Tuesday, May 24, 2016

Just Published: "Regulating Financial Markets: What We Might Learn From Sovereign Wealth Funds."

I am happy to report the publication of "Regulating Financial Markets: What We Might Learn From Sovereign Wealth Funds." It appears as part of Reshaping Markets: Economic Governance, the Global Financial Crisis, and Liberal Utopia 229-254 (Bertram Lomfeld, Alessandro Somma and Peer Zumbansen, editors, Cambridge University Press, 2016). In his introduction, Peer Zumbansen notes of these contributions:
Our counter-narratives focus on ‘the market’ as the primary site of critical investigation. The tradition of such a research angle is as long as its results appear frustratingly open-ended and inconclusive. But, similarly, perhaps, to the way in which we are obviously asked to overcome any remnant irritation with the lack of a clear definition of ‘globalization', we continue to be prompted to take ‘markets’ seriously. The trajectories of such serious engagement are prominent and promising–but only if, in fact, we allow them to be and if we join in the investigations already underway in an active and critical manner . . . . Our book can be seen against this background, as its authors intervene in important, sensitive regulatory areas and policy discourses, ranging from debt and credit regulation (Michos, Somma, Renner & Leidinger), corporate liability and banking regulation (Engert, Tröger, Conley & Williams, Catá Backer), contractualization of corporate regulation and banking (Zumbansen, Varellas), contract governance itself (Lomfeld, Haberl, Caruso) to national and transnational economic governance policy making and strategic choices (Campbell, Ferrarese). (Peer Zumbansen, "Introduction: reshaping markets and the question of agency" in Reshaping Markets: Economic Governance, the Global Financial Crisis, and Liberal Utopia 1-6, 3 (Bertram Lomfeld, Alessandro Somma and Peer Zumbansen, editors, Cambridge University Press, 2016))
The Introduction of my contribution follows, along with links to the collection and its table of content.


Regulating financial markets what we might learn from sovereign wealth funds

Larry Catá Backer

10.1 Introduction
10.2 The operation of the Norwegian Sovereign Wealth Fund: private actor, international actor, and sovereign
10.2.1 Organization of the NSWF
10.2.2 Responsible investing and active ownership
10.3 Juridification of investment: the emerging jurisprudence of the ethics council
10.3.1 The NSWF Ethical Guidelines
10.3.2 Operationalizing the Ethics Guidelines–the structure and functions of the NSWF Council on Ethics
10.4 Cooperative and inter-systemic governance: its strength and fragility
10.5 Conclusion

10.1 Introduction

“Sovereign wealth funds (SWFs) have recently been recognized as well-established institutional investors and important participants in the international monetary and financial system” (International Working Group of Sovereign Wealth Funds 2008, Santiago Principles”, Introduction). This form of investing by sovereigns has become an important new element in emerging patterns of governance in this century (Clark et al., 2010; Gilson & Milhaupt 2007–8). Indeed, the International Working Group of Sovereign Wealth Funds, in the course of developing its “Santiago Principles” explained that as “a result of the SWFs’ increasing level of assets invested in public and private equity holdings, they are exercising greater influence on corporate governance practices” (Santiago Principles, 3 (Santiago Principles: Objective and Purpose); also Kay 2008, 11). SWFs have become an object of great concern as they have grown in size and as they have become more visible actors within financial markets outside of their territories – either by investing in securities markets or through efforts to acquire companies abroad (Rose 2008, 84–89). Sovereign investing through SWFs remains controversial, even as its allure remains powerful (Bath 2012, 19). They adhere to the forms of free market investor activity, but in reflecting investor preference they permit states to project power privately in new ways that threaten the assumptions on which the current economic order is based (Summers 2007). But SWFs are no longer merely instruments of state investment in markets – they have increasingly been used as instruments of hybrid investing – focusing especially in developing states on development and infrastructure investment (Backer 2014; Gelb, Tordo and Holland 2014; Monk 2013). In all these roles, SWFs evidence a great collision between two tectonic forces – the state system and public law making on one side, and private-consent-based governance structures on the other side. This collision is producing a new normative framework of governance and power (Backer 2012). The resulting tension suggests both the frameworks for understanding the way in which SWFs may be managed through regulation (Bassan 2011; Chalamish 2012; Lee 2010, 226), and the ways in which SWFs may themselves manage the environment through which they are managed.

Sovereign investing takes a number of forms that reflect this collision. Two of the most innovative and dynamic are those of China (Backer 2010) and Norway (Backer 2010a). Both have changed the fundamental assumptions about the way in which states regulate internally and project power externally, by using the logic of globalization and its markets to project power beyond their borders (Schifferes 2008). The Chinese have tended to project economic power, aligning investment objectives to state policy (Kraus 1999). The Norwegians have sought to project regulatory power, and in the process shape the national law of states in which they invest, private corporate governance culture globally, and the development of international law and norms for the conduct of economic activity within globalization (Chesterman 2008; Clark and Monk 2010). Other forms are developing at the margins (Chatham House 2014). These point to a form of cooperative governance that has been emerging in the global regulation of markets and finance over the last half-decade especially (Backer 2011).

The Norwegian SWF, then, presents an important context for understanding the conditions of the alleged “return of the state” (Grewal 2010), and the focus of this chapter: the emergence of SWFs as a means of effectuating public regulatory power through private financial markets. Undertaken through its sovereign wealth fund, the Government Pension Fund-Global (the NSWF) (Norway Ministry of Finance 2011–2012, Section 1), Norway is not merely to projecting public wealth into private global markets, but is also attempting the construction of a complex rule-of-law-centered framework that blends the imperatives of a state-based public policy with a rules-based governance system that incorporates domestic and international norms. To this Norway adds a policy-oriented use of traditional shareholder power to regulate the behavior and governance of companies in which the NSWF has invested. The object is not merely to maximize the welfare of the funds’ ultimate investors, the people of Norway (through its state apparatus), but also to use the fund to advance Norwegian public policy in the international sphere and within the domestic legal systems of other states to achieve a measure of horizontal harmonization of corporate governance. That project involves a distinctive development of standards (e.g., Wielsch 2012) developed to transform policy into governance through investment activity.

This investment activity with legislative effect, undertaken through the framework of responsible investing provides the foundation for the thesis of this study: Sovereign wealth funds embody a new and important form of cooperative governance, one that (1) bridges public and private government spheres; (2) blends law, custom, contract and non-state governance regimes; and (3) mediates between the national and international systems. The functionally directed governance activities of the NSWF do not serve as a convergence of law project undertaken by Norway. Rather its objective is to position Norway as a nexus point for the mediation of governance polycentricity inherent in globalization. As a consequence, the state assumes the role of a chameleon (Backer 2010a), adopting actions and objectives in line with the role it plays in a particular governance system. Yet this complex cooperative regulatory regime is also quite fragile, reflecting both its youth and its inherent instability in the tectonic collisions that made the regime possible. This essay considers both the possibilities and fragilities of this emerging system embedded within the governance structures and operation of the NSWF.

Section 10.2 of this study turns to a brief description of the legal and regulatory framework within which the NSWF is organized, introducing the innovative institutionalization of responsible investing and active ownership. Section 10.3 then examines the ethical component of responsible investing, through the substantive provisions of the Ethical Guidelines, and their implementation through the Ethics Council pointing to the construction of a polycentric and hybrid jurisprudence effected through markets. Section 10.4 then suggests a generalizable analytical framework for framing the market as market and as regulatory spaces and its systemic fragility, considering the reforms of late 2014 for its implications for the emerging regimes of cooperative inter-systemicity, especially in the context of financial regulation of markets.


Reshaping Markets: Economic Governance, the Global Financial Crisis, and Liberal Utopia (Bertram Lomfeld, Alessandro Somma and Peer Zumbansen, editors, Cambridge University Press, 2016).
Look Inside
Copyright Information Page (94 KB)
Marketing Excerpt (111 KB)
Front Matter (149 KB)
Table of Contents (94 KB)
Index (139 KB)
Table of Contents

Introduction: reshaping markets and the question of agency Peer Zumbansen

Part I. Crisis and Normality in Transnational Market Regulation:
1. The central problem of Marx's economics and the nature of market regulation David Campbell
2. Contract law, securitization and the pre-crisis transformation of banking James Varellas
3. 'Inside' and 'outside' the firm: corporate law and contract governance as regulatory theories Peer Zumbansen

Part II. Austerity Woes: Trials and Tribulations of Debt:
4. The Greek crisis: a critical narrative Iannis Michos
5. The biopolitics of debt-economy: market order, ascetic and hedonistic morality Alessandro Somma
6. Credit contracts and the political economy of debt Moritz Renner and Andreas Leidinger

Part III. Reforming Finance: Systematic Risk and Accountability:
7. Why manager liability fails at controlling systemic risk Andreas Engert
8. How special are they? Targeting systemic risk by regulating shadow banking Tobias Tröger
9. Fixing finance 2.0 John M. Conley and Cynthia A. Williams
10. Regulating financial markets: what we might learn from sovereign wealth funds Larry Catá Backer

Part IV. Transforming Contract:
11. Sustainable contracting: how standard terms could govern markets Bertram Lomfeld
12. Anti-discrimination law and social policy-making Sonja Haberl
13. European or American style? Cultures of contract regulation Daniela Caruso

Part V. Conceptual Utopia: The Market After the Market:
14. The truth of the market Maria Rosaria Ferrarese
Epilogue: the power of law to reshape markets Bertram Lomfeld.

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