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Sovereign Funds Agree to Voluntary PrinciplesSubmitted by: Subodh Mishra, Governance Institute

Members of the International Working Group of Sovereign Wealth Funds agreed in early September to a voluntary set of principles to guide their governance, accountability, and investment practices. The principles are currently being debated by the funds? home governments, and will be publicly disclosed at an International Monetary and Financial Committee meeting in Washington on Oct. 11.

?These principles and practices will promote a clearer understanding of the institutional framework, governance, and investment operations of [sovereign funds], thereby fostering trust and confidence in the international financial system,? said working group co-chairs Hamad al Suwaidi, undersecretary of the Abu Dhabi Department of Finance and a director of the Abu Dhabi Investment Authority, and Jaime Caruana, counselor and director of the International Monetary Fund?s Monetary and Capital Markets Department.

Roughly two dozen nations comprise the working group, dubbed the IWG, including several that operate sizeable sovereign funds (SWFs) such as Australia, Singapore, Russia, China, Norway, and Qatar. By most estimates, SWFs now collectively manage $2-3 trillion in assets, while some analysts project those holdings will grow to between $10 and $15 trillion by 2015. Growth will depend on commodity prices and exchange rates, however, given that most SWF wealth is derived from oil and natural gas sales and export-account surpluses.

Sovereign funds have received widespread media coverage for taking stakes in Merrill Lynch, Citigroup, and other distressed financial institutions in the U.S. and Europe. Some regulators, politicians, and financial market participants have debated the wisdom of allowing for SWF investment in the absence of robust transparency and disclosure regarding the funds? investment motives.

To address these concerns, the Group of Seven finance ministers last October called on the IMF to develop a code of conduct to address SWF transparency, governance, and disclosure. The Organization for Economic Cooperation and Development is developing best practices guidance for countries receiving SWF investment. Some countries, meanwhile, are also proposing limits on investment that could ward off sovereign investors. The German government last month proposed legislation to bar foreign entities from purchasing large stakes in key domestic companies. The law would apply to investments of 25 percent or more by buyers outside the European Union or European Free Trade Association. The law, which still requires approval by parliament, would allow the government ?to intervene within three months of the deal being made, but only if it was thought to pose a security threat,? BBC News reported.

The specter of such a law has not deterred some companies from seeking out sovereign funds in bid to shore-up their long-term investor base, however. German industrial conglomerate Siemens is now in talks with Russian and Gulf-based funds, according to press reports.

We ?would very much welcome an active involvement? by sovereign funds, Joe Kaeser, Siemens' chief financial officer, told the Financial Times. ?We are very open to anyone who would want to join us as an investor??

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on September 11, 2008 (boomark / email).