r Academy of Management Perspectives 2016, Vol. 30, No. 1, 5–23. http://dx.doi.org/10.5465/amp.2013.0055 SYMPOSIUM

SOVEREIGN WEALTH FUNDS: A STRATEGIC GOVERNANCE VIEW

RUTH V. AGUILERA Northeastern University and ESADE—Universitat Ramon Llull

JAVIER CAPAPE´ ESADE—Universitat Ramon Llull and Tufts University

JAVIER SANTISO ESADE

Recent tectonic, global economic and political shifts have spurred the emergence of new organizational forms such as sovereign wealth funds (SWFs)—state-owned investment organizations without pension liabilities—primarily in emerging and frontier markets. Although scholars have begun to explore SWF macroeconomic trends, little is known about the challenges these institutional investors face or their strategic capabilities to address these concerns. Drawing on comparative and strategic corporate governance research, we develop an organizing framework to better understand the firm-level characteristics of SWFs and their consequences. Our analysis of these investment funds’ multidimensional strategic governance traits contributes to the literature on state cap- italism and comparative corporate governance.

State intervention in the form of full ownership and Lazzarini (2014) and Bruton, Ahlstrom, Stan, Peng, management of state-owned national champions or and Xu (2015) have documented, we are entering large diversified conglomerates has progressively a new era of state capitalism where governments tend eroded, with the role of the state being reinvented into to share their ownership with nongovernmental new organizational and strategic forms. This gradual owners and/or provide strategic support to private transformation is partly explained by waves of pri- firms by means of subsidized credit and/or other state vatization, changes in state and nonstate relation- protections. ships, new industrial policies, and the dismantling of This new state capitalism is centered on a rein- large diversified business groups. As Musacchio and vented state, one that as an owner seeks to si- multaneously achieve the often conflicting goals We thank Professor Siegel and two anonymous re- of financial efficiency (e.g., short-term share- viewers for their extremely developmental comments on holder value maximization) and political pursuits an earlier draft. We also thank Patrick Schena, Paul Rose, (e.g., industrial policy, geopolitical positioning, na- Adrian Orr, Ashby Monk, Veljko Fotak, and Adam Dixon tional security). Sovereign wealth funds such as for helpful comments. Additionally, we are grateful for Singapore’s Temasek, the China Investment Corpo- feedback from conference participants at meetings of the ration (CIC), and Norway’s Government Pension Academy of Management (2013), the Academy of In- Fund Global (GPFG) are a salient class of funds ternational Business (2014), and the World Bank/Bank of within this new state capitalism, blurring the lines International Settlements’ Public Investors Conference (2014) and seminar participants at Sciences Po and the between finance and politics. SWFs are government- University of Illinois at Urbana-Champaign. Javier Capape´ owned investment funds without explicit pension thanks ESADE for financial support during his visit at the liabilities that typically pursue long-term investment University of Illinois at Urbana-Champaign. All errors are strategies. They also tend to be internationally fo- ours. cused and manage multibillion-dollar assets. This

5 Copyright of the Academy of Management, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder’s express written permission. Users may print, download, or email articles for individual use only. 6 Academy of Management Perspectives February excludes other types of organizations such as state- dimensions of their investment strategies and gov- owned enterprises (e.g., Gazprom), pension funds ernance traits, or what we refer to as their strategic (e.g., CalPERS), and private equity investors (e.g., the governance. Our underlying proposition is that Blackstone Group). SWFs seek to align their unique governance capa- It is important to understand the emergence of bilities with their interest in excelling in the global SWFs within the context of the latest global financial investment arena. In particular, we explore how developments. The world economy has changed a wide variety of states (personified by a wide array of rapidly, particularly in terms of the distribution of leaders ranging from politicians in dictatorships to international reserves, which are a core funding ruling elites in countries with weak institutions and source for SWFs. At the turn of the 21st century, financial bureaucrats in developed democratic central banks from advanced economies held 66% of countries) and SWF managers relate to investee the world’s reserves (mostly in foreign exchange and firms, their managers, and co-owners. gold); emerging and developing economies held the There are at least five reasons why understanding remaining 34%. A decade later, the tables have SWF patterns and their potential is both critical and turned. Emerging and developing economies now timely. First, these investment organizations have hold 60% of all reserves, and, more strikingly, they become key players in the global economy, collec- have grown six-fold in this period, increasing their tively managing US$6 trillion1 as of the end of 2014; assets from US$2.2 trillion in 2000 to $12.1 trillion in their total assets surpassed those of hedge funds 2011 (Truman, 2012). These systemic global imbal- and private equity combined in less than a decade ances account for some of the features of today’s (Megginson & Fotak, 2015). Thus, SWFs are clearly global financial scenario. On one hand, export-led shaping today’s global financial landscape, and their economies and those sitting on large natural resource presence will surely increase in coming years. That reserves benefit substantially from more prudent notwithstanding, these organizations have not been fiscal and foreign-exchange policies, an increasingly adequately studied, and we need to integrate all we integrated world economy, and the recent period of know about them into a cohesive framework to help man- high commodity prices. On the other hand, most agerial scholars, practitioners, and policymakers Western economies now face sovereign deficits, debt better understand them. pressures, and low growth rates. Thus, investors Second, SWFs became salient global players dur- from the Middle East, Southeast Asia (particularly ing the 2008 financial crisis by recapitalizing most of China), and, to a lesser extent, Latin America have the Western banking system, and they have since the liquidity that Western economies seek. SWFs become top players in other industries such as nat- have become highly liquid organizational investors ural resources, real estate, transportation, and utili- in an illiquid world. ties. For example, Norway’s GPFG (the world’s SWFs adopt differing governance structures to largest SWF, managing approximately US$900 bil- manage enormous pools of capital and to engage in lion in assets) owns 3% of all publicly listed shares in strategic investment relationships with firms and Europe. Moreover, GPFG is part of the global strate- managers from a wide array of industries and foreign gic governance movement of shareholder activism, countries. While there are a handful of excellent and it has the potential to affect many global com- compilations on SWFs (Balding, 2012; Bernstein, panies. Third, SWFs are learning organizations, Lerner, & Schoar, 2013; Castelli & Scacciavillani, venturing into managing more complex types of as- 2012; Clark, Dixon, & Monk, 2013; Megginson & sets such as infrastructures, private equity, and real Fotak, 2015), existing research tends to take a mac- estate. For example, SWFs account for 9.5% of all roeconomic or financial perspective or is otherwise private equity investments made between 2003 and highly dispersed across the different disciplinary 2007 (Bernstein et al., 2013). fields. Therefore, there is a strong need to integrate Fourth, SWF investment trends are not geared the “siloed” knowledge on these global institutional only toward the advanced industrialized world; they investors and, more important, to study SWFs at the have also begun to shift toward strong “South-South” organizational level of analysis (as opposed to ’ country level), where we can identify these funds 1 Institutional sources used include Sovereign Wealth strategies and challenges. Centre (London), ESADEgeo (ESADE Business School, In this paper, we offer an organizing framework Madrid), SovereigNET (The Fletcher School, Tufts Uni- to shed light on these fairly unknown yet impor- versity, Medford, MA), and Sovereign Investment Lab tant institutional investors, uncovering the different (Bocconi University, Milan). 2016 Aguilera, Capape,´ and Santiso 7

(non-OECD countries) investment relationships. WHAT WE KNOW ABOUT SOVEREIGN For example, Singapore’s Temasek holds more than WEALTH FUNDS US$17 billion in Chinese bank stock. Moreover, four Table 1 includes a summary of the existing body out of the five largest deals in 2013 were South-South of research on SWFs in the finance,2 strategy, po- investments. Last, some SWFs are leading the eco- litical economy, economics, international law, nomic transformation of their own national economies. and organizational theory fields. Upon reviewing For example, the Mubadala Development Company, this research, we conclude that, while there is in- which was established by the government of Abu creasing interest in the topic, current literature Dhabi, has developed a world-class aerospace in- remains fragmented by discipline. To partially dustry through foreign strategic investments and alli- amend this, we uncover three consistent findings ances and now supplies components to EADS, the from our analysis of SWF literature. First, these European champion in the aerospace industry. organizations are highly heterogeneous in terms of In sum, SWFs are unique investors due to their size, geographic origin, geographic destination, size, central involvement in global finance, systemic funding sources, and policy purposes (as shown in power, unique capacity to learn, geopolitical Table 2). Although the first SWF technically dates breadth, and developmental strength. Although they back to 1854 (Texas Permanent School Fund), SWFs are certainly quite heterogeneous given their di- are a fairly novel type of organization in the new state versity in size, country of origin, and source of capitalism. The term was first coined in 2005 by wealth, they capture the spirit of the new state cap- Andrew Rozanov (2011), then managing director of italism. And despite being state-owned investors, State Street. However, there is still an ongoing debate their capacity to intervene in private firms is equal to on the definition of SWF (Capape´ & Guerrero, 2013). that of other institutional investors, though their in- Second, in terms of financial performance, centives are likely to be different. These state owners SWFs’ short-term influence over investee firms is adopt a unique type of governance: They are equity comparable to that of other institutional investors, owners that cannot exercise sovereign regulatory or even though SWFs are often portrayed as “barbar- supervisory powers in the organizations in which ians at the gate” (Reed, 2009). Some scholars have they invest. SWFs are simply one investor among found that SWF investment announcements cause many, and they have a fiduciary duty to the state (or, positive short-term stock reactions (Bortolotti ultimately, the citizens of a given country). They are et al., 2013; Dewenter et al., 2010; Kotter & Lel, still under pressure to achieve the same financial 2011). However, their long-term impact is neutral efficiency as other institutional investors in the race in terms of absolute returns (Bortolotti et al., 2013) to become global players, but their challenge is to and negative when measured by Sharpe and P/E balance their dual strategy of financial efficiency and ratios (Bernstein et al., 2013; Knill et al., 2012a). political effectiveness. This dual focus is often hard According to Bernstein et al. (2013), long-term to reconcile and ultimately defines the boundaries of performance worsens when politicians are in- the new state capitalism. volved in SWF management, reflecting embedded Unfortunately, existing research on SWFs remains agency issues in which politicians’ investment highly fragmented across different disciplines: fi- interests are not always aligned with those of nance, economics, and law. In this paper, we begin the SWFs. by briefly highlighting the main findings from our Bortolotti et al. (2013) refer to SWFs’ inability to review of existing literature and then turn to the firm keep up with the performance of peer institutional level to analyze the combined strategic motives and investors as the “SWF discount,” alluding to these governance traits of SWFs as the star representatives organizations’ most salient feature: that they are state- of this new state capitalism. We draw on research owned investment funds. This discount is in line with from the strategic management and corporate gov- corporate governance research claiming that the con- ernance fields to develop an organizing framework figuration of types of owners has a great deal of influ- that systematically identifies four strategic gover- ence on firms’ strategic decisions (Aguilera & Jackson, nance dimensions on which SWFs rely to compete in the global financial arena. We then discuss the the- oretical logic present in this new form of governance, 2 For a detailed literature review on SWF asset allocation and we conclude by identifying promising areas of and geographic and industrial investment patterns, and the future research and the possible managerial impli- impact of SWF investment in target companies, see cations for SWF practitioners. Megginson and Fotak (2015). 8 Academy of Management Perspectives February

TABLE 1 Main Findings on Research on Sovereign Wealth Funds

Discipline Findings

Finance c Short- and long-term impact on target companies: SWFs’ investment announcements cause positive short-term stock reactions (Bortolotti et al., 2013; Dewenter et al., 2010; Kotter & Lel, 2011), but they are lower than those from their private counterparts (Bortolotti et al., 2013), reflecting an “SWF discount.” The long-term impact on target companies is negative in terms of abnormal returns (Karolyi & Liao, in press), Sharpe ratio (Knill, Lee, & Mauck, 2012a), and P/E ratio when politicians are involved (Bernstein et al., 2013), implying SWFs’ weak monitoring role. On the contrary, some findings suggest that SWFs add value (15% in Tobin’s q) to investee companies (Fernandes, 2014) and that there is a reduction in target companies’ credit risk (Bertoni & Lugo, 2014). Paradoxically, however, firms with SWF investment experience higher debt costs (Borisova, Fotak, Holland, & Megginson, 2015). c Investment strategies: Mixed findings. The evidence shows SWFs’ preference for both stable (Karolyi & Liao, in press) and distressed companies (Kotter & Lel, 2011). SWFs also select target companies aligned with national industrial-planning strategies (Dyck & Morse, 2011; Haberly, 2011) or based on political bilateral relations (Knill, Lee, & Mauck, 2012b). Other findings demonstrate that SWF portfolios do not diverge from mutual funds’ strategies (Avendaño & Santiso, 2011) but showcertain home bias (Bernstein et al., 2013; Chhaochharia& Laeven,2008).SWFs do not show a systematic preference for specific industries and tend to diversify in equity markets (Miceli, 2013). Strategy c SWF investment practices may spread to the rest of private domestic investors, as shown in the Norwegian case (Vasudeva, 2013). c Governments should design SWF portfolio allocation (financial assets) taking into account underground (minerals, oil, and gas) assets (van den Bremer, van der Ploeg, & Wills, 2013). c Contrary to FDI theory, SWFs prefer to invest in private (vs. public) equity in countries with lower investor protection and where the bilateral political relations between the SWF country and the target one are weaker (Johan, Knill, & Mauck, 2013). c Company target and recipient countries will benefit (lower transaction costs) from coordinated actions with respect to SWF investments (Rose, 2009). Political economy c SWFs represent a new mode of state capitalism; they enable governments to exert soft control through minority stakes (Fotak, Gao, & Megginson, 2013; Musacchio & Lazzarini, 2014). SWFs as a means of new state capitalism might allow governments to exert control in nonstate companies through financing (Milhaupt & Zheng, 2014). c SWFs’investment agendas and mandates should be integrated with the rest of state-owned vehicles such as development banks, regional agencies, and SOEs (Al-Hassan, Papaioannou, Skancke, & Sung, 2013; Gelb, Tordo, & Halland, 2014). c SWFs engage in idiosyncratic political accountability (Clark et al., 2013; Gelpern, 2011); as a heterogeneous group, SWFs have been created across a wide political spectrum, ranging from the most to the least democratic countries. c SWFs serve ruling elites to maintain their privileges (Pistor & Hatton, 2011) even in times of crisis by concentrating substantial resources. They can lie in the shadows of regulations and politics (Balding, 2012; Rose, 2009). Economics c SWFs have evolved as a sophistication of stabilization funds (Balding, 2012; Das et al., 2009) in terms of asset management (expanding both geographic allocation and asset classes) and corporate governance (clearer rules and accountability). However, SWFs have been used as sovereign development funds (Santiso, 2008) with inherent risks of political capture (Gelb et al., 2014). c The recent surge of new SWFs depends on international reserve accumulation (due to high commodity prices and current account surpluses) in times of low global interest rates (Aizenman & Glick, 2009; Castelli & Scacciavillani, 2012). International law c Host countries receiving SWF investments face a trade-off between national security and open capital markets (Cohen, 2009). Regulatory burdens might decrease with better transparency practices from SWFs (Rose, 2014). c Sovereign wealth immunity in the United States favors SWF taxation (Bird-Pollan, 2012). To overcome this, tax reform should encourage investments with low political risk and require higher accountability for SWFs (Fleischer, 2009) or even distinguish financial SWFs from strategic SWFs by proposing a suspension of voting rights (Gilson & Milhaupt, 2008). c On the contrary, evidence shows that SWFs have acted thus far as model investors (Epstein & Rose, 2009). Thus, imposing additional obstacles to SWF investments in the United States seems unreasonable. Discouraging SWFs from investing in the United States will impose political and economic opportunity costs larger than the natural security benefits. Organizational c Governments use SWFs as institutional innovations (Weiss, 2009). Clark et al. (2013) foresaw two different paths theory for SWFs: adopting global financial standards or transforming into nation-state development institutions. c The Norwegian SWF GPFG maintains its political legitimacy primarily through the process governing the decision making of the public interest rather than through its functionality (Clark et al., 2013). c Truman (2013) simplified SWF transparency analysis through a scoreboard comprising structure, governance, transparency and accountability, and investment behavior. 2016 Aguilera, Capape,´ and Santiso 9

TABLE 2 Sovereign Wealth Fund Characteristics

Age Senior (five SWFs): , 1960s Senior: Includes the Saudi Arabian Monetary Authority and the Kuwait Investment Authority. Adult (nine SWFs): 1970–1980s Adult: Includes three SWFs from the U.S., two from Singapore, and the Abu Dhabi Investment Authority (ADIA). Teen (nine SWFs): 1990s Teen is the largest group in terms of assets under management ($1.77 trillion): Includes the Norwegian GPFG ($900 billion) and SAFE (China). Baby (56 SWFs): 2000–2010s Babies: 56 new funds ($1.63 trillion) established in the SWF baby boom led by China Investment Corporation ($575 billion). Size Extra-large (five SWFs) . $400 billion The SWF industry has $6 trillion in assets; industry concentration Large (eight SWFs) . $100 billion is key. The top 10 SWFs manage 70% of the industry’s assets. We Medium (37 SWFs) . $5 billion foresee a continued transfer of wealth from central banks’ Small (28 SWFs) , $5 billion foreign-exchange reserves to more sophisticated SWFs.

Global location Middle East (17 SWFs): $2.1 trillion; 34% New poles in Africa, and to a lesser extent in Latin America, are China (five SWFs): $1.5 trillion; 25% surfacing. Central Asia will continue to grow. SWFs from Norway (one SWF): $0.9 trillion; 15% emerging markets will dominate even more in the foreseeable SEA (eight SWFs): $0.7 trillion; 12% future. Funding sources Commodity: oil, gas, other minerals, metals Oil-related SWFs will benefit from recent global demand Non-commodities: foreign-exchange reserves projections. However, other funding sources (e.g., debt Others: leverage, privatizations, SOE profits, etc. issuance) will become more prevalent.

Policy purposes* Macro-stabilization (“rainy day fund”)SWFs’ objectives are compound, overlapping, and changing over Savings (“future generation” distribution) time (e.g., short-term stabilization of SWFs may evolve into Reserve investment savings funds; likewise, pension reserve SWFs may choose Pension reserve more active and direct investment strategies).

* As defined by Kunzel, Lu, Petrova, and Pihlman (2011). Note: all monetary references are in U.S. dollars.

2010). In SWFs, governments serve as co-owners and the establishment of SWFs all over the world and the might thus be able to influence the nonfinancial goals need to decide on optimal capital allocation. of their investee firms and capture private benefits of control that might ultimately expropriate from their AN ORGANIZING STRATEGIC GOVERNANCE co-owners’ financial goals. Contrarily, there is also FRAMEWORK evidence that SWFs can increase investee companies’ value and performance through stable and long-term Drawing on notions from strategic management and access to capital and markets (Fernandes, 2014). corporate governance research, we propose a frame- Last, we know quite a bit about the investment work to better understand the underlying SWF orga- and economic motives that led to the creation and nizational capabilities and challenges and to analyze growth of SWFs: intergenerational balance, macro- how the ultimate owners of SWFs (states personified stabilization, resource diversification, national eco- by politicians and executed by SWF managers) relate nomic development, and greater supremacy in the to both managers in the investee firms and to their co- international geopolitical arena. Bodie and Briere owners. We first draw on the logic of principal–agent (2013) shed light on this macro view, revealing how theory (Dalton, Hitt, Certo, & Dalton, 2007; Jensen & SWF strategies are not typically in line with the gov- Meckling, 1976) in which SWFs (agents) as minority ernments’ fiscal, monetary, and public debt strategies. shareholders and globally diversified investors with Economists have sought to attribute the increasing a limited ability to influence managerial decisions and surge of SWFs in recent years to the immense accu- managers (principals) can have their own, often dis- mulation of international reserves, a takeaway from the parate, incentives. We subsequently introduce the Asian crisis in 1997 accompanied by soaring oil and principal–principal perspective (Morck, Wolfenzon, & gas prices at a time of low global interest rates and Yeung, 2005; Young, Peng, Ahlstrom, Bruton, & Jiang, recent oil and gas discoveries in Africa (Aizenman & 2008) because it enables us to engage in the debate Glick, 2009; Castelli & Scacciavillani, 2012; Megginson regarding co-owners. In particular, we explore some of & Fotak, 2015). This capital hoarding has encouraged the challenges that SWFs encounter when interacting 10 Academy of Management Perspectives February as minority shareholders with other (majority) in- investors. Figure 1 summarizes the four possible sce- fluential co-owners and when seeking to minimize narios we propose. information asymmetry. Our framework classifies SWFs in two dimensions: 1) investment motivation Investment Motivation: Financial and Strategic and 2) the ownership type of the investee firms. These key dimensions (reflecting strategy and governance In terms of the first dimension, investment moti- traits) offer important insights into the capabilities and vation, we would like to underscore that SWFs are constraints that SWFs are likely to face in terms of government owned, often without much managerial their strategic governance to become effective global involvement in investee companies (Rose, 2013).

FIGURE 1 Strategic Governance Types of Sovereign Wealth Funds

Quadrant 1: Shareholder activism Quadrant 2: In-house capabilities

SWFs play a strong monitoring role and SWFs establish specialized teams looking help to improve the corporate governance for higher returns and new asset classes of listed companies worldwide. and geographies. There are spillover effects for the organization: An SWF as the principal seeks to professionalization, fee reduction, and lower agency costs. Financial enhance the target company’s (agent’s) corporate governance through active participation in the company’s An SWF as a principal engages with other committees and annual general meetings. owner(s) (also principal(s)) in low shareholder protection schemes. Setting up Norway’s GPFG is designing a new investment offices “closer to the action” approach to intervene in its largest equity helps to overcome this P–P conflict. positions. Others will follow. New Zealand’s Superannuation Fund, Malaysia’s Khazanah, ADIA, and GIC have specialized world-class investment teams managing complex asset classes. Investment motivation Quadrant 3: Legitimacy and Quadrant 4: Long-term learning decoupling SWFs look for domestic economic Governments use SWFs to obtain longer- diversification and to engage in long-term term state goals yet simultaneously seek relations with foreign companies to acquire to acquire legitimacy as institutional resources and know-how—that is, to learn. investors. SWFs face principal–principal conflicts when investing with governments as well Strategic The trade-off between symbolic goals (efficiency by investing in top-listed as with private companies through joint equities) and substantial goals (political ventures. Also, SWFs need to address legitimacy at home and abroad) drives principal–agent conflicts at home with these SWFs’decision-making. domestic SOEs.

QIA, CIC, and Temasek have different Mubadala learns valuable lessons from its political goals, yet all of them aim to joint ventures with innovative achieve them through financial efficiency multinational companies. RDIF uses a and thus decoupling. different model by co-investing with other SWFs and governments.

Public Private

Ownership type 2016 Aguilera, Capape,´ and Santiso 11

The principal–agent problem is embedded because goals within the global financial arena, accounted of who the owners are, which is distinct from owners for in the Generally Accepted Principles and and managers of state-owned enterprises (Bruton Practices for SWFs (also known as the Santiago et al., 2015). The key challenge in this classic agency Principles). However, strategic capital allocations conflict is to define the motivation behind the in- vary widely. For instance, Clark et al. (2013, p. 27) vestment. Comparative corporate governance liter- showed how SWFs can be “tools for facilitating ature makes a sharp distinction between investors autonomy and sovereignty” for governments or that are typically short-term oriented and pursue a powerful form of protection from the global mostly a shareholder value-maximization strategy economy preying on their currency and commod- and those that are long-term oriented and seek ity fluctuations. We conceptualize this investment broader societal or political goals such as sustain- motivation as a continuous and bidirectional fac- ing full employment, keeping harmony within tor, as SWFs move between strategic and financial business groups, guaranteeing a minimum social poles. In the discussion section below, we return to welfare threshold, or protecting business elites this point, namely that SWFs are dynamic organi- (Shleifer & Vishny, 1997). We can extend the di- zations whose interests evolve over time (Fotak chotomy between shareholder- and stakeholder- et al., 2013). oriented governance systems to the SWF context as financial versus strategic goals (Aguilera & Jackson, Investee Ownership Type: Publicly Versus 2003; Hoskisson, Johnson, Tihanyi, & White, 2005). Privately Held Companies Differentiating between financial and strategic motivation is relevant because it moves away from In this section, we discuss the other dimension of purely Anglo-American conceptions of short-term our organizing framework of SWFs: the ownership financial gains and includes broader market logics nature of investee firms, a discrete variable consist- tied to political interests prevalent in emerging and ing of either publicly or privately listed firms. We frontier markets with weak shareholder rights also discuss under what conditions the principal– protection and strong national states. We thus principal conflict is likely to be greater. Each own- propose two investment motivations: financial and ership structure is linked to unique governance strategic. modes. This is an important differentiation because In terms of financial motivation, some SWFs the firm’s ownership structure dictates how the operate fairly similarly to their institutional investor owners can influence managers and the intensity of counterparts, investing in global, diversified portfo- the information asymmetries. Publicly traded firms lios to maximize their long-term returns subject to an tend to have a more dispersed and broader floating acceptable risk level (Balding, 2012; Bernstein et al., ownership. From the point of view of an investor 2013; Chhaochharia & Laeven, 2008; Fernandes, (such as an SWF), public entities involve less un- 2014). In this way, they might seek to invest in- certainty and less information asymmetry regarding ternationally to shield themselves from domestic their value due to disclosure requirements, market political pressures and thereby differentiate them- pricing, coverage from analysts, and ties with in- selves from SWFs that pursue nonfinancial goals. vestment banks. The intrinsic characteristics of Moreover, as Das et al. (2009) argued, the pursuit of publicly traded firms result in lower search costs, purely financial goals might insulate the sovereign implying more effective explorations and a lower economy from resource price and supply fluctua- risk of adverse selection (Capron & Shen, 2007). tions and diversify revenues from nonrenewable However, publicly traded companies experience resources. higher pressure to achieve short-term results. These Strategic motivations, on the other hand, are firms welcome passive institutional investors such defined as those that add to sovereign value. Sov- as public pension funds and SWFs because they are ereign developmental goals encompass several not likely to rock the boat (Barclay, Holderness, & strategies, such as assisting national industrial Sheehan, 2007). SWFs can calculate expropriation planning (Dyck & Morse, 2011), securing natural risks by private benefits of control, as there is more resources, and establishing alliances with foreign information. Hence, they can better assess the industry leaders. Governments can deploy SWFs as principal–agent conflicts. a means to engage in international relationships Conversely, private firms have a higher con- with other countries and/or foster national secu- centration of ownership (Claessens & Tzioumis, rity. Broad development aims can entail legitimate 2006), while the reduced liquidity of their shares 12 Academy of Management Perspectives February encourages investors’ long-term commitment (Fischer & challenges and align with their unique state capi- Pollock, 2004; Lee & O’Neill, 2003). That notwith- talism style. standing, firm valuations are more uncertain due to the lack of publicly disclosed information and lower Quadrant 1: Shareholder Activism scrutiny (Cumming & Walz, 2010). We do not refer here to SWFs investing in private equity firms as Quadrant 1 in Figure 1 encompasses SWFs that limited partners. Rather, our focus is on SWFs as can play an important role as shareholder activists. direct investors in privately held companies, in- These SWFs primarily seek financial goals and frastructures, properties, and timber projects or as invest in publicly traded firms to either set the co-investors with private equity firms as general country’s investment tone and become national partners. From the investor point of view (i.e., the investment benchmarks or to overcome the “liability SWFs), they are likely to benefit from the “private of sovereignness,” protecting themselves from do- firm discount” (i.e., investors can negotiate more mestic politicians. Moreover, while SWFs are asked advantageous prices and invest at a substantial dis- to comply with typically high standards of financial count relative to public firms [Capron & Shen, 2007]). and social disclosure, they are also empowered with This benefit is accentuated by the fact that private shareholder rights to monitor investee managers and firms are not as rigorously regulated (Henisz, exercise their voice as owners. SWFs in this quadrant Mansfield, & Von Glinow, 2010). have the governance capacity (Desender, Aguilera, Moreover, Capron and Shen (2007) showed that Crespi-Cladera, & Garcia-Cestona, 2013) to minimize there is industry specialization in the context of ac- agency problems with managers. quisitions of privately held firms, given the risk of Moreover, the state capitalism perspective is also adverse selection. Investors favor private firms in applicable when SWFs are seen as a state legitimiz- familiar industries and tend to invest in listed com- ing tool. Because these SWFs’ investments are panies when they don’t have a knowledge advantage. transparent and typically large, they tend to set the This investment behavior supports their ability to investment choices for other domestic firms that manage the principal–principal problem. In other seek to invest globally yet do not have the research words, when SWFs have good information about resources to select investee firms. Thus, we can see their co-owners, they can minimize the risk of ex- that these investment organizations are not only ac- propriation and other risks derived from low share- tive in their investment choices and governance holder protection. Accordingly, SWFs investing in practices, but, within the new state capitalism, they private firms are likely to specialize in two familiar are also perceived as legitimate organizations (Ang, industries: natural resources and financial services. 2012) that activate isomorphic investment dynamics On one hand, SWFs funnel their natural resources (Vasudeva, 2013). through funds (e.g., Middle Eastern funds and Nor- Norway’s GPFG is the best-known case among way’s GPFG) or need to secure their access to key these investment organizations of an active share- natural resources (e.g., SWFs from Singapore and holder and, in this sense, is a clear example of China). On the other hand, all SWFs are, by defini- strategic governance. First, through its government- tion, investment organizations and, thus, financial commissioned Council on Ethics, GPFG carries out players in and of themselves. active, widespread monitoring of its investments in nearly 7,500 companies (by the end of 2013), iden- tifying inconsistencies between its portfolio compa- A STRATEGIC GOVERNANCE FRAMEWORK OF nies and its ethical guidelines. When necessary, the SOVEREIGN WEALTH FUNDS Council on Ethics recommends the exclusion or Next, we turn to our framework of SWFs, drawing close monitoring of a company to the Norwegian on the two dimensions we’ve discussed thus far: SWF Ministry of Finance, which has the last word in this investment motivations and investee firm ownership respect. Since 2004, firms potentially causing envi- type. Our framework yields four analytical quadrants ronmental damage, those involved in producing ei- (shown in Figure 1, above), which we use to identify ther nuclear weapons or cluster bombs, and tobacco four key strategic governance modes, each with companies have all been excluded from GPFG’s in- unique managerial advantages and challenges. In vestment portfolio. This list of excluded firms in- particular, we discuss how SWFs in each of these cludes well-known companies such as Boeing, quadrants have different strategic governance traits EADS, Rio Tinto, and Wal-Mart. In addition to ex- to manage principal–agent and principal–principal ercising its exit shareholder right, GPFG recently 2016 Aguilera, Capape,´ and Santiso 13 launched a campaign for increased corporate gov- costs (Clark et al., 2013). Thus, by investing in private ernance engagement in companies where it has equity to diversify risk and achieve greater profit- a substantial investment and a long-term interest ability, SWFs have achieved greater professionalism (e.g., in BlackRock, BG Group, UBS, Prudential, and developed in-house investment capabilities. Volvo, and Svenska Cellulosa). GPFG publishes its Investments in private equity face two key voting intentions ahead of general meetings for se- principal–agency challenges that can be partially lected companies and for given issues it wants to overcome by developing in-house investment capa- highlight. The rationale is that GPFG seeks to express bilities. On one hand, the general opacity of private its voice in governance issues such as director equity (relative to publicly traded companies) exac- nominations and remuneration policies. In other erbates the information asymmetry between the words, this SWF is using governance strategically to principal (SWF) and the agent (external fund man- define what the organization does but also to align ager) (Johan et al., 2013). These asymmetries are even it with the geopolitical stance of the Norwegian larger in the context of SWFs investing in foreign government. markets. However, the continuing growth of these We argue that SWFs with a financial purpose that state-owned funds within the new wave of state invest in publicly traded firms are more likely to be capitalism (Bremmer, 2014; Karolyi & Liao, in press; perceived as other institutional investors equipped Li, Cui, & Lu, 2014) has fostered the development of to engage in shareholder activism, exercise their new capabilities that can either be developed in- voting rights, and demand effective corporate gov- ternally or, more commonly, acquired by hiring for- ernance standards in the investee companies where eign senior talent, in turn making SWFs more they have become state co-owners. Along with professional and sophisticated (Ang, 2012). The de- GPFG, Korea Investment Corporation is another velopment of this internal human capital facilitates good example of SWFs in this quadrant. greater internationalization, particularly in private equity investments. Therefore, SWFs are drawing on strategic gover- Quadrant 2: In-House Capabilities nance through their growing direct investments in SWFs in quadrant 2 seek financial goals and invest private equity to address three challenges. First, their in private firms. There are significant differences engagement with private equity fund managers forces between the motivations to invest in private versus SWFs to professionalize their internal investment publicly listed firms, as discussed above. In this teams by developing and/or acquiring talent. Better quadrant, we introduce the idea of SWFs as human capital is likely to lead to an overall efficient investment organizations gradually developing in- organization. Second, as a result of developing new house capabilities. Typically, institutional investors internal investment capabilities, SWFs lower their hire external fund managers (e.g., Goldman Sachs, dependence on external investment management, re- UBS, etc.) to manage their assets. In the case of SWFs, ducing their transaction costs (fees). Moreover, greater many give mandates to external fund managers to internal investment capabilities are typically associ- pursue their established investment strategies and ated with the increasing ability to manage more com- goals. Until recently, SWFs, like other institutional plex assets such as private equity (Hurst, 2014). Third, investors, paid high fees to their external fund man- the development of in-house investment capabilities agers, usually to invest in private equity as lim- reduces agency costs by more closely aligning the in- ited partners or co-investors to general partners terests between SWFs and investee shareholders (Hoskisson, Shi, Yi, & Jin, 2013). However, the 2008 (principal–principal conflict) as well as SWFs as financial crisis altered the relationship between in- owners and investee firm managers (Clark et al., 2013). vestors and external fund managers and brought in The main challenge for this type of SWF investment a new practice. During the financial turmoil, these is coexisting as state owners with other owners (not external fund managers did not succeed in providing always state owners) who might have different in- reasonable returns on investments, leading SWFs to terests in the firm. This raises the classic principal– seek alternative solutions that would minimize the principal problem (Young et al., 2008). In terms of transaction costs of their investments (Dixon & strategic governance and to minimize both principal– Monk, 2013). One of the responses to this non- principal and principal–agent problems, SWFs might contingent external management fund cost is in- set up investment management offices closer to their ternalizing this service, reducing SWF dependence investment partners and investee companies to mini- on external agents as well as the intrinsic agency mize moral hazard and to exert more control over 14 Academy of Management Perspectives February managers, respectively (Al-Kharusi, Dixon, & Monk, ownership of the SWF and the publicly traded own- 2014). Thus, SWFs can reduce the institutional dis- ership of the investee firms. First, an increasingly tance (Eden & Miller, 2004) with their investment common trend within state capitalism is that the gov- partners (co-owners) by developing in-house manage- ernments responsible for SWFs develop financial re- rial capabilities to monitor this risk. This closer lationships with host country governments, with the relationship is likely to foster trust and reduce ultimate goal of establishing strong political and fi- information asymmetries, which in turn might de- nancial ties with them (Clark et al., 2013). This tends to crease the principal–principal costs. Doing so also happen particularly with SWFs from small govern- exposes SWFs to learning opportunities with other ments that do not have a significant geopolitical pro- co-investors and financial intermediaries. file. It is a strategic governance move to minimize ADIA from Abu Dhabi is an illustrative example of uncertainty and develop trust through relationships. SWFs in quadrant 2. ADIA’s volume in assets is es- Clark et al. (2013) referred to these SWFs as “post- timated to be more than US$700 billion, and it is in colonialist.” the process of reducing its reliance on external in- Second, SWFs in quadrant 3 rely on their large vestment managers (in 2012, around 75% of fund state-owned endowment pool to launch long-term holdings were managed by external managers) and investment relationships with organizations equipped capturing international talent (for instance, ADIA is with critical economic or political power (i.e., multi- hiring managers from Deutsche Bank, Credit Suisse, national firms and nongovernmental organizations). and BP as heads of key private equity departments). Here, SWFs are used as a governmental tool, differ- In addition to reducing transaction and agency costs, entiating them from other countries’ investment this internalization effort also demonstrates ADIA’s mechanisms. In this sense, these SWFs move strate- strategic governance, incorporating human capital to gically from the parameters of state capitalism into obtain higher control. Another good example of this market capitalism. For instance, Singapore’sTemasek strategic governance is GIC from Singapore. This has a stake in Repsol, the Spanish oil national cham- US$280 billion SWF is increasing its investments in pion, whereas CIC made a sound investment (now private equity (in 2014, around 15% of its portfolio) sold) in Morgan Stanley in the midst of the financial and engaging in product diversification. It is now one crisis. of the 10 largest investors in real estate in the world Third, there is a risk associated with pursuing in- and an active player in the venture capital industry. ternational public investments that seek national These in-house capabilities were encouraged by the strategic goals as opposed to purely financial ones. Singaporean government in its attempt to raise the The potential stigma connected with state ownership quality of the country’s asset management industry. (i.e., deep pockets accompanied by nonfinancial The recent opening of GIC’s San Francisco office is goals) can be overcome when choosing the publicly further proof of its commitment to venture capital, its traded firms in which to invest. In this regard, we argue efforts to minimize principal–principal conflict, and that SWFs in this quadrant might decouple and un- the strength of its internal investment capabilities dertake dual agendas to overcome the liability of (the same applies to Khazanah Nasional, which re- sovereignness. In other words, they invest in publicly cently opened its first non-Asian office in San traded firms to legitimize themselves and pursue their Francisco). strategic goals. This is a symbolic as opposed to a substantial effort (Meyer & Rowan, 1977). However, their sovereign interests are not likely to be fully Quadrant 3: Legitimacy and Decoupling aligned with the core shareholder value maximization SWFs in quadrant 3 pursue strategic (nonfinancial) interests of the publicly traded firms. The presence of goals and invest in publicly traded firms. Their in- strategic SWFs can be quite powerful when countries vestments seek legitimation by being listed in foreign seek to gain international investment legitimation. A public markets while simultaneously pursuing non- good example is the SWF Qatar Holding, whose clear financial goals. The dynamics of this quadrant follow goal is to promote the national country brand. Qatar the behavioral perspective of corporate governance Holding has invested in European global companies and strategy, which emphasizes social structural such as Volkswagen, Banco Santander, Hochtief, relationships, institutional processes, and social Lagardere, Iberdrola, and Harrods. It has also been cognition (Westphal & Zajac, 2013). Four strategic involved in one of the largest acquisition deals of the dynamics fall into this quadrant, complemented by decade, showing its strength as a shareholder. In par- these SWFs’ unique governance structure: the state ticular, Qatar Holding, with a 12% ownership in 2016 Aguilera, Capape,´ and Santiso 15

Xstrata (a multinational mining company), pressured represent the highest percentage of institutional in- Glencore (a global commodities trading firm) to in- vestors in private equity (Johan et al., 2013), as the crease its initial bid by 9%. We interpret this gover- logic of state capitalism is consistent with opaque nance activism as the SWF’s attempt to show that it is governance of private equity. Often, SWFs that seek alegitimateinvestor. more than just financial goals will engage in extreme Finally, it is also possible that SWFs in this quad- strategic governance such as taking over a private rant engage in cross-national institutional arbitrage company to maximize control and minimize the (Witt & Lewin, 2007) in the sense that they look for need for disclosure. The owner can easily reduce the most institutionally appropriate foreign markets agency costs by eliminating external shareholders in which to invest in public firms. SWFs borrow from and, as a result, directly set the management in- the host country’s national institutions to gain the centives and redesign the strategy. Another SWF in home country legitimation that they lack. This is also this quadrant is the International Petroleum In- labeled “institutional bonding” (Bell, Filatotchev, & vestment Corporation (IPIC), Abu Dhabi’s SWF spe- Aguilera, 2014; Coffee, 2002). Most of these strategic cializing in oil. IPIC began investing in the Spanish funds originate from nondemocratic countries that petroleum multinational Cepsa in 1988, and it made lack accountability and shareholder protection laws the company go private in 2011. Although IPIC was (Aggarwal, Erel, Stulz, & Williamson, 2009; World seeking to acquire Cepsa’s existing geographic di- Bank, 2013). These SWF managers have to take into versification capabilities, the main objective was to account sovereign interests when making in- obtain the necessary knowledge to undertake more vestment decisions and while seeking global in- efficient operations in the SWF’s own extensive en- vestment legitimation. SWFs in this quadrant ergy investment portfolio. include those from small countries, such as Qatar Third, SWFs in this quadrant, like those in quadrant Holding and Temasek (Singapore), but also other 3, seek to develop long-term country-to-country re- funds from countries with significant political clout lationships (Clark et al., 2013). Strategic SWFs have and strategic policies tightly aligned with the gov- stronger ties to their sponsoring governments than fi- ernment (e.g., the Chinese CIC). nancial SWFs and more intensely embed the dual economic and sociopolitical objectives of state capi- talism. These aims and mandates are aligned with Quadrant 4: Long-Term Learning those of the respective governments. Thus, these Quadrant 4 includes SWFs that pursue strategic SWFs directly represent their governments (and are investment goals and invest in private firms, typically often run by government officials), making it easier with a domestic focus. This quadrant introduces three and faster to engage in agreements with other states. new strategic governance dimensions among SWFs. For example, SWFs such as Russia Direct Investment First, they are interested in learning and acquiring Fund and Qatar Holding have established agreements new capabilities, achieving this through alliances with the governments of Italy, France, and Ireland in and joint ventures with leading international private key strategic sectors: export-oriented companies, companies. The governance associated with this medium-size enterprises, and technology companies, strategic effort entails the need to keep a low gover- respectively (Santiso & R´ıos, 2014). In all cases, host nance profile in terms of public scrutiny and fi- governments are interested in the SWFs’ large finan- nancial disclosure, though also coping with the cial resources for their private companies for whom principal–principal tension. An example of how access to credit and investors is difficult. In this regard, acquiring knowledge and pursuing long-term in- SWFs are an arm of the state in question to pursue its vestment can help a country diversify its domestic goals through private financial agreements. It is im- productive portfolio is Mubadala from Abu Dhabi. It portant to note that these strategic goals are not nec- started a series of private joint ventures in the re- essarily harmful, often resulting in a win-win newable energy industry with leading Western situation: Foreign companies and countries secure companies such as Total (France), SENER and long-term investments, and SWFs gain access to re- Abengoa Solar (Spain), and E.ON (Germany). This sources and know-how in relevant industries. strategy also illustrates state capitalism at its core by engaging in financially viable projects that mostly DISCUSSION benefit the home country’s economic prosperity. Second, SWFs form many of these strategic alli- Sovereign wealth funds as state-owned institutional ances with nonlisted companies. In particular, SWFs investors without pension obligations are one of the 16 Academy of Management Perspectives February key players in the new state capitalism, with states no quadrant in our ideal-type organizing framework longer serving as the sole owners or controlling man- (Figure 1). SWFs are evolving organizations (Clark agers in investee firms, as is the case with state-owned et al., 2013) and might also change or expand to other corporations. States as owners engage in economic quadrants over time (Schena & Kalter, 2013). This and political relationships with other owners and ex- mobility includes both public financial (asset classes ternal managers. This new state capitalism also em- and geographic allocation) and private financial braces the idea that SWFs can pursue both political SWFs (in-house capabilities through specialized and financial objectives, at times fulfilling both si- workforce and new organizational challenges via multaneously. In this paper, we shed light on the international offices). We discuss four of these “siloed” research on SWFs by offering an organizing common movements. framework based on SWFs’ investment motivation The first movement we have detected comes from and the ownership type of the investee firms. We have financially oriented SWFs transitioning from quad- defined four distinct strategic governance dimensions rant 1 to quadrant 2 (from a focus on publicly traded in which SWFs cope with the principal–agency to privately held target firms). The most financially problem, the principal–principal problem, and be- oriented SWFs from Norway and Korea invest havioral governance challenges. heavily in listed assets, which represent more than First, we identified financial SWFs that play 90% of their equity portfolios. However, they also a larger role as active shareholders of listed compa- participate in more complex asset classes, increasing nies worldwide. This incipient trend aligns well their exposure to private assets. Norway’s GPFG is with a more active capitalism in which owners have a good example. Although it has traditionally split its greater influence in an investee company’s strate- investment strategy between equity (40%) and fixed gic management. Second, financial SWFs are de- income (60%), it has shifted gears and started to in- veloping stronger in-house capabilities. Several vest directly in private real estate assets. As of June factors have triggered this move toward more numerous 2014, GPFG had acquired property in Europe and the and specialized human capital: organization pro- United States worth US$10.3 billion (Yu, 2014), and fessionalization, investment fees, and lower agency it forecasts investing at least 5% of its portfolio in real costs. Third, governments use strategic SWFs to ob- estate (approximately US$45 billion). Jumping into tain state goals while simultaneously seeking to gain quadrant 2 while keeping a foot in quadrant 1 will legitimacy as institutional investors. These policy reinforce GPFG’s internal teams by hiring new talent objectives are not necessarily mutually exclusive and increasing its in-house capabilities. from financial efficiency. Fourth, strategic SWFs are The logic behind this first kind of movement re- learning organizations. The funds act as catalysts of flects the growing sophistication of SWFs. Investing domestic economic diversification and leverage re- directly or indirectly in private assets allows SWFs to lationships with global industry leaders to learn. expand the universe of investable assets while These four strategic dimensions comprise an or- keeping a return-risk financial motivation. Given the ganizing framework with four quadrants, represent- globally low interest rates, turning to private assets ing a valuable tool with which to study SWFs. helps increase the possibility of higher returns. And, However, these four quadrants sometimes have given the new risks arising especially when SWFs blurred boundaries or overlap. In addition, funds bypass private equity funds and invest or co-invest evolve over time (in terms of goals, structure, and directly in private companies, the need for more in- teams), so one fund may currently fit into a given ternal talent results in better prepared workforces. quadrant and later move to another. To analyze this Thus, this first movement implies jumping from complex and dynamic scenario, we examine the more standard investment organizations in quadrant movements between quadrants and the reasons that 1 to reinforced in-house sophisticated talent found lead funds to shift between them. After that, we offer among SWFs in quadrant 2. two productive avenues for future research with Second, there are funds in quadrant 2 moving to- implications for the management and finance areas. ward quadrant 4. For example, SWFs from New Zealand, Australia, and even Alaska are trans- forming into strategic funds by investing heavily to Dynamic Strategic Governance: Movements promote specific domestic sectors or to secure the Between Quadrants provision of natural resources. These SWFs with SWFs are multidimensional organizations in that, clear investment mandates might suffer from politi- at any given time, they might belong to more than one cal instability or external shock (e.g., changes of 2016 Aguilera, Capape,´ and Santiso 17 government, long-term low oil prices, and domestic Since then, Temasek has pursued strategic goals banking crises). A possible response might be to such as championing formerly private and in- tackle short-term problems with long-term re- efficient Singaporean government-linked compa- sources. This implies that funds might change their nies (e.g., SingTel and Singapore Airlines) and goal from acquiring in-house capabilities to invest- turning them into regionally listed giants. Thus, it ing abroad toward more domestic and sector-specific shifted from quadrant 4 to quadrant 3. By doing so, arrangements in an attempt to obtain long-term Temasek has reduced its exposure to domestic economic returns. A good example here is Ireland, companies and gained prestige in the international but we can apply it to any country that has had to take investment community. The jump from quadrant 4 a more strategic (and usually domestically oriented) to quadrant 3 is explained by a certain natural evo- stance after a profound financial crisis to establish lution among the funds toward a more diversified investment programs to revive the local business international portfolio. This evolution also reflects ecosystem and economic activity. After rescuing the the transition of funds that have a development vo- national banking system, the old Irish National cation (common in quadrant 4) toward being more Pension Reserves Fund is now transferring its assets open to investing in listed companies. This is to the Ireland Strategic Investment Fund. The ISIF is a common transition among sovereign funds from committed to investing on a commercial basis to developing countries that achieve specialization. support economic activity and employment in Ire- Typically, these funds then cede financing devel- land. Thus, it has changed the financial goals typi- opment projects to banks or public development cally found among SWFs in quadrant 2 to provide agencies. a broader economic and strategic support typical of funds in quadrant 4. Future Research: An Exploration of the Bright and We see a third movement with funds moving from the Dark Sides of SWFs quadrant 3 to quadrant 1—that is, strategic funds investing heavily in listed equities that reduce their Our strategic governance framework touches on political alignment and then shifting into global fi- two key features of this investment organization at nancial players. An example is the China Investment the apex of the new state capitalism: the logic of Corporation (CIC). China has five SWFs, two of long-term capitalism and the role of politicians and which are among the largest in the world: CIC and politics (sometimes leading to crony capitalism). SAFE. CIC was created in 2007 and has grown rap- We think these are fascinating areas for future idly since then, from US$200 billion originally to cross-disciplinary research. First, SWFs are well approximately US$600 billion today. While CIC and equipped to become significant actors in the new SAFE compete globally for deals and domestically long-term capitalism (Bolton & Samama, 2012). In for political favors in the cradle of state capitalism, principle, long-term investors provide patient the Chinese government seems to have split their capital and managerial rewards to companies with respective roles, with CIC becoming a global fi- long-term focus (Davis, 2009; Krippner, 2012), nancial player (quadrant 1) and SAFE remaining thereby alleviating the short-term distortions and a strategic fund in quadrant 3. Consequently, pressures introduced by stock volatility. The gi- avoiding competition between same-country funds gantic needs of global infrastructure investments can be an important driver behind this move- (estimated by the World Economic Forum [2014] to ment, helping to create funds with financial goals be around US$5 trillion per year over the next two (with a focus on foreign listed equity) and keeping decades) reinforce the new opportunities for SWFs others with more strategic objectives (typically as long-term investors. Infrastructure’ssteadylong- domestic). When symbolic goals represent an ob- term cash flows also serve to diversify and legiti- stacle to achieving substantial goals (as explained mate SWFs. in Figure 1), a given country may opt to abandon Thanks to sustained, successful track records in strategic motivations to engage with other “stan- other asset classes, funds such as ADIA and GIC have dard” institutional investors such as public pen- attracted international talent (both funds are included sion funds in quadrant 1. in quadrant 2 with strong in-house capabilities) and Fourth, we have seen some SWFs shifting from are now able to deploy long-term investment strategies quadrant 4 to quadrant 3. We see this with SWFs that (Barbary, 2014). As SWFs acquire these in-house ca- are multidimensional and dynamic, such as Singa- pabilities, they will play an increasingly important pore’s Temasek, which was incorporated in 1974. role in the long-term economy focused on the global 18 Academy of Management Perspectives February enhancement of corporate governance and real assets require a global orientation and the ability to rec- such as infrastructure and agribusiness. For example, oncile divergent interests. Managers from state- GPFG’s voting intention disclosures (and potential owned organizations are mostly presumed to be herding behavior coming from its website but also unmotivated and inefficient (Rajan, 2010). The new social media) serve as a quasi-natural experiment to state capitalism is at a turning point as it reconciles analyze the market’s reactions to sensible corporate the strengths of capitalism (results-oriented and governance questions. open to global markets) with the goals of states Second, SWFs also have a darker side that de- (long-term objectives and political influences). In- serves further scholarly attention: the hidden terestingly, at the individual level, the unresolved political motives behind SWFs and how political question is whether managers will be able to com- interventionism may affect the management of SWFs bine state and political goals with financial returns. and their investment targets. One of the main risks This question affects funds in every quadrant of our SWFs face (particularly those with strategic goals) is analysis, as it reflects a tension rooted in the very excessive involvement by politicians in operations, nature of SWFs: They are state-owned organizations goals, and governance. This is normally associated in a capitalist playground. with a bias toward domestic investments, less re- Two other areas within the management field de- liance on external fund managers (Bernstein et al., mand further attention. The first involves the SWFs’ 2013), a higher risk of political rent-seeking (Pistor & own corporate governance. Here, a key question is Hatton, 2011), and a turn toward short-term goals. whether in-house capabilities will grow evenly This context of non–efficiency seeking is particu- within the entire SWF industry. Depending on the larly salient during economic downturns, when pace of these changes, the gap between the most and politicians face higher pressures to alter the SWFs’ the least sophisticated funds will grow wider, lead- mandates and use their resources to capture specific ing to a two-speed industry in terms of investment electorates. Similarly, different rhythms of the po- capabilities. In fact, there is still scant research litical and economic cycles account for short-term linking SWF performance and corporate governance pressures, and SWFs may succumb to the temptation (including size, top management teams, and organi- of coming to the rescue of underperforming compa- zational design). nies for political rather than economic purposes, Second, SWF governance within the state in- such as during election times. stitutional architecture requires more exploration. A In sum, politicians’ influence in SWF investment main problem to be solved is SWF alignment with decisions is at the intersection between regulation stable long-term strategic state plans rather than and policy (Balding, 2012; Rose, 2009). In this regard, discrete short-term political goals. State plans would funds in quadrant 3 face a permanent trade-off be- thus serve as long-term benchmarks to improve tween symbolic goals (political legitimacy at home scrutiny over SWFs’ returns and objectives. There- and abroad) and substantial goals (efficiency by fore, research on disentangling state and political investing in top listed equities). If the government goals, though complex, would be useful for gover- decides to tip the balance toward political goals, le- nance and management purposes. However, it is also gitimacy will not be attained and the sovereign dis- critical to enhance corporate transparency domesti- count will increase. According to Deephouse (1999), cally and internationally when SWFs’ strategy is part SWFs can be as strategic as legitimately possible. of well-publicized long-term state plans. Turning to future financial-related research re- garding SWFs, we propose three main areas for fur- Managerial and Financial Challenges ther exploration. First, the question of whether Another interesting area to explore for manage- countries need an SWF or not remains unresolved. ment practice refers to the nature and development After years of economic and commodity windfalls, of SWFs’ human capital (a hybrid between state most countries with old and newly established oil- employees and global investors). The workforce of related SWFs are now facing lower oil prices and, the new state capitalism comprises employees from thus, substantially reduced margins at best. Will SWFs but also from state-owned enterprises (SOEs), SWFs react as the fiscal buffer funds they are meant development banks, and public agencies, each to be? Is there an alternative way to shield a commodity- with unique skills and incentives. SWF pro- dependent economy? What are the main empirical fessionalization (quadrant 2) demonstrates that in- findings and differences in countries such as Russia, vestment managers in this kind of organization Angola, and Nigeria? In addition, long-term horizons 2016 Aguilera, Capape,´ and Santiso 19 need better analysis, particularly when assuming that enhancing their in-house capabilities, SWFs have all risks become financial in the long run. Similarly, been able to simultaneously reduce their de- risk management, specifically uncertainty manage- pendence on external managers while also in- ment, will require further attention given the duration creasing their professionalization (risk management of the wagers SWFs make. and due diligence requirements are currently similar Second, as extensions of the state, SWFs benefit to those for well-established global investment in- from fewer information asymmetries than private stitutions). Third, strategic SWFs might be deployed players when dealing with governments. Therefore, as governmental tools, decoupling and investing in a pending research question is whether there is publicly traded firms to gain legitimation, though a “sovereignness advantage” for SWFs in specific their sovereign interests may likely not be fully projects and countries compared to their private in- aligned with the core shareholder value maximiza- vestment competitors. tion interests of their co-owners. Fourth, strategic Last, there is an interesting issue intersecting the SWFs investing in private companies seek to obtain management and finance areas. As stated in the Fu- long-term learning templates that will help them ture Research section, more external managers might acquire the relevant know-how and diversify the insulate SWFs from politically short-term and biased base of their own national economies. With our decisions and help to deal with complex investment proposed strategic governance framework, we dis- opportunities otherwise out of reach. However, ex- cuss movements across strategic governance di- ternal managers come at a cost in terms of asymme- mensions and uncover two research topics that need tries and fees. The question is this: What is the proper further attention: the idea of long-term capitalism balance between managerial independence and fi- and the role of politicians and politics in SWFs. nancial returns? State capitalism is salient in each of the quadrants in our theoretical framework, as is the governance tension among owners, co-owners, and their man- CONCLUSIONS agers. Interestingly, some SWFs have become cor- Most of the existing research on SWFs is grounded porate governance global watchdogs, such as GPFG, in specific disciplinary fields and has focused pri- and this is an organizational innovation. Also, SWFs marily on economic and performance trends. In this have introduced a new way of understanding the paper, we sought to bring this research to the firm relationship between the state and the private sector. level and explore SWFs’ strategic governance. We Some questions still remain, however: Will states began by briefly reviewing the state-of-the-art find- sponsoring SWFs be able to attract or develop ings on what we know about SWFs: They are a highly enough talent to achieve their goals? 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Business School at Northeastern University and a visiting strategies used by sovereign wealth funds both at home and professor at ESADE Business School, Universitat Ramon abroad and the role they play as owners. Llull. Her research falls at the intersection of international Javier Santiso ([email protected]) is a professor of business and economic sociology, with special emphasis on economics and entrepreneurship at IE Business School comparative corporate governance, corporate social re- and former professor of economics at ESADE Business sponsibility, and internationalization issues. School. He has been in the past chief economist and di- Javier Capape´ ([email protected]) is a Ph.D. candidate rector general of the OECD Development Centre. His cur- at ESADE Business School, Universitat Ramon Llull, and rent research is focused on sovereign venture funds, associate researcher at Sovereign Wealth Lab at IE Business sovereign funds, venture capital, and startups. School. His research lies at the intersection of international business, management, and finance. He studies different Copyright of Academy of Management Perspectives is the property of Academy of Management and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.