Keeping a sovereign fund out of politics

The funds that last share three rules: a deposit rule that cannot be skipped, a spending rule that cannot be raised, and a governance line no politician can cross. The funds that fail lacked one of them.

The Santiago Principles

In 2008 the major sovereign funds agreed a set of twenty-four Generally Accepted Principles and Practices, the Santiago Principles, through what is now the International Forum of Sovereign Wealth Funds. They cover the obvious: a clear legal basis, a published mandate, independent governance, public reporting, and investment decisions made on economic grounds rather than political ones.

They are voluntary and unevenly observed. Their value is as a checklist a fund can be measured against in public. The initiative's charter adopts them as the governance standard, which means the question "is this fund political?" has a published answer rather than an opinion.

Norway's spending rule

Norway's fund works because of a rule, not because of its size. The government may spend, on average over time, only the fund's expected real return, currently set at three per cent of its value. The principal is never touched. The rule has been bent in crises and has held in every ordinary year since it was written, which is the test that matters.

Alberta's fund had no such rule. Deposits were a political decision each year, and after 1987 the decision was no. The difference between the two funds today is not oil prices or luck. It is that one rule could be suspended and the other could not.

Arm's length, concretely

Arm's length means no minister, mayor, board member or founder can direct a purchase or a sale. In practice: an independent board with staggered terms; an investment mandate written in the charter and changeable only by a supermajority or not at all; a professional manager whose decisions are reviewed after the fact, not approved before; and a rule that related parties cannot transact with the fund at all.

For a private initiative the same rules apply with the sponsor in the politician's seat. The initiative's charter says so directly: the founder cannot direct a purchase either.

Transparency as the enforcement mechanism

A fund that publishes its holdings, its rule and its returns can be held to them by anyone. A fund that does not can be held to nothing. Norway publishes every holding; the funds with the worst reputations publish nothing.

The initiative has published its charter before holding anything, and its governance documents will follow before any instrument does. The order is the point: rules first, so there is something to be held to.

Canada's Wealth Sovereign Fund is an initiative of Semple Ventures. Nothing on this page is an offer to sell or a solicitation to buy securities, nor investment, legal or tax advice. Figures are matters of public record and may have moved since this page was written.