The past few years have witnessed the rise of a new force in global capitalism, sovereign wealth funds: massive pools of capital, often under government control, flush with cash as a result of high global commodity prices and the pooling of large foreign reserves. As these funds become more active, there is a concern among western finance types that the opaque governance models of these funds will turn back the clock on transparency and arm’s-length, non-political investment decisions. Canadian Business staff writer Jeff Sanford spoke to Gail Cook-Bennett, chairwoman of the Canada Pension Plan Investment Board, on this issue.
What are some of the concerns being raised around these newly wealthy sovereign wealth funds?
What we have are very large pools of capital with a lot of momentum, becoming involved in direct investments. Pools of capital that were more passive in the past are taking on very active investment decisions, and it’s not clear in some cases whether these government funds are operating according to commercial principles. It is sometimes not clear what the objectives are. As a result of that, there are concerns in other countries about national security, political or even economic motives of these pools of capital. There is an increasing concern in some quarters about sovereign wealth funds, government funds, which feature somewhat opaque objectives. It could be a real change in the way global capitalism operates.
What was the message you recently delivered to the OECD in Paris?
That the CPPIB is not a sovereign wealth fund. We do not invest government funds. We invest contributions of individual Canadians. Secondly, there is no top-up of any sort through tax revenue. [General government revenues are not advanced to the fund, only CPP contributions.] Third of all, we operate at arm’s length from governments in a fashion that is specified very clearly in our legislation. We are very clear, because of our statute about our commercial objectives, which is to maximize returns without incurring undue risk of loss. Finally, both by our statutes and by our own decisions, we are extremely transparent. All of the concerns that arise potentially around the very opaque sovereign wealth funds are not characteristic of us at all. We’re a pool of capital that should not be feared when we are investing in other countries.
Why are these funds emerging as a force in global capitalism now?
Commodity prices are one aspect of it, and there are the foreign exchange reserves. Combine that with a commitment to more direct investment, and some of these countries want to get returns that will stabilize these funds. But there is a whole range of sovereign wealth funds with quite different characteristics.
The CPPIB, which has a very evolved governance model, has been mentioned as an example of how the large pools of capital with connections to government should be structured. What can the CPPIB offer up as an example?
Some of the funds that would be closer to us on the continuum would want to do the same thing as we’re doing. There is a lot of effort on the part of investment pools, or the owners of them, whether they are government owners or not, to distance themselves from the sovereign wealth funds that are being feared. In other words, countries that have government-controlled investments want to make sure that others understand that they are operating according to commercial principles. Our governance model and its characteristics were outlined in the statute that led to our creation. And the reason this model is so important is that the characteristics we describe as the governance model, in essence, protect us from government control and permit investment professionals to make investment decisions. That was the original rationale. This governance model was developed to allow us to invest successfully globally. What has happened is that features of that model are now interesting in the context of the sovereign wealth fund debate because they include the fact that we have very clear commercial objectives, and we’re absolutely transparent. We are required within our legislation to be transparent. But we have made decisions with our board of directors to enhance even that. As a result of this, if you add all of these characteristics up, it leads to trust. And that is what countries need in terms of the sovereign wealth debate, they need to develop trust and confidence that these pools of capital are operating according to commercial objectives.
