Corporate Governance Of Sovereign Wealth Funds

Sovereign wealth funds (SWFs) are state owned institutions that activelyallocate foreign reserve globally with a long-term horizon to maintain andadd value to national wealth. There are around50SWFs so far with totalassets of$2trillion to$3trillion. It is forecasted that SWFs will grow at40billion per year in next decade, playing a more and more important role inglobal market. However, academic research in corporate governance of thesefunds, which is discussed in this paper, is still limited.Based on principle-agent theory and information asymmetry theory, thepaper analyzes corporate governance issues in SWFs from the perspective ofgame theory. The paper systematically outlines frame work of internal andexternal corporate governance of SWFs, theoretically discusses game rules of related parties, and explores prospect of China Investment Corporation,which is a SWF of China, by the case of Temasek Holdings.The rest of the paper is organized as follows. The first chapter outlinesbackground, structure and significance of the study. The second chapteridentifies definitions of two key words in the first chapter, i.e. SWFs andcorporate governance. The third chapter focuses on internal corporategovernance issues, proposes an institutional HM model which is specific forSWFs’ principle agent problem, and discusses incentive games betweengovernment and SWFs. Then the forth chapter explores on external corporategovernance issues, puts forward cost-revenue function of information release,and builds a supervisory game model between public and SWFs. Based ontheoretic analysis above, the fifth chapter investigates Temasek Holding’ssuccess in corporate governance, thereby concludes with lessons for China’sreference. Last but not the least, the sixth chapter concludes.It shows that institutional environment can impact corporate governanceof SWFs through multi channels. That is, institutional environment affectsnot only SWFs’ behavior but also exogenous game rules. On the internal side,institutional environment influences risk exposure and agent cost, thereforeaffects efficiency of SWFs’ incentive mechanism, which points to principleagent problem. On the external side, institutional environment and appeal for development are key drivers in information release and game equilibrium.Dynamic adjustments of these two elements promote involution of game,therefore affects efficiency of SWFs’ supervisory mechanism, which relatesto transparency problem. Besides, the above mentioned models are, to someextents, confirmed by Temasek’s case, from which China can leam lessons inaspects of state owned assets management, foreign reserve investment, andinstitutional reform.From both theoretical and practical perspective, the paper’s significancelies in three points. First, game theory expands academic research approachesin corporate governance of SWFs. Second, substantial attention on externalcorporate governance environment has practical significance for developingcountries with inefficient market mechanism and poor corporate governance.Third, study on Temasek Holding casts light on corporate governance ofChina Investment Corporation and state owned assets management.