Sovereign Wealth Funds U.A.E.’s ADIA, China’s CIC, Kuwait’s KIA, Qatar’s QIA, Saudi’s PIF Are Providers of Dumb Money- Zero Value Add to Governance, Corporate Actions, ESG, Shareholder Proposals to U.S. Companies—-

I have been examining the proxy voting and engagement policies and practices of SWFs and am particularly concerned with U.A.E ADIA, China CIC, Kuwait KIA, Qatar QIA & Saudi PIF . I tend to think of their capital as dumb money, for despite their often-significant equity stakes and associated voting power, they bring zero value add to matters related to governance, corporate actions, ESG and shareholder proposals to U.S. companies.

These SWFs no doubt hold huge amounts of U.S. equity through funds, indexed vehicles, private placements but tend to act as passive investors in U.S. equity markets. This is not necessarily a good thing. These SWFs do not publish data on their proxy votes, have no published proxy voting guidelines, do not report on their private engagement with management, don’t take board seats. Treading carefully the intersect of politics and finance, to clear of controversy, they often do not vote, do not file 13 Fs and have little economic incentive to engage in shareholder activism – and are therefore derelict in contributing to improving corporate governance. They avoid the costs of engagement and are free riders on others who exercise activist governance. They are bad stewards of corporate governance and shareholder rights, have little to say on child labor, risk management, climate change, board competence, exec compensation. These funds do not clearly explain their true objectives and relationship with citizens, little is known about their internal governance and decision-making process, their internal operations and how exactly do they implement their investment strategies or performance, AUM risk profile etc. They keep their holding below thresholds that trigger tax liability. To avoid headline risk they make use of CFIUS safe harbor provisions. More crucial given their inert holdings they take up a seat which could belong to vigilant engaged shareholders which exercise control over company boards and reign in principal agency problems. In short, their behavior is very different from responsible large investment funds, such as pension funds, endowment funds, or mutual funds.

The Santiago Principles GAPP 21 addresses participation in corporate governance to the extent it recommends return maximization, commercial, non-strategic investing but is largely silent on specifics. It is of little help. Only Norway’s Government Pension Fund Global and Singapore’s Temasek Holdings meet standards expected. Their process is designed to improve transparency and enable fund shareholders to monitor their funds’ involvement in the governance activities of portfolio companies.

We need legislation and rules that require SWFs report their proxy votes. These funds do have voting power when they have the ability to vote the security, including the ability to determine whether to vote the security at all, or to recall a loaned security before a vote. Not voting too is a form of voting after all!

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

Leave a Reply

%d bloggers like this: