The Maharlika strategic investment fund: Starting with credibility through governance scorecards

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(Part 5)

“Make haste slowly.” — Gen-ichi Nakamura, professor of Strategic Management, Japan Productivity Council, 1988. This column is dedicated to the memory of Prof. Gen-ichi Nakamura, whose birthday was Jan. 1.

In line with the suggestions in Part 2 of this series on the  Maharlika strategic investment fund which came out on Nov. 9, 2023 (“Governance issues: Aligning with best practice”), the very first board meeting of the Maharlika Investment Corp. (MIC) on Jan. 3 created three key committees — the Investment Committee, the Governance and Ethics Committee and the Related Party Transactions Committee — that were not provided for in RA 11954 or its Implementing Rules and Regulations (IRR).

The creation of these three committees, together with the Audit and Risk Management committee, conveys serious intent to adhere to the principles of transparency, disclosure, and accountability. While the Compliance committee was not separately created, its functions can be performed by the Governance and Ethics committee.

This is “only the beginning.” Going forward, a more comprehensive approach should be guided by a governance scorecard using the framework of the 24 Santiago principles and the SWF scorecard by the Petersen Institute of International Economics (PIIE).

“First Habit: Begin with the end in mind.” — Stephen Covey, Seven Habits of Highly Effective People

The International Forum for Sovereign Wealth Funds (IFSWF) published in November 2014 the report “Santiago Principles: 15 Case Studies — How ISWF members Implement the Santiago Principles.”

The 15 countries were Australia (the Future Fund), Azerbaijan (the State Oil Fund), Botswana (the Pula Fund, from diamonds exports), Canada (the Alberta Heritage Savings Trust Fund), Chile (the Economic & Social Stabilization Fund), Iran (the National Development Fund of Iran), Korea (the Kora Investment Corp.), Kuwait (the Kuwait Investment Authority), New Zealand (the NZ Superannuation Fund), Norway (the Government Pension Fund-Global), Qatar (the Qatar Investment Authority), Singapore (GIC), Timor-Leste (the Petroleum Fund), Trinidad & Tobago (the Heritage & Stabilization Fund) and the US (the Alaska Permanent Fund).

The 24 Generally Accepted Principles and Practices (GAPP)

GAPP 1. The legal framework for the SWF should be sound and support its effective operation and the achievement of its stated objectives.

GAPP 1.1. The legal framework for the SWF should ensure legal soundness of the SWF and its transactions.

GAPP 1.2. The key features of the SWF’s legal basis and structure, as well as the legal relationship between the SWF and other state bodies, should be publicly disclosed.

GAPP 2. The policy purpose of the SWF should be clearly defined and publicly disclosed.

GAPP 3. Where the SWF’s activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with the domestic fiscal and monetary authorities, to ensure consistency with the overall macroeconomic policies.

GAPP 4. There should be clear and publicly disclosed policies, rules, procedures, or arrangements in relation to the SWF’s general approach to funding, withdrawal, and spending operations.

GAPP 4.1. The source of SWF funding should be publicly disclosed.

GAPP 4.2. The general approach to withdrawals from the SWF and spending on behalf of the government should be publicly disclosed.

GAPP 5. The relevant statistical data pertaining to the SWF should be reported on a timely basis to the owner, or as otherwise required, for inclusion where appropriate in macroeconomic data sets.

GAPP 6. The governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities to facilitate accountability and operational independence in the management of the SWF to pursue its objectives.

GAPP 7. The owner should set the objectives of the SWF, appoint the members of its governing bodies in accordance with clearly defined procedures, and exercise oversight over the SWF’s operations.

GAPP 8. The governing bodies should act in the best interests of the SWF and have a clear mandate and adequate authority and competency to carry out its functions.

GAPP 9. The operational management of the SWF should implement the SWF’s strategies in an independent manner and in accordance with clearly defined responsibilities.

GAPP 10. The accountability framework for the SWF’s operations should be clearly defined in the relevant legislation, charter, other constitutive documents, or management agreement.

GAPP 11. An annual report and accompanying financial statements on the SWF’s operations and performance should be prepared in a timely fashion and in accordance with recognized international or national accounting standards in a consistent manner.

GAPP 12. The SWF’s operations and financial statements should be audited annually in accordance with recognized international or national auditing standards in a consistent manner.

GAPP 13. Professional and ethical standards should be clearly defined and made known to the members of the SWF’s governing bodies, management, and staff.

GAPP 14. Dealing with third parties for the purpose of the SWF’s operational management should be based on economic and financial grounds and follow clear rules and procedures.

GAPP 15. SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate.

GAPP 16. The governance framework and objectives, as well as the manner in which the SWF’s management is operationally independent from the owner, should be publicly disclosed.

GAPP 17. Relevant financial information regarding the SWF should be publicly disclosed to demonstrate its economic and financial orientation, to contribute to stability in international financial markets and enhance trust in recipient countries.

GAPP 18. The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing bodies, and be based on sound portfolio management principles.

GAPP 18.1. The investment policy should guide the SWF’s financial risk exposures and the possible use of leverage.

GAPP 18.2. The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected, and their performance monitored.

GAPP 18.3. A description of the investment policy of the SWF should be publicly disclosed.

GAPP 19. The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy and based on economic and financial grounds.

GAPP 19.1. If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.

GAPP 19.2. The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.

GAPP 20. The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.

GAPP 21. SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value. If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments. The SWF should publicly disclose its general approach to voting securities of listed entities, including the key factors guiding its exercise of ownership rights.

GAPP 22. The SWF should have a framework that identifies, assesses, and manages the risks of its operations.

GAPP 22.1. The risk management framework should include reliable information and timely reporting systems, which should enable the adequate monitoring and management of relevant risks within acceptable parameters and levels, control and incentive mechanisms, codes of conduct, business continuity planning, and an independent audit function.

GAPP 22.2. The general approach to the SWF’s risk management framework should be publicly disclosed.

GAPP 23. The assets and investment performance (absolute and relative to benchmarks, if any) of the SWF should be measured and reported to the owner according to clearly defined principles or standards.

GAPP 24. A process of regular review of the implementation of the GAPP should be engaged in by or on behalf of the SWF.

The next column, Maharlika Part 6, will discuss the SWF governance scorecard of the Petersen Institute for International Economics.

Alexander C. Escucha is president of the Institute for Development and Econometric Analysis, Inc. (IDEA), and chairman of the UP Visayas Foundation, Inc. He is a fellow of the Foundation for Economic Freedom and a past president of the Philippine Economic Society. He wrote the handbook on the Overview of the Banking Industry for the Bankers Association of the Philippines’ 60th anniversary in 2014. He is an International Resource Director of The Asian Banker (Singapore).