Policy Seminar on Sovereign Wealth Funds

Monday, May 5, 2008
George Shultz Conference Room, Herbert Hoover Memorial Building

PARTICIPANTS

Ted Truman (IIE), Adnan Mazarei (IMF), Anne Sheehan (CalPERS), Jim Hoagland, (Washington Post), George Shultz, John Taylor, John Cogan, Joe Grundfest, Michael Boskin, John Ciorciari, and Matt Gunn.

KEY ISSUES DISCUSSED

  • Background on Sovereign Wealth Funds (“SWFs”) – Ted Truman began by providing some background on SWFs. He noted that SWFs, including pension and non-pension funds, now hold roughly $3.5 trillion in foreign assets. He outlined key concerns associated with SWFs, such as the possibility of asset mismanagement, investment for non-economic objectives, protectionist backlash, or market instability. He argued that these concerns are largely prospective in nature. The group discussed the potential for SWFs to influence market stability and to serve as instruments in broader foreign policy negotiations.

  • Scoring SWF Behavior – Truman then proceeded to explain his system for scoring SWFs on for axes: structure, governance, accountability & transparency, and behavior. He argued that accountability is the key to “making the world safe for SWFs” and noted that many funds have considerable room for improvement. Elaborating on that theme, participants discussed how the notion of fiduciary duty might apply to SWFs as investors of state assets.

  • Concerns of SWFs – Adnan Mazarei then described some of the concerns that SWF officials have expressed in their discussions with the IMF. He explained that SWF officials have diverse views, but most are comfortable with principles of transparent governance and with reasonable limitations on their rights to invest. For example, most view certain national security restrictions as acceptable. SWF officials are generally more concerned by calls for disclosure of their assets and operating strategies. Many fear that disclosing their size will disadvantage them in financial negotiations and that regular disclosure of their operations will expose them to unwanted political pressures. Many SWF officials also believe they have been stabilizing forces in the global economy and resent recent efforts by some Western governments to promote best practices. The group discussed the evidence to date and the importance of depoliticizing the issue.

  • Possible Policy Approaches – The group concluded by focusing on possible policy approaches to SWFs. Participants noted that some of the concerns about SWF activities could be mitigated through contractual arrangements, such as voluntary agreements by SWFs to exercise their voting rights in particular ways. Legal and regulatory restrictions are also a possibility. However, participants raised a number of challenges to implementing effective corporate laws and considered some of the undesired consequences that could result from poorly tailored restrictions on SWF activity. In conclusion, the group discussed the importance of devising practical solutions that build trust and promote sound practices while markets and governments adjust to the increasing importance of SWFs.

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