Transparency A Threat to Legitimacy?

Ashby Monk

About a year ago I had a long discussion with a former employee of an OECD SWF. This individual made a fascinating observation: their transparency and accountability came with a financial cost. In order to secure the acceptance of domestic constituencies, this specific SWF had been less aggressive in its early years than it might have been. In other words, it took time to secure the acceptance of the domestic stakeholders (i.e. achieve legitimacy***) before it could foray into investing in more risky assets.

So it is interesting to note that as formerly secretive SWFs become more transparent, they too are coming to see how hard it can be to secure the acceptance of domestic constituencies. Recent losses have made this process more difficult. Moreover, according to some analysts, losing domestic support may actually prevent SWFs from investing for the long-term and focus more on the short-term, which would remove a SWF comparative advantage over other institutional investors. In other words, as with my interviewee above, these funds are beginning to understand the cost of transparency.

But here is my question: what is the alternative? Hiding away behind a veil of secrecy to avoid public scrutiny is not, in my view, appealing. To be sure, Alaska’s recent experience with its reorganization may have been difficult, but I’m sure Alaskans are comforted that their representatives are holding the SWF accountable for its decisions. And while being more transparent may be difficult for funds such as the GIC, I wonder if it would be having an easier time in the present crisis if it had a more transparent past. The financial crisis perhaps reminds us that securing the consent of domestic constituencies can actually offer some cover in down times.

So I don’t view the increasing levels of transparency as a threat to legitimacy. I take the opposite view; transparency may solidify the legitimacy of SWFs over the long term, albeit it with some short- and medium-term costs (that are worth paying).

***Dowling and Pfeffer (1975) described legitimacy as the acceptance of an organization by its environment. As Massey (2001, 157) notes, “An illegitimate status demands that the organization respond, or else organizational failure could result.” In this sense, legitimacy is a constraint. Specifically, being legitimate means that the organizational procedures, structures and principles align with the values, norms and expectations of the society in the environment in which the organization seeks legitimacy. In situations where the organization is highly transparent, there is considerable pressure to get this right.

5 Responses to “Transparency A Threat to Legitimacy?”


  1. 1 rien huizer August 21, 2009 at 4:13 pm

    There is no general reason why secrecy should produce better returns. Someone should educate the public that a certain investment activity is in the public interest (which may be hard) and that explanation should also set the main boundaries for the acticvity. There are many ways to do this but what your spokesman of the OECD fund would like is an opportunity to cheat for a while..

  2. 2 Ashby Monk August 26, 2009 at 2:01 pm

    Yes. This is a situation where short term gains don’t necessarily ensure long-term survival. Cheers.


  1. 1 Transparency Necessitates Communication « Oxford SWF Project Trackback on September 15, 2009 at 3:03 pm
  2. 2 Temasek Launches Seatown « Oxford SWF Project Trackback on February 10, 2010 at 4:06 pm
  3. 3 El-Erian Seriously Gets ‘It’ « Oxford SWF Project Trackback on June 17, 2010 at 12:33 pm

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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