I’ve had quite a few people over the last month or so ask me to explain and describe the Santiago Principles, formally known as the Generally Accepted Principles and Practices (GAPP) for Sovereign Wealth Funds.
(For the uninitiated, the GAPP was developed by the International Working Group of SWFs and is now advanced by its successor, the International Forum of SWFs. The rationale underpinning GAPP, which was unveiled in 2008, was to ensure the domestic and international legitimacy of sovereign funds by asking them to adopt western notions of accountability and transparency.)
Anyway, why have I been seeing an uptick in people’s interest in GAPP? Here are some ideas:
-Perhaps it’s due to the fact that there’s an entire cohort of new SWFs that are being set up and are now interested in adopting this international standard?
-Perhaps it’s due to the fact that many people are now focusing their attention on the challenges associated with investors implementing a long-term investment strategy, and they are worried about the effect that the GAPP is having on SWFs’ abilities to remain long term? (I would point out that they are right to worry about this.)
-Perhaps it’s the fact that there has been a renewed interest in the behavior of state-owned enterprises and sovereign fund investment activity around the world? For example, Canada has recently struggled with the issue of China’s inward investments.
-Perhaps it’s due to the fact that pension funds in the United States have taken to arguing that there are good commercial reasons NOT to be totally transparent? (Note: Much of the GAPP is about pushing transparency on SWFs, so to see Western pension funds arguing for non-transparency is a bit... ironic.) For example, check out this blurb from a WSJ piece today: “In Utah, the state retirement system has kept its meetings and many of its money managers private without much controversy for decades. Part of that may be explained by the fund’s solid investment performance and healthy funding level... Many hedge funds agreed to do business with Utah partly because the pension was exempt from disclosures... In some cases, the exemption has allowed the pension to gain access to detailed information about the hedge funds’ investment positions, helping Mr. Newman and others assess risks.”
Whatever the reason, it’s fair to say that there’s a confluence of factors that seem to be bringing the SPs back onto the radar screens of my colleagues. So, for the sake of the readers of this blog who are interested in getting a good sense for GAPP, I’ve taken the liberty of rewriting all 24 Principles and Practices in under 150 words. Think of this as the GAPP Cliffs Notes; I hope it helps to explain what the SPs are all about.
Eithout further ado, here’s what the Santiago Principles say SWFs need to have:
1) A sound legal framework. 2) A well-defined mission. 3) Domestic activities coordinated with fiscal and monetary authorities. 4) Clearly defined rules for drawdowns. 5) Transparency to the owner. 6) Clear division of roles. 7) Governing bodies appointed in a predetermined manner. 8) Governing bodies that act in the best interest of the SWF. 9) Independence. 10) Formal definition of accountability. 11) Annual reporting. 12) Independent auditor. 13) Ethics and professionalism. 14) Rules-based outsourcing. 15) Ability to abide by rules of foreign countries. 16) More independence. 17) Some public transparency. 18) Clear investment policies. 19) Commercially orientation. 20) Restrictions against using insider information. 21) Policies for using shareholder rights. 22) Effective risk management. 23) Proper reporting of performance. 24) And frequent reviews of compliance with these principles.
And that’s really it. The over-arching message here is quite simple: Be transparent, accountable, independent and commercially oriented. As you can see, it is really quite high level, which is, I guess, my beef with the SPs (yes, I do generally have a few problems with GAPP). I’m not convinced that GAPP actually offers a practical roadmap for SWFs looking to develop world-class operations. Instead, the SPs seem to be about asking SWFs to demonstrate to the West that they are not “baddies out to get classified information or grab natural resources”. And, as a result of this focus on national security, I think an opportunity was missed to really help these organizations (and potentially help finance generally). But that’s just one man’s view... (If you’re interested in learning more about this view, however, you can read this paper I did with Adam Dixon that looks at how the SPs could be improved :)
