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| Strategic Investment Funds
representatives on SIF governing bodies or its relationship with government entities outside of the formal governing bodies. For example, the government, which often operates under competing priorities, could pressure a public capital SIF in certain circumstances to invest in politically motivated projects that may deviate from the long-term mandate of the SIF. On the flip side, the government could also give the SIF favored access to government public-private partnership project pipelines, favored pricing on government assets, and favored treatment by regulatory authorities—all of which could distort and crowd out private investors operating in the same sectors. The governance framework for the SIF ideally corrects for these issues through (1) an oversight structure that seeks to insulate SIF management from pressures to deviate from the mandate or distort the private market, and (2) the identification ex ante of the market gap the SIF must address without the risk of crowding out private capital.
KEY DECISION-MAKING BODIES AND THEIR FUNCTIONS SIF governance structures typically consist of three levels of decision-making bodies that represent ownership, oversight, and management. The owner (or public sponsor), in addition to providing capital to the SIF, sets its driving objectives; the overseeing board sets the strategy to deliver on these objectives (with the input of the manager) and supervises the delivery; and the management carries out the objectives. The governance structure ideally works to (1) insulate the SIF and its investment decisions from political interference, (2) ensure that short-term political interests do not outweigh the long-term mandate, and (3) balance autonomy and independence of the fund with proper oversight and accountability. The selection, composition, and characteristics of each governance body are important ingredients to the overall governance framework of a SIF. Each of these factors can either subtly, or more tangibly, undermine the integrity and efficacy of a SIF. Recruiting qualified and experienced decision-makers on governing bodies improves the likelihood that a fund’s mandate and investment policy are aligned (Alsweilem et al. 2015). Nevertheless, institutions vary a great deal with regard to their capacity to select qualified board members, hire strong senior staff, and govern themselves as human capital–enhancing organizations (Ambachtsheer 2007; Clark and Urwin 2008). Ideally, no overlaps in membership should exist between the three governance bodies because such overlaps could create parallel chains of reporting. The principle of clarity should generally drive governance arrangements, and the respective roles and responsibilities of these three bodies should be transparently defined in the SIF’s establishment law, bylaws, or governance codes or guidelines. Separation of responsibilities between the governance bodies is to some extent country- specific, reflecting legal and political circumstances. However, public sector participation ideally occurs in the higher-level governing bodies representing ownership, whereas private sector characteristics predominate at the oversight and management levels. The specific characteristics of the governance arrangements derive primarily from the law establishing the SIF and from whether the fund and the fund manager are separate legal entities with different ownership compositions. As discussed in chapter 3, investor rights and governance arrangements are embedded within the law(s) that set up the SIF—such as trust law or company law—and the
