Sovereign Wealth Funds Must Choose a Different Path
By Christopher Mackin
(This article appeared originally in the Financial Times. It is reprinted here by permission of the author.)
Sovereign wealth funds, with a combined $8tn in assets, are in the news. China Investment Corporation recently teamed up with France’s largest bank to create a €1bn-plus fund to back European companies. Norway’s oil fund cut back its investment in oil and gas stocks, and Abu Dhabi’s Mubadala set up a tech hub with SoftBank.
But a reckoning awaits this key financial constituency—can their wealth be deployed in a manner that respects the sovereignty of the recipient countries? And can funds earn market returns without being economically extractive or politically divisive? Norway’s fund has sought to address these issues by pushing for governance improvements in investee companies.
There is an established investment structure that performs economically while also respecting concerns about foreign investment.
Sovereign wealth funds should invest in employee-owned companies. In Europe, the Mondragon Group of co-operative firms in Spain boast the most impressive statistics. With €12bn of revenue spread across 266 firms employing more than 80,000 people, Mondragon has, since 1956, demonstrated that democratic structures and technological sophistication can coexist. The UK’s John Lewis Partnership has 85,000 employees across 400 eponymous and Waitrose stores and £10.2bn in revenue. And in the US, nearly 7,000 companies employing more than 14m workers participate in employee stock ownership plans, from Publix supermarkets with $34bn of revenue to Harpoon Brewery with just $60m.
In US cases where owners sold out to employee trusts, studies show that these transactions have had a positive impact on sales and employment growth. This is particularly true when the company remains in private hands, rather than listing on the stock market. In the past such deals have relied on ordinary bank debt, but more funding is needed.
Not only do existing successful employee-owned firms need capital to grow, but there is a much larger potential market of companies currently owned by baby boomers seeking exits from companies they have successfully founded.
Sovereign wealth funds can supplement conventional debt through the use of synthetic equity structures that track traditional equity holdings without diluting employee control. These sorts of investments could be made directly into individual companies or through specialised funds knowledgeable about this niche.
At present, the US has very favourable tax and legal structures to launch this investment strategy. Over time, the practice will spread worldwide, as rules are harmonised across international borders.
Supporting employee ownership would do more than insulate sovereign wealth funds from complaints that they undermine local economies and nation-states. The target companies would reap the demonstrated benefits of employee ownership. Research points to increased retirement security and more robust job growth in addition to a significant sharing of wealth.
At a time when concerns about economic inequality are rising, some politicians are pushing redistributive, after-the-fact taxation as the only possible solution. We should consider more innovative and inclusive options that share wealth as it is being created.
Sovereign wealth funds are part of the contemporary economic conversation. If they continue to rely on traditional investment practices, they will become increasingly vulnerable to charges that they are opportunistically extracting value across borders. It is time for them to explore a different path that shares value with corporate managers, engineers and workers within the nation-states where these funds invest. All that is required is the will to act.
The writer is a partner at American Working Capital and a contributing editor of Employee-Owned America. Cornell University professor Robert Hockett also contributed.