SWFs in Search of Legitimacy

Ashby Monk

I think it’s intriguing to watch new organizations vie for legitimacy. It’s something they all have to do; Freeman et al. called this phenomenon the “liability of newness” back in 1983, and I think they were right on. As Greenwood and Suddaby explained in 2006, a contestation over legitimacy is a clue that a new organizational form is emerging. In this regard, I think it’s safe to say that SWFs represent a new organizational form. Over the past three years, we have seen SWFs face off against crises of legitimacy both at home and abroad, as the world community has had to come to grips with the dramatic rise of this new organization.

However, it’s crucial that organizations achieve legitimacy; without it an organization simply can’t be sustained. As such, in order to achieve legitimacy SWFs have done a lot of “institutional work”, improving their governance and transparency while justifying their activities to both domestic and international constituencies.

Significantly, there is an interesting legitimacy strategy that a small cohort of these funds has decided to try, and that is “dis-association”. By that I mean that some SWFs are simply claiming that they are not SWFs at all, and thus should not be treated as such. I’m referring specifically to Mubadala and Temasek. For those of us who have adopted a broad definition of SWFs, Mubadala and Temasek are SWFs. But that’s not what these two funds are now saying publicly:

According to Mubadala’s website:

“Although we receive funding from the Government, we are not a Sovereign Wealth Fund. Rather, we are a business builder. We harness expertise and resources – including partnerships with international best-in-class companies – to generate sustainable financial returns and build businesses, clusters of expertise and new industries.”

Also, the WSJ reported late last year:

“Despite the government being its sole shareholder, Temasek doesn’t consider itself to be a sovereign-wealth fund. Temasek officials insist its goals are primarily financial rather than to support Singapore government policy, although Singaporean companies make up a substantial portion of its portfolio.”

I obviously disagree with the quotes above, as I think each fund is a SWF. In both cases, the government is the sole shareholder. The government sets the mandate for the investment fund. Both hold domestic and international assets. While both use leverage, it is not out of necessity; it is to “juice” returns and ensure that the funds maintain a commercial focus. Moreover, Temasek was an active participant in the IWG of SWFs. And Moody’s describes Mubadala as “one of a group of government-owned entities whose primary task is to manage Abu Dhabi’s substantial hydrocarbon wealth.”

So what’s going on? In my view, these SWFs are going through an identity crisis. Why? They have come to see the SWF moniker as imparting a negative connotation that jeopardizes their legitimacy. As such, they are attempting to dis-associate themselves from SWFs on the grounds that they have higher than average levels of transparency, accountability, governance and operate exclusively on commercial principles. In other words, they think SWFs are bad and since they are good, they are not SWFs. This is an error.

SWFs are government-owned and controlled (directly or indirectly) investment funds that invest according to the interests and objectives of the sponsoring government. Nowhere in this definition is there a statement about governance or transparency. The term SWF should not in and of itself mean that a fund is not transparent, accountable, or well-governed. If it did, it would imply that as SWFs improved these characteristics, they would ‘graduate’ from being a SWF and become something else altogether. That doesn’t seem right to me. Consider a different type of financial institution: are central banks with perfect governance practices and those with deficient governance practices all still central banks? The obvious answer is yes; the same principle should hold for SWFs.

In attempting to achieve legitimacy through dis-association, these SWFs perpetuate the misconception that all ‘sovereign wealth funds’ operate at sub-standard levels. In my view, Mubadala and Temasek would better serve the SWF community and themselves if they simply accepted what they are and continued to operate according to their high standards of transparency and governance. If they want to achieve international legitimacy, they should be championing the SWF movement…not attempting to leave it.

4 Responses to “SWFs in Search of Legitimacy”


  1. 1 rien huizer February 17, 2010 at 2:01 pm

    Ashby,

    When is a government entity involved in private sector activity (business or portfolio investment) a fund or a business. I would think that neither “fund” mentioned here are pure portfolio investments. They are conglomerates. They are intereseted in the businesses they own, will intervene in appointments,

  2. 2 rien huizer February 17, 2010 at 2:02 pm

    Something went wrong here, apart from the typos..

    And they will fix a business before they abandon or sell. Much too much emotional ownership for a fund.

  3. 3 Ashby Monk February 17, 2010 at 2:29 pm

    I take your point, Rien. But both do have some portfolio investments. While Mubadala has fewer than Temasek, Mubadala hasn’t been around as long as Temasek. I accept that these funds are far more engaged in the businesses they own, but to me that just makes them a different category of SWF, not something altogether different. Ultimately, they are both investing the country’s wealth in a diversified group of strategic and portfolio investments. I just so happens that some of these investments are wholly owned, subsidiaries.


  1. 1 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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