Woochan Kim just published a new paper entitled “Korea Investment Corporation: Its Origin and Evolution.” And the fact that he did is a really big deal. Why? Because Kim was intimately involved in the creation of the KIC. Kim was Deputy Director of Forex Policy at the MoF when the idea of a new SWF was first raised. He then headed the first mission to Hong Kong and Singapore to learn from these countries’ experiences with sovereign funds. Later, Kim led the government-appointed consulting team that was tasked with coming up with the KIC’s governance structure. In short, he was an insider in the long process of creating the fund. And that’s why this paper is so interesting; he gives “a detailed account of the creation and evolution of Korea Investment Corporation.”
But what I found most surprising about this paper was his assessment of the KIC’s governance and management. Generally papers such this one — i.e, those written by organizational insiders based on inside accounts — end up feeling like opportunistic ‘victory laps’ instead of real scholarship. But, I can assure you, this paper isn’t a victory lap. Quite the contrary, in fact, as Kim is rather critical of the KIC’s governance. I’m not sure if Kim is grinding axes here (anybody?), but he has some rather provocative conclusions:
“KIC does not seem to be abiding by the Santiago Principles. First, according to Principle 2, the policy purpose of the SWF should be clearly defined and publicly disclosed and the pursuit of any other types of objectives should be narrowly defined and mandated explicitly. As mentioned earlier many times, KIC’s mission statement is unclearly defined with multiple objectives. Second, according to Principle 6, the SWF’s operational management should be conducted on an independent basis. Early dismissals of its executives and appointment of former bureaucrats are jeopardizing KIC’s independent operation. Third, according to Principle 21, SWFs should publicly disclose its general approach to voting securities of listed companies, including the key factors guiding its exercise of ownership rights. Also, to dispel concerns about potential noneconomic or nonfinancial objectives, SWFs should disclose ex ante whether and how they exercise their voting rights. Moreover, to demonstrate that their voting decisions continue to be based on economic and financial criteria, SWFs could also make appropriate ex post disclosures. According to the same principle, SWFs are also expected to disclose their general approach to board representation. As mentioned earlier, KIC does not ex ante disclose its proxy voting guideline, nor does it make appropriate ex post disclosure of its proxy voting. Also, no policy has been disclosed by KIC regarding board representation.”
Wow. That’s not a resounding endorsement of the fund’s operations. Nonetheless, Kim offers some straightforward ways in which the problems above can be resolved:
“First, the Korea Investment Corporation Act should be revised to narrow down the scope of KIC’s mission. A more focused mission statement would prevent KIC from deviating away from its original purpose. It also enables KIC to have an internally-consistent investment policy that can discipline its managers and also give them a sense of direction. Second, the Act or the Enforcement Decree should be revised so that KIC can be run in a much transparent way. For example, it should not leave out the details of its strategic asset allocation (SAA) when disclosing its investment policy statement (IPS). It should also disclose its investment performance separately for each asset class. When doing so, it should not use the classification that lumps up all securities in one asset class. Moreover, it should disclose the list of its external managers instead of its internal fund managers. Third, the investment management contract between BOK and KIC should be revised so that KIC can invest the entrusted funds in alternative assets. Otherwise, KIC cannot improve BOK’s balance sheet and thus fail to fulfill one of its most important missions. Once KIC invests BOK-entrusted assets in alternative assets, they will be excluded from Korea’s FX reserves.”
It’s hard to disagree with these recommendations. I’ll be interested to see what sort of reactions this provokes from the KIC or Korean policymakers, if any; these unpleasant conclusions may just be water under the bridge at this point.