Temptation and the Virtues of Long-Term Commitment: The Governance of Sovereign Wealth Fund Investment

Abstract:     
Abstract. Debate over the significance of sovereign wealth funds tends to emphasize the geopolitical consequences of their investments. By contrast, in this paper we look at the governance of sovereign wealth funds from the perspective of the competing political interests embedded in the sponsor-the domestic political claims on funds and the principles and practice of governance used to discipline those interests in favour of a long-term perspective that emphasizes the conservation of wealth and the intergenerational transfer of benefits. It is noted that there is an ever-present temptation that faces the nation-state sponsors of sovereign wealth funds: the option of spending the assets for current political advantage and legitimacy. These issues are explored through a case study of the Australian government's design of their Future Fund. The government faced squarely the question of political temptation and in response instituted a model of governance that could be thought to have 'tamed' politics. The paper focuses on the principles used to design the Future Fund and references recent research on best practice investment management. Whereas the Future Fund is thought by many to be just another pension fund in the guise of a sovereign institution it is shown that it has certain important characteristics that distinguish it from a conventional pension fund. The implications of an expanded definition of intergenerational equity are drawn for the notion of long-term investment.

Keywords: Governance, long-term investment decision-making, politics, temptation

JEL Classifications: F33, F59, G23

Working Paper Series