Wanted: International business ethics


Characteristic of his perverse presidency, George W. Bush got it the wrong way round again last week. Signalling an agreement between the United States authorities and representatives of the sovereign wealth funds (SWFs) of Abu Dhabi and Singapore, the soon-to-be former president of the US said: “It makes no sense to deny capital, including sovereign wealth funds, access to the US markets.”


What he probably meant, but for reasons of American financial chauvinism could not quite bring himself to say, was something like this: “It would be wrong, when our financial institutions are creaking almost to the point of collapse, to deny them life-saving access to the most liquid and mobile sources of capital in the world, the sovereign wealth funds of friendly countries that until now we have smeared as threats to our national security and sinister manipulators of the financial system.”


You just cannot imagine him saying that, can you?


But despite Bush’s solipsism, we should be grateful that the US – and the European Union in a similar policy statement – have recognised that the SWFs are a force for good in the current credit crisis.


The deal agreed the between the US Treasury on one side, and the Abu Dhabi Investment Authority, the Government of Singapore Investment Corporation and Temasek, on the other, represent a template for the discussions due to take place later this year with the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) on the introduction of a broader global agreement for the operations of SWFs. If that helps remove obstacles to the free-flow of capital around the world, it is a good thing, especially in these troubled times.


In general outline, there is nothing anybody can object to in the broad proposals agreed with Washington. The funds should be operated at arm’s length from their government’s policy, there should be a strong governance structure, respect for the regulatory regime of the host country, and agreement on the desirability of standards of transparency and accountability. These are measures agreed by almost everybody in the world as the minimum requirement for doing business in a foreign country.


But there will still be opposition to overcome in the West, and potential stumbling blocks in extending the proposals to encompass all SWFs.


Even as the US Treasury was shaking the SWFs’ hand on the deal last week, a group of US politicians launched an offensive about the tax treatment of SWF investment in American corporations. US politicians often use tax threats as an instrument of government policy – remember, the infamous gangster Al Capone was imprisoned for tax violations, not for the violent reign of terror he brought to Chicago – so the threat from the Internal Revenue should be viewed with alarm by the SWF lobbyists in America. Any suggestion of a special tax on SWF investments should be vigorously opposed.


There are broader concerns too. I have argued before that the whole debate about SWFs has been characterised by hypocrisy and double standards on the Western side, and that it ignores the long history of Western mercantilist expansion in Latin America, Asia and the Middle East – surely an historical example of business being used as an instrument of government policy. But the West should not fall into another trap, that of putting the convenient but misleading label of “SWF” on all the diverse funds that are seeking to do business with USA Inc. This will only create more problems than it solves.


Abu Dhabi and Singapore are natural companions to be under one banner – geographically small, with limited geopolitical ambitions and a history of benign relations with the US and Europe. Along with the Qatar Investment Authority, which is thinking about the US plan, they are model sovereign wealth funds.


Some reports last week quoted Dubai International Capital as also considering signing up to the proposals, and I think things start to get a little trickier here. DIC could argue that it is a special case on several fronts: it is probably best described as a government-owned private equity group, rather than a sovereign wealth fund; it already has a strong team of professional investment advisers, and incorporates quite high standards of accountability and transparency in its operations (though there is always room for improvement). And most important, it is an active trader in international assets – it will not be willing to miss out on a profitable opportunity because of a deal signed to keep American politicians happy.


Imagine, for example, that DIC had been blocked from doing its highly profitable sale last year of Tussauds because it has promised Senator Somebody-or-other that it would hold on to foreign investments for a minimum period of, say, 10 years. DIC shareholders would not have liked that.


When you consider the wider world of SWFs, the picture gets even more complicated. How can the Norwegian state pension fund – high up the list of asset-rich government-owned funds – be included in the same proposals as the China Investment Corporation, or the Stabilisation Fund of the Russian Federation, also classed as SWFs?


China and Russia will present special challenges to the IMF and OECD as they seek a worldwide agreement. Both are big, expansionist geopolitical entities, with enormous military as well as financial resources to back up their strategic interests. Of course, the rest of the world should and must do business with them, but it is doubtful any useful purpose would be served by ranking them in the same category as Abu Dhabi and Norway.


I would especially like to see the IMF addressing the issue behind Bush’s one-sided view of the world, illustrated at the top. Western corporations doing international business have historically behaved, and often still do behave, in a manner that is now being attributed to the SWFs – as instruments of their governments’ geo-strategic interests.


A cursory reading of the history of the international oil industry provides endless examples of American and European energy companies’ determined pursuit of their national owners’ strategic interests with little regard for standards of business ethics.


Perhaps what the IMF and OECD should be considering is a much wider agreement on the fundamentals of international investment principles, rather than focusing on an alleged SWF problem perceived and propagated by the USA.