Back in 2007, SWFs found themselves under the intense glare of the international community, which was due in large part to some high-profile investments in Western financial services firms at the outset of the financial crisis (e.g. Citigroup) and the creation of some new, large SWFs (e.g. China Investment Corporation). And because few people knew much, if anything, about SWFs, this raised questions about their motives and operations and sparked the beginnings of protectionist rhetoric.
On cue, Edwin Truman of the Peterson Institute launched his now famous Scoreboard that ranked SWFs’ structure, governance, accountability, transparency and behavior. And, unfortunately for the funds, the results weren’t very flattering. In fact, that’s putting it mildly, as some of the biggest funds in the world, such as the GIC and ADIA, scored embarrassingly low (2.25 and 0.5, respectively, out of a possible 25).
Truman’s scoreboard seemingly catapulted him to the pulpit of what became a sort of ‘reform movement’ for SWFs. Indeed, facilitated by the IMF, the world’s biggest SWFs subsequently came together in the International Working Group of SWFs to consider how their operations could be improved to align them with international expectations. The outcome of these deliberations was the Santiago Principles, comprised of a series of (voluntary) principles and practices that amounted to a “best practice” mantra for SWF management, governance and design.
And now, he’s baaaack. And Truman’s new message isn’t going to comfort SWFs any more than his original one: he is apparently arguing that the Santiago Principles fall well short of international standards of best practice, as he defines them. At a recent conference on SWFs organized by Forrest Research (click here for an agenda and a link to Truman’s presentation), he said that a fund that achieves 100% compliance with the Santiago Principles (which, by the way, no fund has achieved) would represent only 76% compliance with his Scoreboard:
“This implies that full performance on the GAPP [Santiago Principles] would put an SWF near the top of the middle group on the SWF Scoreboard…The biggest weaknesses are with respect to accountability and associated transparency.”
But it’s not all bad; Truman seems to agree with a point that I made a few months back: the Santiago Principles may be weak and toothless, but they have actually been effective:
“…weak principles are more easily adopted, which is why we have seen so many SWFs attempt to become GAPP-compliant. In that sense, perhaps this was the right “starting point” for SWFs’ process of opening up; baby steps.”
I still believe that. And the increases in transparency at funds such as the GIC and ADIA seem to give further credence to this argument.
But, as Truman concludes, one of the big tests going forward will be whether the Santiago Principles can be improved and actually implemented. I agree that implementation is key here, and shouldn’t be too onerous. After all, we’re just asking the funds to implement the framework that they themselves came up with (remember that some of funds, such as Iran’s, are 0% compliant with the Principles…seriously). Why is this important, you ask? Why are the SWFs being singled out? I don’t have an easy answer to that. All I know is that the Santiago Principles were designed to guard against financial protectionism, and I think many would agree that open investing is in everyone’s interest.