The Arab Sovereign Wealth Funds and the Need for Transparency

The recent global financial crisis has taken a major toll on the institutional investors, especially different sovereign wealth funds (SWFs) including those in the Arabian Gulf area. However, that impact is not clear because of the lack of transparency in these funds, which denies these SWFs the benefits accountability and frustrates institutional learning.

Because the investment process is not clear, there isn't much accountability when it comes to bad investments. For example, investing in the financial sector in the US at the end of 2007 was disastrous for most SWFs, yet no one was held accountable for deciding to jump into companies like Citigroup and Merrill Lynch when the value of their stocks was about to collapse.

Another effect of the lack of transparency is that it thwarts any possible institutional learning. The secretive nature of organziations is not usually limited to their dealings with the outside world; it extends to their internal mechanisms. This means that when a bad investment is made, no review is conducted and the causes of the failure are not documented in the SWF's knowledge base. New fund managers are not aware of earlier mistakes and tend to repeat them.

The recent news of equity investments by Arab SWFs in Western companies show that the lessons of the major losses of 2008 and 2009 have indeed been lost. In fact, many of these investments seem to be motivated by hindsight: bargain hunting by looking at historic values rather than looking at the expected future values of companies. However, without transparency no one will be able to evaluate these investments accurately and mistakes will repeat themselves indefinitely.

Share