What Responsibilities Do Sovereign Funds Have to Other Investors?

Abstract

With trillions of dollars in assets, sovereign wealth funds (SWFs) play a major role in financial markets around the world. With billions (and probably well over a trillion) dollars’ worth of equity investments around the world, the investment behavior of SWFs is of primary concern to regulators, portfolio firms and other investors. The routinely cited perils of sovereign investment, such as politicization, corporate espionage, and mercantilism, are typically seen as emanating from equity investments by SWFs. On the other hand, SWFs offer the promise of patient, sustainable investment by engaged stewards who take a long view of the impact of their investments. This essay, prepared for a Wake Forest Law Review symposium on sovereign wealth funds, seeks to provide a realistic appraisal of the benefits and potential costs of SWF investment for other investors. Most work on SWF investment has focused on the challenges that SWFs present to regulators, portfolio companies or their own domestic constituencies. Although a few studies have examined SWF investment price impacts, SWF analyses have tended to ignore the effect of SWF investment on other investors. What, if anything, do SWFs owe to other investors? The essay calls for sovereign investors to recognize the special responsibilities they have to co-investors. While these responsibilities may not constitute actionable fiduciary duties, SWFs should embrace a model of transparent, engaged ownership that will benefit their co-investors and their common portfolio companies. The essay first outlines the concept of fiduciary duties generally, and describes the way that such duties (or their civil law equivalents) impact SWF governance. The next section addresses the complex question of the object of SWF duties. The sponsor government, at least, has claim to these duties, but what of other impacted constituencies, such as citizens? The essay then turns to the issue of investor obligations, and notes that while investors typically do not owe one another fiduciary duties, they can mutually benefit by minimizing costs for one another as they adhere to basic principles of transparency and predictable investment behavior. The essay then evaluates the ability of the Santiago Principles to encourage this kind of transparency and predictability through a review of recently completed SWF self-assessments of compliance with the Santiago Principles.