The SWF Conundrum

Ashby Monk

SWFs are state-owned and state-controlled entities operating in the era of state capitalism. And yet, they have expended considerable effort trying to convince the world that they act just like private firms when they go abroad – that they focus on profits and returns and don’t engage in politically motivated investing. It’s for this reason that Anna Gelpern of the Washington College of Law at American University argues that SWFs present a formidable governance conundrum:

“Reading between the lines of SWF definitions and commentary reveals a jumble of contradictions: public money that pledges to act private, vast pools of capital that promise not to move markets, non-controlling investors that manage centrally controlled economies; and public fiduciaries that balk at corporate governance of their investment targets.”

She’s right. It’s the reason I’ve been so interested in studying SWFs; they sit at the intersection of so many different political and economic forces. And if you’re like me, then you’ll definitely want to read Anna’s latest paper entitled, “Sovereignty, Accountability, and the Wealth Fund Governance Conundrum,” as she teases out some fascinating truths about these remarkable funds:

“SWFs are public and private at the same time; as such, they do not fit into neat legal and regulatory boxes. Even when they act commercially, SWFs are sovereign—profit will drive them, until it does not. States may not respond to regulatory incentives as private actors do; yet they are often subject to the same laws. SWFs have separate information and communication channels to regulators, raising the possibility of both insider trading and regulatory capture. Their decision-making may be insulated from politics and markets alike, or exposed to both. More daunting yet, each state is different: Brazil, China, Norway, Qatar and the United States mix public and private in different ways. When their hybrids go global, they expose distinct tensions in the law and structure of global finance.”

In the end, she explains how SWFs face what she calls a ‘a four-fold challenge’:

“…they are accountable to constituencies at home and abroad; to the public at large, and to a narrower set of stakeholders defined by their organizational form and business practices.”

In short, these diverse accountability structures are what makes governing these funds such a conundrum. And, in my opinion, it’s also what makes them so fascinating. Get the paper here.

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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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