A colleague is going to speak to several SWFs in the coming weeks and asked for a few thoughts on governance issues that he could pass along to the SWFs. Here are a few things that came to mind:
- Transparency is key. I know SWFs hear this all the time, but regulators want to know what funds are up to (with full acknowledgement of the problems that “bottom-line” transparency can bring, as Dixon and Monk have noted). This doesn’t require funds to disclose short-term performance, or to reveal all of their positions and interests (although if they invest more than $100 million in public equities in the US they should disclose these equity investments per SEC rules), but I think it does require them to be very deliberate and careful in disclosing their general strategies and policies, including how they exercise their shareholder rights. Funds don’t want to give an excuse to politically-motivated regulators or legislators to raise their lack of transparency as a sign that they are engaged in something nefarious.
- Related to that, I think funds have to very transparent and precise in how they use funds for domestic purposes. Whether a fund should be used for domestic purposes is a political and economic issue that is largely beyond my analysis, but I do think that academic observers and regulators have looked at economic development funds in countries that also have SWFs, or at SWFs that are used both for domestic and international investment, and have raised concerns about “political” uses of SWFs based on domestic investments; in other words, the SWF’s international investments are more heavily scrutinized because of domestic “political” uses. A number of countries have both types of funds, and I think it is prudent to keep them separate and clearly defined. I like to think of SWFs as in need of positive branding, and to protect the brand as a “non-political, passive investor”, countries should be very transparent and diligent about using their SWF only as an international, non-political, passive investment vehicle. Even regional investments may draw suspicion as political investments. Again, I see this as a branding issue, and sponsors should be very careful about protecting their SWF’s brand. CIC is trying conscientiously to develop such a brand, it seems to me, even as other Chinese funds engage in arguably “political” activities.
- Finally, domestic funds have a number of governance risks that in some cases are less likely to arise in the international investment context, namely, the danger of corruption. Strong conflicts-of-interest and anti-bribery rules and compliance efforts are very helpful in protecting against corruption (and the likely decreased returns that flow from it).
The State Capitalist 