Introduction

4

Governance

INTRODUCTION

This chapter discusses the importance of good governance for strategic investment funds (SIFs) and how these entities and their public backers and capital providers can embed robust governance techniques within the organization. Chapter 3 sets out the key laws and regulations that underpin the governance of a SIF, and this chapter explores more closely why governance is important, what foundational elements constitute the governance of a SIF, and the principles of a well-governed SIF. The following chapters then spell out further the governance processes embedded within the SIF’s investment policy, risk management, and transparency and disclosure requirements.

An entity’s governance framework specifies the allocation of rights and responsibilities between its different stakeholders and articulates the rules and procedures for decision-making (World Bank 2014). Good governance contributes to the capacity of the entity to function consistently within its defined objectives and is an essential component to functional performance (North 1990; Williamson 1996). Research finds that good governance can affect investment returns by as much as 100 to 300 basis points per year (Ambachtsheer 2007; Ammann and Ehmann 2017). Even ideal institutions fail if poorly governed (Clark and Urwin 2008). The financial scandal involving the Malaysian SIF, 1Malaysia Development Berhad (1MDB), is a prime example of an institution that appeared to have good governance but for which in reality governance failures led to the theft of billions of dollars’ worth of taxpayer money.1

A robust governance framework therefore bolsters a SIFs’ legitimacy and is a prerequisite to effective long-term performance. Among the multiple factors involved in establishing a SIF, governance is core to establishing its legitimacy and implementing its mandate. A well-constructed governance framework aligns the SIF’s governing bodies, providing incentives for proper oversight and management to ensure the objectives of the dual mandate are both met and monitored (see Gelb, Tordo, and Halland 2014).2 Robust governance arrangements also insulate the SIF and its governing bodies from fluctuations in the political climate that can jeopardize the fund’s long-term