Buffett’s stock conflicts with Gates charity aims
THE janjaweed militia charged into Hayffa Ahmed’s village in Darfur on horseback -- rifles raised, swords glinting, kicking up clouds of dust. First they killed her grandfather, the village chief.
Janjaweed warriors, said to be allies of the Sudanese government, “continued to kill everyone,” Ahmed, 30, declared in melodic Arabic. Her voice was soft, like a child’s. “They used guns, clubs, swords -- anything to be able to kill or hurt human beings. For some people, they tied them behind their horses and pulled them until they died in the road.”
In Darfur, where more than 200,000 people have perished in what the United States calls a genocide, the killing has been supported by profits from companies helping the government of Sudan tap its vast reservoirs of oil, according to services that research corporate conduct for investors. The firms include China’s Sinopec Corp., Malaysia’s Petronas, and Schlumberger, based in the Netherlands Antilles -- whose investors include the Bill & Melinda Gates Foundation.
The Gates Foundation’s most significant connection to the Sudanese oil industry, however, is through Berkshire Hathaway Inc. Bill Gates is a Berkshire director, and Berkshire’s chairman, Warren E. Buffett, is a trustee of the Gates Foundation. Berkshire holds a $3.3-billion stake in PetroChina Co., a subsidiary of the China National Petroleum Corp., or CNPC, the biggest player in Sudanese oil.
Buffett has pledged $31 billion worth of Berkshire stock to the Gates Foundation in annual installments, beginning last year with $1.6 billion. In 2009 and afterward, the foundation expects Berkshire’s wealth to fund about half of its charitable awards -- which have included more than $34 million for emergency refugee and health services in Sudan, plus a share of at least $167 million more in regional health grants.
But some of Berkshire’s wealth comes from PetroChina, whose parent company supplies a large part of the money that underwrites Sudan’s military -- as well as the janjaweed, according to the United States and the United Nations. The infusion of Berkshire stock places the Gates Foundation in conflict with its own efforts to help victims of the Sudanese civil war.
Those victims include refugees of the massacre at Hayffa Ahmed’s village.
Sudan denies that it supports the janjaweed and accuses Darfur rebels of instigating the violence. But Sudanese officials acknowledge that some militia commanders and government officials might have committed human rights abuses and vow to prosecute such cases. Amid concerns over a possible boycott of the 2008 Beijing Olympics, China has recently begun to pressure the Sudanese government to resolve the crisis.
In April 2004, the janjaweed, who had gang-raped girls in neighboring villages, torched houses on the north side of Ahmed’s hamlet, near Tawila, looting as they moved south. “We had a chance in that time to run,” Ahmed said. She, her husband, Abdel Hamid Mohamed, and their three children fled with only the clothes they were wearing.
They found temporary sanctuary in El Fasher, a nearby city in northern Darfur, at a refugee camp teeming with desperate people. That same month, the Gates Foundation began an infusion of funds to CARE, Save the Children, the International Rescue Committee and other groups that have operated in the El Fasher camp.
The family moved on to Khartoum, the capital of Sudan, and then bribed its way to Cairo, where the five obtained official refugee status. Last year, they arrived in Omaha, home to about 9,000 Sudanese refugees, more than anywhere else in America.
The commercial hub of Sudanese life here is modest. A small restaurant, a mom-and-pop grocery, a few storefronts and the Sudanese Center, a social club, are packed into the intersection of 25th and Farnam, in a depressed area of downtown.
By coincidence, nine blocks away stands Berkshire Hathaway’s headquarters.
On a recent Monday evening, Gabriel Ngong, a refugee and tax accountant, sat in his outer office, which doubles as a store selling colorful African shirts, and voiced a Sudanese axiom: “The Chinese take oil out for the government, then the government kills the people.”
When he was told about Berkshire’s investment in PetroChina, and that its stake made Berkshire the largest single independent shareholder in the Chinese company, Ngong said he was surprised and sad. “Our people always trust Americans.”
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Buffett rejects divestment
In response to questions from The Times about the Gates Foundation’s investments in key economic supporters of the Sudanese government, Monica Harrington, a senior policy officer at the foundation, said: “Bill and Melinda have initiated a process to assess the asset trust investments in Sudan.”
These investments, totaling $22.4 million, included $1.5 million in Petronas, $3.2 million in Sinopec and $2.4 million in Schlumberger, all in 2005, the most recent totals available. The firms were cited as key economic supporters of the Sudanese government by Calvert Group Ltd. and KLD Research & Analytics Inc., which research corporate conduct.
Harrington did not address the conflict with the foundation’s mission caused by Berkshire’s holdings in PetroChina. She did say, however, that Buffett served as a trustee for the foundation’s grant programs and had no involvement in the foundation’s investment decisions, “including decisions that might be made about the disposition of Berkshire Hathaway stock.”
An assistant to Buffett said one week ago that the Berkshire Hathaway chairman did not have time to respond to written questions. But in a rare open letter to his shareholders in February, Buffett said that Berkshire would retain its financial holdings in PetroChina. It was PetroChina’s parent company, CNPC, he said, that had oil operations in Sudan. And the subsidiary, he said, bore no responsibility for the actions of its parent.
Buffett deplored the conditions in Darfur, but he rejected the idea that divestment from PetroChina “would in any way have a beneficial effect on Sudanese behavior.”
“We have seen no records ... that indicate PetroChina has operations in Sudan,” Buffett said in his letter to shareholders. “The controlling shareholder of PetroChina, CNPC, does do business in Sudan. CNPC is 100% owned by the Chinese government, and its activities may logically be attributed to the government of China. [But] subsidiaries have no ability to control the policies of their parent.”
Nonetheless, Buffett has allowed a shareholder resolution challenging the PetroChina holdings to be placed on the agenda for Berkshire’s annual meeting Saturday in Omaha.
Critics have said Buffett was ignoring his ability, as PetroChina’s largest outside shareholder, to pressure CNPC and the government of China into ending the support it provides for the genocide by its oil dealings with Sudan and by providing arms to the Sudanese government and blocking U.N. efforts to stop the killing in Darfur.
By investing in PetroChina, Buffett signaled that the status quo in Sudan was acceptable, said Timothy Smith, president of the Social Investment Forum, an association of more than 600 financial institutions, research companies and foundations.
“There is no morally neutral ground,” Smith said. “If Mr. Buffett doesn’t want to divest his shares from PetroChina, he should use his considerable prestige and leverage as an investor to demand that the genocide be stopped.”
Though the critics agree that PetroChina operates only outside Sudan, they say the company’s intimate ties to CNPC raise serious questions about separation between the two.
In 1999, when CNPC proposed a public stock offering to raise cash to expand its operations, concerns about the company’s business in Sudan, which is subject to U.S. sanctions as a sponsor of terrorism, caused CNPC to cancel the sale. Instead, it sold stock in PetroChina, a newly created subsidiary that CNPC promised would not operate in Sudan and would be separated from its parent by a legal and financial firewall.
But critics say the firewall is paper-thin.
Ten of PetroChina’s 13 directors or officers serve in similar jobs for CNPC, according to the companies’ websites, and CNPC owns nearly 90% of PetroChina, according to a filing with the U.S. Securities and Exchange Commission -- giving it unilateral control of PetroChina’s “policies, management and affairs.”
PetroChina inherited $15 billion in CNPC debt, some derived from its Sudan oil operations, and gave 10% of the proceeds from the initial public stock offering to CNPC, partly to increase operations in Sudan. Much of PetroChina’s profit goes to CNPC -- PetroChina’s second-largest customer and largest supplier. Moreover, PetroChina has twice proposed buying CNPC’s assets in Sudan, according to the Standard, a leading financial newspaper in Hong Kong.
PetroChina -- the fifth-largest public oil company in the world measured by market capitalization -- is by far CNPC’s largest subsidiary. It took over most of the parent company’s domestic operations and many of its foreign holdings.
The ties between CNPC and PetroChina were well-known when Buffett disclosed his first stake in PetroChina in September 2002, near the height of the public concern over government atrocities in southern Sudan. He built up his holdings by April 2003, with war in southern Sudan still raging and the Darfur conflict well underway.
Since then, PetroChina’s share price has risen about sixfold, making it one of Berkshire’s more lucrative investments.
Buffett’s fame and credibility often push up the value of his major holdings, and the pattern seems to be true with PetroChina. In the three months before his large PetroChina stake was disclosed, only 14 major institutional investors purchased PetroChina shares. But in the three months after, 49 did so. PetroChina’s share price also rose sharply immediately afterward.
The Buffett seal of approval may have encouraged stock sales and share increases that boosted CNPC’s capital reserves and its ability to invest in Sudan and elsewhere, experts said. “He always seems to win,” said Charles Elson, chair of the Center for Corporate Governance at the University of Delaware. “And people follow.”
Little wonder. Since 1965, according to company records, Berkshire shares rose an average of 21.4% annually, beating the Standard & Poor’s 500 stock index 36 out of the last 42 years, often by wide margins.
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Others divesting
Albertina Issa recalled bombs raining on her hometown of Juba, deep in the south of Sudan. Juba was 250 miles from the oil fields but on the front line of the Sudanese war. It was 2003, and Issa, studying economics in Khartoum, had come home to visit her family.
“When the bombs came down,” Issa said, “the people ran into the streets.” Her uncle had been killed in an earlier bombardment. Her next-door neighbors’ home was destroyed.
As Catholics, Issa and her husband, Emmanuel Lugang, left Juba to escape both the war and forced conversions to Islam by government forces. After years of exile in Egypt, they moved to Omaha last year. With their three children, they are slowly beginning to prosper, with the help of Project Welcome Sudanese Refugee Community, a local group that has helped 500 southern Sudanese families find jobs, schools and homes.
Lugang and Issa adjusted to Omaha more easily than many other Sudanese because they are well-educated and speak English, said Creighton University theology professor Joan Mueller, who runs Project Welcome.
In a recent telephone call from Sudan, Lugang’s brother described Juba today. Despite a 2005 cease-fire, a tenuous alliance between the central Sudanese government and former southern rebels was unraveling. There were few signs, Lugang’s brother said, that oil wealth from the north was trickling down.
“We lack medicine, we lack doctors. No school for the kids,” he reported.
Instead, according to the Harvard Corp., which manages Harvard University’s endowment funds, oil production has become “essential to the government’s capacity to fund military operations” -- a view shared by the U.S. Department of Energy. For this reason, Harvard has divested from firms with ties to Sudan.
Indeed, 95 U.S. universities, colleges and high schools, along with 31 states including California, and 14 cities including Los Angeles, are considering or have enacted similar divestment policies, according to the Sudan Divestment Task Force, an advocacy group.
Human Rights Watch concluded in 2003: “CNPC and Petronas operations ... have been complicit in human rights violations. Their activities are inextricably intertwined with the [Sudanese] government’s abuses; the abuses are gross; the corporate presence fuels, facilitates or benefits from violations.”
Similar complaints have been lodged against Petrodar Operating Co., according to a 2006 report by the European Coalition on Oil in Sudan, a group of more than 80 religious and peace groups.
CNPC owns 41% of Petrodar.
A report in 2000 by a Canadian government commission said an airstrip at Heglig, operated by Sudan’s Greater Nile Petroleum Operating Co., was a staging area for military attacks on civilians.
CNPC owns 40% of Greater Nile.
Oil provides well over half of Sudan’s budget, and CNPC buys about two-thirds of that oil.
To Lugang, these reports, together with his brother’s words by telephone from Juba, have made it clear: “Sudan is getting money from the Chinese oil companies in order to buy guns and tanks,” first to terrorize the south, now Darfur.
Oil money, Lugang said, is “prolonging the war.”
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A sharp conflict
Because Berkshire Hathaway’s stock will become the largest single part of the Gates Foundation’s portfolio and will fund half of its future grants, The Times examined holdings in Berkshire’s investment portfolio in addition to PetroChina.
Using data from the research groups that evaluate social performance, Berkshire investments were found to conflict even more sharply with the foundation’s philanthropic goals than do the foundation’s own endowment investments, as analyzed by The Times in a two-part series in January.
About $56.4 billion, or 87% of Berkshire’s stock holdings, is invested in companies criticized by the research groups for profiting from environmental irresponsibility, human rights violations and other activities that undermine the foundation’s good works or its goals of improving the lot of humankind.
That contrasted to $8.7 billion, or 41%, of the foundation’s holdings with similar conflicts, according to the most recently available data.
The foundation declined to respond to most questions before or after The Times published its January series. However, Patty Stonesifer, the foundation’s chief executive, said in a letter to the editor of The Times that it was naive to think that a shift in investment strategy would reduce the human misery blamed on the companies in which it had invested.
Buffett’s aide said he did not have time to respond to written questions about the apparent conflicts between his investments and the foundation’s goals.
But Jed Emerson, an expert in foundation asset management and a visiting fellow at Oxford University, said that “Buffett has a special opportunity to help redefine the role of business today. People say that the market has answers for a lot of problems in the world.
“That will be true only when investors come to the table with enhanced expectations,” Emerson added. “If they say, ‘We won’t turn a blind eye to things like child labor, environmental devastation and Darfur.’ ”
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Buffett’s ethics
Warren Buffett’s authority is part financial, part moral.
“St. Warren,” said Michael Useem, a professor of management at the University of Pennsylvania’s Wharton School, “has built additional credibility as a wise and informed observer of what’s good for companies, what’s good for governance and where the country should be going.”
Buffett made his reputation in corporate governance in 1991, when he saved Salomon Inc., the storied investment bank, from imminent collapse after one of its traders tried to evade securities laws. Buffett, then a Salomon director, restored the bank’s ethical culture.
But in his investments, Buffett’s good-governance ethos does not extend to social or environmental concerns, according to reports by independent investment analysts.
The holdings of Berkshire Hathaway, totaling more than $4.6 billion in eight companies, came in dead last by a wide margin in a ranking of oil and gas holdings among the 100 largest investors in the United States. The ranking was based on social, environmental and governance performance ratings developed by the investment bank Goldman Sachs Group Inc. and a related ownership analysis by Cary Krosinsky of CapitalBridge, a capital markets intelligence firm.
More than any other large investor, Berkshire bought into oil companies whose records on greenhouse gas emissions, safety, business ethics, human rights and other issues significantly lagged those of their peers.
As Berkshire stock is transferred to the Gates Foundation, the lag measured by Goldman Sachs and other researchers contravenes the foundation’s efforts to improve human health and welfare and its philosophy that “all lives -- no matter where they are being led -- have equal value.”
Berkshire holds about $64 million in pharmaceutical companies, for example, whose pricing policies have tended to keep antiretroviral drugs out of reach for HIV/AIDS patients in developing nations -- one of the foundation’s most important constituencies.
Berkshire also owns shares worth $28.5 billion in companies accused of human rights abuses, including $921 million in Wal-Mart Stores Inc.
On its website, Wal-Mart says it has long supported human rights in the workplace and that it cancels orders from factories overseas that violate its policies supporting fair compensation and bans on child labor.
But Wal-Mart has paid fines or lost rulings in regulatory and court cases accusing it of violating laws banning child labor and governing union organizing and adult working conditions.
In addition, a Berkshire subsidiary, General Re Corp., owns shares worth $652,000 in Altria Group Inc., the largest U.S. cigarette maker.
The Gates Foundation screens tobacco out of its own investments, in keeping with its emphasis on health. In her response to questions, Harrington, the senior policy officer at Gates, reiterated its tobacco-screening policy but did not address Berkshire’s investment in Altria.
Buffett was unavailable to respond to written questions about possible conflicts between his investments in poor environmental stewards, makers of AIDS drugs and a tobacco company, or their impact on the foundation’s global health goals.
“Buffett has shown how to invest wisely and still be concerned about governance,” Oxford’s Emerson said. “The next step would be to look at environmental and social problems as opportunities to build beneficial new markets. There isn’t one [single] solution, but Buffett is someone who could really frame the issues.”
In shareholder reports, Buffett frequently scolds fellow executives for bloated pay. In 2006, he declared: “Compensation reform will only occur if the largest institutional shareholders -- it would only take a few -- demand a fresh look at the whole system.”
Yet his own investment choices seem to show little such concern. Among Berkshire’s top 100 investments, 74 were evaluated for compensation problems by either KLD Research & Analytics, Institutional Shareholder Services Inc., or Goldman Sachs. Of those, 35 were in companies flagged for overpaying chief executives and 50 in companies flagged for excessive rewards for board members.
Berkshire holdings worth more than $21 billion also fared poorly on overall corporate governance, including accounting procedures; transparency on environmental and social policies; and lawsuits or regulatory problems concerning harm to investors, employees, customers or local communities.
Lapses on such issues tend to undermine Gates Foundation goals supporting human welfare.
But Buffett retains a rare authority, investment experts said, that could shift the debate on these issues, including the violence in Darfur.
“Buffett has tremendous power and influence,” said Smith, of the Social Investment Forum. “He has the platform of the Gates Foundation and its incredibly important mission to speak from. His voice would be heeded.”
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Times staff writers Doug Smith and Edmund Sanders and researchers Maloy Moore and Scott Wilson contributed to this report.
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(BEGIN TEXT OF INFOBOX)
Conflicted investments
Berkshire Hathaway invests primarily in companies whose poor social, environmental or governance performance, as rated by investment researchers, tends to contradict the goals of the Bill & Melinda Gates Foundation.
Holdings that contradict the Gates mission (In millions)
*--* Problem area Gates Foundation Berkshire Hathaway Governance $3,072.6 $21,387.6 AIDS drug pricing 1,425.7 63.9 Environmental 3,370.0 28,798.0 Human rights 2,073.8 25,187.1 Sudan operations 22.4 3,315.6
*--*
Dollar amounts include companies that are listed in more than one category; not all problem categories are listed.
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Percentage of investments getting poor ratings
Gates Foundation
2005*
Total: $21.2 billion
Good performance or unrated - 41%
Poor performance - 59%
Berkshire Hathaway
2006*
Total: $64.6 billion
Good performance or unrated - 13%
Poor performance - 87%
*Latest year available. Excludes loaned investments and government securities.
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Sources: Bill & Melinda Gates Foundation; Berkshire Hathaway Inc.; Times reporting
Graphics reporting by Doug Smith and Charles Piller
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Warren E. Buffett
He is a trustee of the Bill & Melinda Gates Foundation. Beginning in 2009, Berkshire’s wealth is expected to fund about half of the foundation’s charitable awards.
Age: 76 (born Aug. 30, 1930)
Position: Chairman and CEO, Berkshire Hathaway Inc.
Education: Bachelor’s degree, University of Nebraska; master’s, Columbia University in New York
Family: Three children with first wife, Susan, who died in 2004; married Astrid Menks in August 2006
Party affiliation: Democrat
Notable:
* He has pledged $31 billion in Berkshire stock to the Gates Foundation.
* He is a fan of burgers, French fries and Cherry Coke.
* He enjoys bridge, math puzzles and playing the ukulele.
* He still lives in the five-bedroom Omaha home he bought in 1958 for $31,500.
* He also owns a 3,200-square-foot home in Laguna Beach, which he bought in 1971.
Times research by Scott J. Wilson
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About this report
This article is based on more than 35 interviews and hundreds of documents, including thousands of pages of Gates Foundation grant descriptions, tax forms, and lists of endowment holdings as of 2005, the most recent data available. It also included filings to the U.S. Securities and Exchange Commission by the foundation, Berkshire Hathaway Inc. and PetroChina.
Information was used from six leading services that give investors guidance on corporate performance: Calvert Group Ltd., Innovest Strategic Value Advisors, KLD Research & Analytics Inc., the Goldman Sachs Group Inc., Institutional Shareholder Services Inc. and Oekom Research. Ownership analysis was provided by Cary Krosinsky of CapitalBridge, a capital markets intelligence firm. None of the companies was directly involved in The Times’ assessment of the Gates Foundation or Berkshire portfolios; they have taken no position on The Times’ conclusions. For details, see latimes.com/gates.
