Sovereign Wealth Funds and the Santiago Principles: The ACG View

Picture of gold bullion representing the ACG article on Sovereign Wealth Funds and the Santiago Principles

In recent years the Sovereign Wealth Funds (SWFs) have started to make waves in Corporate Governance. In our regular look at governance in a range of sectors and regions, we examine SWFs and assess their governance code, the Santiago Principles, against our own Golden Rules.


Most recently the huge national fund of Norway has been taking a more active position in the governance of the major companies in which it has invested, as we discussed in our recent article about current influences on corporate governance. Furthermore, not very long ago, it was reported as considering withdrawing from investments in fossil fuels – a very significant political step.

SWFs are also becoming more and more influential in infrastructure investment, this being deemed to be a suitable type of investment for funds like them which wish to take a long term view. This, however, is entering the political scene in a big way, with a long-term engagement with the countries in which the infrastructure is being renewed or created.

Who are these huge players? 

The Sovereign Wealth Fund Institute (SWFI) lists its Sovereign Wealth Fund rankings at www.swfinstitute.org/sovereign-wealth-fund-rankings/. There are fourteen with assets of over $100 billion, totalling over $6 trillion, of which the largest five, representing  more than half, are Norway Government Pension Fund Global $847bn, UAE Abu Dhabi Investment Authority $792bn, China Investment Corporation $746bn, Saudi Arabia SAMA Foreign Holdings $598bn and Kuwait Investment Authority $592bn. The total of approximately eighty SWFs amounts to over £7tn according to SWFI’s latest estimates.

What exactly are SWFs? In 2008, the International Working Group of Sovereign Wealth Funds in its Generally Accepted Principles and Practices (the so-called Santiago Principles) of which more later, defined them as follows:

SWFs are defined as special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.

The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.

It thus excludes foreign currency assets held by central banks, assets of state enterprises and those of pension funds and individuals.

These SWFs can be categorized into savings funds, such as Norway’s, aiming at building a fund for the country when the oil runs out, stabilisation funds to top up government revenues against volatility in commodity prices, or even war chests such as Kuwait’s during the Gulf War. Singapore’s Temasek is seen as a statement of Singapore’s importance as a local financial centre.

Are Sovereign Wealth Funds and their governance a growing worry?

The market operations of these big funds, and their investment in and even acquisition of major companies, have created political waves in the countries concerned. Particular worries have been about national security, with concern over foreign governments taking a stake in organisations perceived as being of national importance, and in some cases the lack of transparency regarding the SWF making the investment. So do we need to start thinking more seriously about the corporate governance of these giant funds?

In 2015, the Swedish establishment was greatly embarrassed by a scandal which broke in the major industrial holding company, Industrivärden, in which its chief executive and chairman were accused of making liberal use of the private jet of one of its investee companies, paper-maker SCA, for the benefit of their families. Norges Bank Investment Management (NBIM), which managed the Norwegian SWF’s investments, had apparently approved the appointment of Andres Nirén, CEO of Industrivarden, to its board at a time when Mr Nirén was being challenged regarding his use of the SCA jets (he was fired shortly afterwards). NBIM was criticised for the fact that NBIM’s chief executive was on the nomination committee that approved the appointment, and the CEO of Sweden’s shareholder association was quoted as saying that they were not paying attention and needed to become a lot more professional. It was also noted unfavourably that NBIM didn’t attend the subsequent AGM. A former director general of Norway’s asset management department was quoted as excusing them on the basis that they couldn’t address every issue with equal vigour in all nine thousand odd companies in which they invested. Readers might refer to the ACG views on this subject expressed in our article on stewardship!

Then, what about 1MDB? The Malaysian state development fund (admittedly not an SWF but not too far removed) has been under a cloud for many months following questions over the payment of $681m into the personal account of the chair of the advisory board, who also happened to be the prime minister and where the articles of the constitution required the prime minister’s written approval for decisions including investments and appointments to the board of directors. A recent article in the FT, in reprising these matters, announced the dismantling of the advisory board and removal of the offending article, but meanwhile the Abu Dhabi SWF has cut its ties with 1MDB and the Swiss regulators have launched a criminal probe into BSI, the Swiss bank, over alleged money laundering failings in relation to 1MDB. US investment bank Goldman Sachs’  former top business getter in Asia has subsequently left the bank as Goldman Sachs takes steps to distance itself from what was previously an important client.

SWFs’ own Corporate Governance Code

So what have the SWFs done about their own corporate governance? Well, in 2008, under the auspices of the International Monetary Fund, an international working group was set up by the SWFs to set out some general principles of good corporate governance. Their conclusions were set out in a report entitled Sovereign Wealth Funds, Generally Accepted Principles and Practices, “Santiago Principles”. So it would seem appropriate to look at the SWFs’ own code and how the SWFs’ compliance is monitored, and then to consider how that code compares with our own ACG holistic approach to corporate governance.

The Santiago Principles can be read in the 59 page report of the working group, where it sets out the Generally Accepted Principles and Practices, but summarising the 24 principles here, they lay down some important guidelines:

  • a sound legal framework with a clear governance framework.
  • the policy purpose and approach to funding and investment to be publicly disclosed
  • statistical and financial data and investment performance to be regularly reported according to recognised international standards
  • operational management to be independent and legally accountable
  • the SWF to be compliant with local laws and regulation
  • asset management to be conducted in accordance with good portfolio practice, aiming at maximising return unless otherwise disclosed and risk policies to be published
  • ownership rights to be exercised to promote financial performance and not to compete unfairly with the private sector
  • compliance with this code to be regularly checked by the SWFs.

Reviewers of SWF performance include the International Forum of Sovereign Wealth Funds, which publishes research and holds an annual gathering of SWFs in different countries round the world, the most recent being in Milan in Italy. And SWFI, which issues an assessment of the transparency of the SWFs, the Linaburg-Maduell Transparency Index, created by the founders of SWFI, which assesses SWFs according to ten principles of transparency.

Golden RulesSantiago Principles and the ACG Five Golden Rules

How do the Santiago Principles compare with our ACG Five Golden Rules of Good Corporate Governance and how effective is the monitoring of compliance compared with our own monitoring process?

As regular readers will know, we at Applied Corporate Governance define corporate governance holistically and our holistic definition comprises five elements to good governance:

  • an ethical approach which is in tune with the societies and cultures in which a company operates
  • balanced objectives which fulfil the goals of all the key stakeholders
  • strategic management rather than opportunism or clientilism driving the policy and decision-making process approach
  • an organisation structured and resourced to deliver the strategic plan
  • a culture of accountability and transparency to all stakeholders.

In implementing a system to deliver good corporate governance and a steadily improving performance, three key elements are:

  • taking proper account of the interests of the key stakeholders
  • defining measurable metrics which provide the basis for management of the key factors
  • using external independent surveys to avoid organisational capture.

If any of the key stakeholders is ignored or disadvantaged, and/or if there are no measurable metrics by which to judge performance, there can be no guarantee of good corporate governance. Indeed, we would say that one can almost guarantee less than satisfactory governance.

So how do the Santiago Principles match up to the ACG standards?
  1. The ethical dimension is hinted at, but not specifically emphasised
  2. A common goal is hardly considered, but rather addressed as an exhortation not to behave unfairly or improperly to other parties which might be affected
  3. Strategic management is suggested in stressing the need for proper policies, though that doesn’t necessarily lead to practical strategic management to achieve the policy ends
  4. A suitable organisation is certainly implied by a number of the principles, for instance in talking about the constitution and the need for a governance framework, though not a holistic one as we would demand, and requiring operational management to be professional and independent
  5. Accountability and transparency are certainly addressed, though primarily to the owners of the SWF

Finally, what about measurable metrics and an independently conducted review of performance? There doesn’t appear to be much beyond an exhortation to the SWF to review performance and report back to itself.

Santiago Principles fall well short of the ACG Golden Rules

Our assessment therefore is that the Santiago Principles are deficient in the following ways:

  • they lay almost no emphasis on the fundamental need for an ethical culture, or even mentioning such concepts as corporate social responsibility
  • the goal is formulated almost entirely around delivering financial performance for the fund’s owners, with no reference to fulfilling the objectives of the recipient of the investment
  • the mention of the need for declared policies, while understandable, falls well short of a requirement for a strategic management process
  • accountability and transparency appear to be limited to the owners and to the statutory and regulatory authorities
  • there are no defined metrics for assessing holistically the corporate governance of the SWF
  • there is no mention of an independent assessment of the SWF’s performance, or reporting of this performance to anyone other than the management of the SWF itself.

Hence we would have to say that, worthy though the Santiago Principles are, they are a very low hurdle for SWFs to surmount and fall well short of our holistic view of measures of good corporate governance. Moreover, we would heavily criticise the absence of measurable metrics, without which performance cannot be significantly or consistently improved.

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