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Sovereign investors and markets



Global Public Investors (GPIs) have a total $30tn under management, amounting to 40% of world GDP. They have the potential to use their influence as shareholders to make a difference to the quality and performance of companies in which they invest. This could have wider repercussions on the monetary system, by integrating sovereign investors from emerging market economies more closely with international capital markets and allowing them to function as shock-absorbers in times of stress.

Some large-scale public sector investors such as Norges Bank Investment Management (NBIM), the Australian Future Fund and California Public Employees’ Retirement System (Calpers) have made well-publicised efforts to set more formal rules and procedures for their interactions with investee companies. Yet such episodes remain exceptional writes Liisa Vainio.

Relatively little is known about the decision-making processes on corporate governance structures of other large public funds especially from the Middle East and Asia – apart from the fact that many of these entities are somewhat shy about disclosing their views in public. However, the financial crisis and increased public scrutiny of global heavyweight companies have brought changes to the governance behaviour of many private sector investors, so it is expected that this would have repercussions on GPIs too. Many sovereign funds are increasingly benchmarking themselves against North American municipal and state fund managers which often have clear corporate governance guidelines.

As demarcation lines become blurred in many cases among different categories of public investors, there will be pressure from both the investor and investee sides for GPIs as a group to tighten up and make more transparent their corporate governance procedures. This applies both to more simple structural questions relating to companies in which they invest, for example, over separating the positions of chairman and chief executive, and to more complex issues of performance, planning and strategy.

As an example, the Swiss National Bank, now ranked 10th among GPIs according to assets under management, with large equity holdings of $70bn to $80bn in companies around the world, is investigating how it can best fulfil corporate governance guidelines to maintain standards as a responsible investor able to use wisely its undoubted shareholder power.

GPIs which have become trailblazers in this field remain a small minority, but the numbers taking these initiatives seriously can be expected to increase. Proactive corporate governance guidelines have the ability to produce higher quality performance in investee companies, improve staff retention, add to purposeful strategic direction and increase overall returns for investors. These benefits should give ample incentive for public investors worldwide to heighten their interest in applying best-practice corporate governance principles, turning to advantage these investors’ growing influence.

A good starting point is the Santiago principles consisting of the 24 Generally Accepted Principles and Practices (GAPP) aimed at improving transparency, governance structures and accountability for the world’s biggest sovereign funds. It is in these institutions’ own interest to invest in appropriate governance structures, both for themselves and for investee companies. This is a long-term trend where institutions which help set appropriate international standards can reap lasting advantages.

■ Liisa Vainio is Head of Projects.