Korea’s NPS Cleaning House

Ashby Monk

Weighing in at over $300 billion, Korea’s National Pension Service is the fourth largest pension reserve fund in the world and is Korea’s largest investor full stop. To give you some notion of its size, it’s roughly $100 billion larger than CalPERS. That’s big. Unfortunately, like CalPERs, the NPS has also been dealing with its fair share of internal governance problems stemming from its dominant position in financial markets.

The Korea Herald reported yesterday that the NPS was shaking up its senior leadership to ‘send a message’ to its investment decision-makers about unethical conduct and corruption (lots of nepotism). Here’s a short blurb from the NPS: “The reshuffle was designed to warn those who have been involved in business wrongdoings as criticized by the media.” What did the NPS do that was so bad, you ask? A recent audit of the NPS shows some rather unsavory conduct:

  • “…the NPS bullied business partners, mainly securities firms, made poor investments in real estate and wrongly collected pension contributions…”
  • “The biggest corruption allegation involves the NPS’s treatment of securities firms via leveraging its dominant status in the market.”
  • “One former NPS team leader, back in late 2009, forced his staff to raise company evaluation scores for two brokerages identified by their initials, F and G, because he had college friends working there, the public auditor’s report said. As a result, F and G were allocated more stocks to manage worth 102 billion won and 95.9 billion won respectively, helping them earn 255 million won and 240 million won in commission.”
  • “In another case, the pension fund allegedly forced a securities firm to use Cheong Pung Resort owned by the pension fund.”
  • “One brokerage identified as N reported the case to the National Assembly and in retaliation, a department head of the NPS last September urged his staff to disqualify the company from handling the fund. The securities firm lost an opportunity to make 37 million won in commission.”
  • “The auditor also criticized the NPS for its investment in real estate. When the NPS acquired a building in central Seoul for 320.7 billion won, an asset manager in charge suggested it won’t collect any commission if the NPS sells the property in five years. If the building is sold later, it would make a 10-percent commission as an incentive. The pension fund, however, decided to pay the commission for selling the property in five years and pay a 15 percent incentive, the BAI’s report revealed.”
  • “In addition, another property on which the NPS spent 83.7 billion won proved to be inappropriate as an investment. The pension fund’s own rules say that properties subject to investment should yield more than a 5 percent inflation-adjusted profit per annum for a five-year period. The 83.7-billion-won building was estimated to yield a 4.21 percent return a year, and this wasn’t reported to the committee.”

Oh and then there was this little nugget of news from the Korea Herald this week:

“…two employees of the NPS were charged by police in the past week for buying sex. The police, currently investigating the case, also suspect them of bribing an employee from a securities company who drank with them on Aug. 13.”

Wow. Some unwelcome distractions for a fund that is in the process of expanding its investment operations to include a variety of global industries and asset classes. Clearly, the NPS has some work to do on its internal governance as it develops as a global institutional investor. At least NPS Chairman Jun Kwang-woo has begun the hard process of institutional reform. Good luck to him.

1 Response to “Korea’s NPS Cleaning House”

  1. 1 Larry Catá Backer August 20, 2011 at 5:38 am

    Hi Ashby: excellent reminder that state organization, perhaps more than their private counterparts (though unlikely), will tend to behave to type. It is not clear to me, though, that Korea’s NPS will be able to reform itself beyond the business cultural expectations of the places where it operates. So my question would be whether the acclivities in NPS are standard but culturally accepted bad conduct, or something worse. If it is the former, then we can expect only periodic reshuffling but no real governance culture changes. If it is the later then NPS faces an institutional culture issue and governance rather than personnel changes will have to be the order of the day. Thanks. Larry

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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