circumstances presented by this particular holding: The subcommittee understands that Harvard manages its endowment to achieve maximum returns to support the academic purposes and programs of the University, consistent with a prudent level of risk. The University maintains a strong presumption against divesting itself of securities for reasons unrelated to investment purposes, and against using divestment as a political tool or a “weapon against injustice” — not because there are not many worthy political causes or deeply troubling injustices in the world, but because the University is first and foremost an academic institution.
During his tenure as president of Harvard, Derek Bok wrote thoughtfully and extensively about the reasons for that approach. His writings are a compelling reminder that the University, as an academic rather than a political institution, must take great care to avoid leveraging its endowment or prestige in ways that could embroil the institution in political and social controversies not directly related to its academic pursuits, and thus compromise the core values and independence of the academic enterprise.
Nevertheless, there are exceptional cases in which the strong presumption against divestment may be overcome. As President Bok noted, “Although trustees have a legal and moral obligation to enhance and conserve the university’s resources, there are rare occasions when the very nature of a company’s business makes it inappropriate for a university to invest in the enterprise.” Typically, in such cases, the act of divestment is not taken with the expectation that it will induce a company to cease its objectionable operations; rather, to paraphrase President Bok, the University simply does not consider it proper to make investments in the enterprise in question.
We believe the unique pattern of circumstances relating PetroChina to the crisis in Sudan counsels in favor of taking the extraordinary step of divestment: the declarations by the U.S. Congress and the U.S. Secretary of State describing the situation in Darfur as involving a “genocide” in which the Sudanese government is complicit; the judgment of a United Nations commission of inquiry that the Government of Sudan shares responsibility for “widespread and systematic acts” in Darfur amounting to “crimes against humanity and war crimes . . . [that] may be no less serious and heinous than genocide”; the apparent persistence of the crisis in Darfur notwithstanding the recently negotiated peace agreement intended to end the north-south civil war in Sudan and several rounds of negotiations focused on Darfur; the salient importance of oil to the Sudanese government as a strategic asset and source of revenue, available to fund military and other operations; the reports that oil-related activities themselves have exacerbated the humanitarian crisis in Sudan; the magnitude and scope of CNPC’s active involvement in Sudanese oil production activities (especially in GNPOC), the importance of its Sudanese activities in its overall range of foreign oil activities, and CNPC’s status as a direct joint venture partner of Sudapet, owned by the Sudanese government; the express inclusion of the GNPOC joint venture on the list of entities with which persons in the United States are prohibited from doing business under U.S. sanctions law; CNPC’s 90 percent ownership of PetroChina, and the lack of realistic opportunity for an owner of a small fraction of PetroChina’s publicly traded shares to exercise “voice” in a way that could be expected to exert significant influence on the conduct of CNPC, which is wholly owned by the Chinese government; the fact that PetroChina’s Board of Directors is dominated by CNPC’s senior management; the recent reports that PetroChina itself may soon become the direct owner of international oil assets (including Sudanese assets) now owned by CNPC, or that CNPC and PetroChina may form a joint venture through which they would jointly own such assets, as a result of a contemplated corporate restructuring.
The CCSR is persuaded, and the Corporation agrees, that this particular combination of circumstances, taken together, warrants the rare step of divestment. We accordingly are directing Harvard Management Company to divest its holdings of PetroChina stock.
Copyright 2005 by the President and Fellows of Harvard College