This article first appeared in Forum, The Edge Malaysia Weekly on May 20, 2024 - May 26, 2024

In the world of sovereign wealth funds (SWFs), the importance of governance and transparency has come under the spotlight as recent evaluations shed light on the performance of regional entities. Insights provided by Global SWF have prompted discussions on the state of governance and transparency among these funds, sparking conversations about potential areas for improvement.

According to the latest findings from Global SWF, regional SWFs such as GIC Singapore received mid-range scores, while Khazanah Nasional exhibited marked improvement since 2021. These SWFs, along with Indonesia’s INA, have emerged as standout performers in terms of resilience. Nevertheless, there are areas where they can enhance, particularly in the disclosure of board selection processes, their approach to sustainability, and whether processes are in place to prevent depletion of these funds during unexpected crises.

SWFs play a significant role in ensuring economic stability and wealth creation, managing assets exceeding US$11 trillion (RM52 trillion) globally. Positioned as custodians of national wealth, these funds are tasked with navigating the complexities of investment to safeguard prosperity for both present and future generations. Due to their position, transparency is critical. Clear governance processes are deemed essential safeguards against malfeasance, with robust disclosures playing a crucial role in building and maintaining public trust in these institutions entrusted with managing national wealth.

Khazanah and Temasek serve as examples of SWFs, balancing investments for financial returns with contributions to socioeconomic development. Their strategies span domestic and international markets, fostering economic growth and nurturing emerging enterprises. However, their success lies in their ability to uphold independence, accountability and adherence to objectives amid ever-changing market dynamics. Global SWF recently placed Temasek at the top of the list for its high level of transparency.

Public confidence in SWFs largely hinges on the professionalism, the independence of their management and their commitment to achieving their objectives. It is not uncommon for SWFs to be compared with other government-linked investment companies (GLICs). However, SWFs are perceived as a reflection of the government they represent, underscoring the necessity for robust governance structures to protect against financial mismanagement and political interference.

The debate over the prioritisation of domestic investments versus diversification abroad underscores the nuanced nature of SWF management. While diversification enhances portfolio returns and mitigates domestic risks, focusing on socioeconomic development — which includes domestic investment — is imperative. SWFs have a delicate balancing act to achieve both outcomes.

As Sarawak launches its own SWF, the Sarawak Sovereign Wealth Future Fund (SSWFF), lessons from existing models serve as guideposts. The adoption of the Santiago Principles signals a commitment to good governance, with safeguards against political interference and transparent board appointments deemed paramount.

To maintain the independence of the SSWFF’s investment choices and shield them from undue political pressure, it is essential to implement strong protective measures. This includes enacting legislation to safeguard the Board of Guardians and senior management from coercion to mishandle funds, holding them responsible and accountable if they succumb to political or other pressures to disperse the funds beyond SSWFF’s mandate, and launching public awareness campaigns about the fund’s investment objectives to ensure accountability among its leadership.

In conclusion, the journey towards bolstering governance and transparency in regional SWFs remains an ongoing endeavour. It requires steadfast commitment, adaptability to global dynamics, and unwavering dedication to accountability and integrity. Only then can these entities fulfil their mandate of safeguarding national wealth and fostering inclusive growth for all citizens.

Given the swift evolution of the global economic landscape, the importance of SWFs in fostering sustainable development and economic resilience has become increasingly vital. As custodians of national wealth, SWFs possess substantial influence over investment choices that impact the course of economies and societies. It is their responsibility to maintain exemplary standards of governance and transparency, ensuring that their actions are in line with the long-term interests of their stakeholders and the general public.

Dr Elsa Satkunasingam is director of executive education at the Asia School of Business

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