Canada, Singapore & Norway to US Congress: Relax, we’re not trying to take you over

Hedge Fund Regulation 10 Mar 2008

On January 31, we made a quip that one of the largest and fastest-growing sovereign wealth funds in the world was right at the doorstep to the United States – the $120 billion Canadian Pension Plan.

Last week, the president of this pension plan appeared before a House Financial Services Subcommittee to argue the opposite, that the CPP Investment Board (“CPPIB”) was not, in fact, a sovereign wealth fund.  The Canadians appeared alongside representatives from the funds of Norway and Singapore.  The CPPIB’s written statement is available in full here.  But their basic argument was that the plan was responsible to pensioners (Canada’s 17 million pension plan members) not to the government itself.  And unlike funds that are controlled directly by foreign governments, the CPPIB does not re-invest foreign currency reserves.

Said the statement:

“The CPPIB is not a government-controlled entity. Although the CPPIB was created and is owned by the Canadian Federal government, its governance structure was carefully designed to prevent political interference. Our founding legislation specifies that we operate at arm’s length from governments, and in accordance with a legislated investment-only, fiduciary mandate. Our investment decisions are not influenced by government direction, regional, social or economic development considerations, or any other non-investment objectives. Independent directors are appointed for three year terms, which can be renewed twice, and can only be removed for cause. We accompany our observance of these features with a high degree of transparency, much of which is also mandated by our legislation, including reporting to the public like a Canadian public company. CPPIB is not a sovereign wealth fund, and instead is internationally recognized for its independence from government influence.”

Many believe that this freedom from government influence is what has allowed the plan to become one of the world’s most innovative institutional investors.  When it comes to money, Canadians distrust their government.  So pension reforms in the 1990’s were only permitted if the government stepped aside.  Continues the written statement:

“Plan participants felt that government influence on investment decision-making could lead to poor investment performance, and that they would suffer the consequences through higher contribution rates and/or lower benefits.”

And if this wasn’t clear enough the CPP provided the following handy pocket-sized chart titled, appropriately, “How CPPIB is not a sovereign wealth fund”

Not surprisingly, other funds appearing before the subcommittee also argued that they were independent of government interference.  In its written statement, Temasek (Singapore’s $110 billion piggy bank) said:

“…all directors are charged with the fiduciary duty of acting in the best interest of their company and its shareholders. The eight-member Temasek board comprises mostly independent members, with independent, non-executive directors chairing the three key board committees…Temasek does not discuss its investment and divestment activities with the Government. The Constitution of Singapore reinforces the independence of the board and management of Temasek from financially imprudent interference by the Government.”

Temasek also told the subcommittee that (like Canada) it does not invest foreign currency reserves.  In fact, wrote Temasek, the fund even has a couple of American directors on its board.  However, the fund also said that its board members are appointed by the country’s President (a role the statement conspicuously describes as the “Elected President“).  So this would surely breach the CPPIB’s arm’s length standard (as spelled out above).

In its own written statement, the $375 billion Norwegian Government Pension Fund also defended its independence, saying:

“Apart from restrictions applying to very limited cases concerning national security, we must respect freedom of investment and equal treatment of shareholders as a fundamental principle. The declaration from the G8-summit on 7 June 2007 in Heiligendamm expressed what would seem to be a sound principle: ‘…we remain committed to minimize any national restrictions on foreign investment. Such restrictions should apply to very limited cases which primarily concern national security.'”

But they were a little more obtuse about the delivery of that message than the Canadians – using the chart below to show the independent relationship between the fund and the government of Norway.

Mathew Slaughter, a Dartmouth prof and a subcommittee co-panelist along with representatives from the countries listed above – urged the subcommittee to put it all into perspective, saying:

“The recent surge of investments into the United States by Sovereign Funds is large to you and me, but it is still a tiny fraction of American’s gross international investment position—a fraction of one percent. Globally, these Funds are estimated to control between $2 and $3 trillion in assets: again, a lot to you and me but only somewhere between one and two percent of the world’s tradable securities.”

This number may indeed be small right now, but is likely to grow significantly along with the size of these funds.  At the end of the day, growing US protectionism (which reared its head in the recent US primaries), means that the American public may not be interested in splitting hairs over the true meaning of “government interference” if and when they sense that the fees paid to toll roads, electrical utilities and ports begins to flow to the pensioners of Canada, Norway and Singapore.

Note: for anyone looking for a good quick overview of these funds, click on their testimonies below:

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