Disclosure highlights differences in SWF governance

IFSWF chairman Adrian Orr says there is much that non-sovereign funds can learn from the Santiago Principles, especially in regards to transparency and good governance.
Disclosure highlights differences in SWF governance

Sovereign wealth funds are not renowned for their openness, but that perception is being challenged by the willingness of 29 of the world’s largest state investors to abide by standards known as the Santiago Principles.

The members of the International Forum of Sovereign Wealth Funds (IFSWF), a global forum with offices in London and a current chairman in New Zealand, have each published their own assessment of how they apply these guidelines, which aim to contribute to a stable global financial system by promoting well-managed investments, transparency and sound governance.

IFSWF chairman Adrian Orr, who is also chief executive of the NZ$31 billion ($22 billion) New Zealand Superannuation Fund, believes there is much that non-sovereign funds can learn from some of these principles, which can facilitate deal-making. 

“Stronger governance builds valuable reputational capital, bolstering a fund’s strategic positioning,” he told AsianInvestor. “Inevitably, commercially-oriented investors, known to operate transparently and in compliance with the regulatory standards of host countries, will see themselves bumped to the front of the queue.” 

He cited the example of NZ Super partnering with Australian infrastructure specialist Infratil to acquire retirement home operator RetireAustralia in 2014. “It was the fund’s experience, access to capital, and long-term outlook that recommended it to management,” Orr said.

Accompanying the IFSWF self-assessments is a study by a team from SovereigNet at Tufts University in Massachusetts, which shows how governance structures vary significantly across funds.

A large majority are independent legal corporations, while several are managed by a board of trustees. But there are a few, more idiosyncratic fund structures too such as the Timor-Leste Petroleum Fund, which is established as an account of its finance ministry that is maintained with the Banco Central de Timor-Leste. Then there is the Russian Direct Investment Fund (RDIF), which is organised as a common-law mutual fund with a general partner, and Alaska’s Permanent Fund (APF), which is constituted as a pool of funds owned by the state with no distinct legal identity or organisational structure.

Fund managers may be appointed under statutory mandate (as in Australia, and Nigeria), through a combination of statutory mandate and administrative action (as in Chile, Italy, and Morocco), by the governing body (as in China and Kuwait), or by the fund’s shareholder or head of state (as is the case with Kazakhstan’s National Investment Corporation, the Palestine Investment Fund and the Qatar Investment Authority (QIA)).

Public Disclosure

Most IFSWF members disclose information publicly, although the scope and manner varies. We are accustomed to seeing regular reports from Asia-Pacific sovereign funds such as Singapore’s GIC, Australia’s Future Fund, and New Zealand’s Superannuation Fund; others are less forthcoming. QIA, for example, has no legal obligation to make disclosures. Any public statements are entirely at the discretion of the fund’s board of directors.

Most funds exercise voting rights directly as shareholders for economic and financial reasons. Of these funds, the Future Fund, China Investment Corporation, NZ Super, the RDIF and APF each share publicly how they exercise shareholder rights. Abu Dhabi Investment Authority reports that it does not exercise voting rights unless it believes it must protect its financial interests or those of shareholders as a body. The State Oil Fund of Azerbaijan and Chile’s Pension Reserve Fund and Economic and Social Stabilization Fund indicate that they do not exercise shareholder rights or they take a neutral position. 

Some IFSWF members have also revealed their efforts at improving disclosure. For example, China Investment Corporation says it has hosted more than a thousand visitors at its Beijing headquarters as part of its commitment to the Santiago Principles.

Despite all that, Orr is on record as recently saying that sovereign funds are falling short on their commitments to high standards of governance. “We told the world that the Santiago Principles are a benchmark against which we can be measured,” Orr said in November at the annual IWSWF conference. “In my view, our progress on this front has not been fast enough.” 

He also recommended at the time that sovereign wealth funds should attempt to offer full transparency. "The results will also include more efficient access to opportunities, better performance by each member fund, and a stronger financial system overall.” 

The economic benefits from greater transparency are manifold, he added this week, with potential excess returns from investing early in the life cycle of assets, less conflict between asset owners and asset management, and the potential to leverage long investment horizons to exploit long term trends – such as resource sustainability – that may not be fully priced in markets influenced by shorter-term investors.

The submissions by the 29 sovereign funds can be accessed online by clicking here.

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