“A journey of a thousand miles begins with a single step.” — Lao Tzu
My previous column (https://tinyurl.com/2xbm8mtk) detailed the 24 Santiago principles, or, more specifically, the generally accepted principles and practices (GAPP), to which 15 sovereign funds have signed to commit to such principles and reported the progress of their implementation in a 2014 report.
With the theme of “Reflecting on 15 Years of the Santiago Principles,” the International Forum for Sovereign Wealth Funds (IFSWF) conference 2023 in Madrid affirmed the need to continue and strengthen adherence to the principles, and is worth repeating here:
• Sovereign wealth funds are becoming increasingly professional organizations, competing effectively alongside private-sector counterparts on world markets.
• Markets will always be skeptical about the presence of state capital. Hence, in the current geopolitical environment, there is greater scrutiny of the governance of sovereign wealth funds and the professionalism of their investment teams.
• Sovereign wealth funds have written and adopted the Santiago Principles to ensure their capacity as global investors. The consistency of this implementation is what provides certainty for third parties and has enabled the Principles to enter the realms of so-called soft law.
• Good governance is a work in progress, and a culture of good governance has to be built. The Santiago Principles are a compass to guide our members … improve their governance processes and disclosure.
As recommended in the previous column, a more comprehensive approach should be guided by a governance scorecard that incorporates both the Santiago principles and the scorecard for sovereign funds by The Peterson Institute for International Economics (PIIE).
This column continues with a more detailed discussion of the PIIE scorecard.
THE PIIE SCORECARDThe initial PIIE scorecard was part of the PIIE Policy Brief by Allie Bagnall and Edwin Truman (“Progress on Sovereign Wealth Transparency: An Updated SWF Scoreboard,” August 2013). Starting from a scorecard first developed by Truman in 2007 and subsequently refined, it also reflects the works of other scholars on SWF governance such as Sarah Stone and Edwin Truman (“Uneven Progress on Sovereign Wealth Fund Transparency and Accountability,” 2016), and Diego Lopez (“Governance, Sustainability & Resilience Scoreboard for Sovereign Wealth Funds and Public Pension Funds,” 2020).
The PIIE scorecard is an improvement over the Lindburg-Maduell Transparency Index for SWFs associated with the Sovereign Wealth Fund Institute. It has also been assessed as strongly correlated, with a “high level of significance,” with similar indexes such as the Revenue Watch Institute’s Resource Governance Index and Transparency International’s 2012 Corruption Perceptions Index.
The Peterson scorecard has 33 indicators in four categories: structure, governance, transparency and accountability, and behavior.
Structure. The structure category contains eight elements that describe the legal basis of the fund and how it is funded and used: Objective stated, Legal framework described, Clear procedure for changing the fund’s structure, Investment strategy described, Source of funding stated, Use of fund earnings stated, SWF operations Integrated with other government policies, and, SWF resources separated from international reserves
Governance. The governance category contains seven elements that describe how the fund operates: Role for government defined, Role for governing body defined, Role for managers defined, Investment decisions made by managers, Internal ethical standards specified, Guidelines for corporate responsibility established, and, Guidelines for ethical investment stated.
Transparency and accountability. The transparency and accountability category groups 14 elements covering the fund’s presentation of information to the public: Discloses investment categories, Discloses use of benchmarks, Discloses use of credit ratings, Discloses holders of mandates, Discloses size of fund, Discloses returns on investments, Discloses location of investments, Discloses specific investments, Discloses currency composition of investments, Publishes annual reports, Publishes quarterly reports, Conducts regular audits, Publishes audits, and, Conducts independent audits.
Behavior. The behavior category contains four operational elements: Reports risk management policies, Reports policy on use of leverage, Reports policy on use of derivatives, Discloses policy on adjusting portfolio.
SCORECARD HISTORYThe first PIEE scorecards in 2009 covered only 18 countries (Norway was not yet covered). The 2012 scorecard covered 49 SWFs — with Norway scoring highest at 98 — and nine pension funds — with the California Public Employees Retirement Systems (CALPERS) scoring highest at 95.
The 2019 scorecard covered 64 funds with an average score of 66. Not surprisingly, the Norwegian Pension Fund-Global scored a perfect 100, followed by New Zealand Superannuation Fund, and the Wyoming Mineral Trust Fund. Notably, developing countries with excellent scores include Chile (92), Azerbaijan (the Azerbaijan State Oil Fund, 92) and newcomer Timor-Leste (91).
DESIRED RESULTSThe gold standard for the Peterson scorecard is, of course, Norway. As demonstrated by Azerbaijan, Chile, and Timor-Leste, a very high score is achievable. A score in the mid-70s would be a good target for the Maharlika Fund, at par or better than the Asian funds existing for at least a decade.
RECAPA consolidated matrix of the Peterson scorecard and the Santiago principles combines the best of both and covers the missing parts in each. A gap analysis should then drive the formulation of the board policies, committee charters, governance manuals, operating procedures, etc. to address the gaps between the desired parameters and the starting point.
The Maharlika Fund will not be starting from scratch, as it can draw upon the various issuances by the GCG, also known as the Governance Commission for Government-owned and/or -controlled corporations (GOCCs). Since its creation by RA 10149 (the GOCC Act of 2011), the GCG has already produced substantive guides for GOCCs, such a Governance Manual (2012), a Governance Scorecard (2015), Guidelines on Integrated Reporting System (2014) and a Performance Evaluation System (2023).
In addition, the “tuition fee” already paid by the dozens of sovereign funds established much earlier means we can apply the lessons from their experience and mistakes, translating to a steeper learning curve.
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).