Home > News > Asset Allocation > Shareholder Group Says Pay Practices at Banks Fueled Risk-Taking
Asset Allocation

Shareholder Group Says Pay Practices at Banks Fueled Risk-Taking

The Council of Institutional Investors, which represents about 130 pension funds, has shown that pay practices at major Wall Street banks likely helped drive excessive risk-taking by executives and contributed to financial collapse in 2008.

(November 30, 2010) — A report by the Council of Institutional Investors, which represents about 130 pension funds, asserts that pay practices at major Wall Street firms have fueled excessive risk-taking by executives.

The report, by Paul Hodgson, senior research associate at The Corporate Library, covered Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. It found that financial firms linked too many of their pay practices to short-term results. Additionally, the survey asserted that many of these firms inflated salaries to offset the impact of regulatory controls put in place after the 2008 market meltdown.

“The global financial crisis that erupted in 2008 cast a harsh light on executive compensation at many Wall Street banks,” the report, titled “Wall Street Pay: Size, Structure and Significance for Shareowners,” stated. “Legions of executives pocketed large compensation packages or departed with generous severance payments even as their banks descended into bankruptcy or were bailed out by the federal government.” The report concluded that the size and structure of these pay packages offered perverse incentives that helped drive excessively risky decisions that pushed financial markets to the brink of disaster.

As institutional investors have become increasingly vocal about pay practices following the 2008 financial crisis, the report may help inform shareowners’ decisions about how to cast advisory votes on executive compensation at US public companies. While the increased pressure has succeeded in pushing Wall Street firms to revise their compensation structures, the report concluded that the changes in the US might not be enough to help prevent future crises. “While many banks have strengthened their pay practices, there’s still a long way to go,” Amy Borrus, deputy director at the Council of Institutional Investors, told the Wall Street Journal. “The report suggests they need to do more to make sure that executive compensation rewards performance over the long term.”

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742
Home > News > Asset Allocation > Korea Investment Corp Aims to Stray Away From Stocks, Bonds
Asset Allocation

Korea Investment Corp Aims to Stray Away From Stocks, Bonds

The nation's $37 billion sovereign wealth fund is planning on making three or four strategic investments with other state funds next year.

(November 30, 2010) — The $37 billion Korea Investment Corp. (KIC) plans on forming joint investments with sovereign wealth funds in 2011, Bloomberg is reporting.

In an attempt to diversify away from traditional assets such as bonds and equities, the Seoul-based sovereign wealth fund is aiming on making up to four strategic investments next year. According to the news service, KIC posted a 7% to 8% return this year from stocks and bonds traded in public markets.

At the KIC, created in July 2005, public market investments consist of 90% of the portfolio. The fund is increasing its allocation to both public and non- traditional assets such as private equity and real estate in the developing world. Chief Investment Officer Scott Kalb told the news service that alternative assets have all been profitable. “..Our end goal there is to wind up having a diversified strategic portfolio in a variety of sectors and countries,” he said. He added that he aims on upping the fund’s alternatives allocation to 20% from 10%, an action that coincides with a recent survey by Deutsche Bank that points to a continued desire to focus on emerging markets and alternative strategies, such as long-short equity, macro funds and special situations, as opposed to US equity.

“I think it’s one of the first times we’ve gotten proof of institutional investors leaving US equities, with data that confirms that trend,” commented an industry observer. “Here, we see proof that the money is going toward alternatives and emerging markets. The realization has come from the fact that strategic diversification alone is not sufficient to protect in downturns.”

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In recent news, the Korean fund has agreed to make a $100 million investment in a small privately held oilsands firm — Osum Oil Sands. “What we have is a large, developing resource that is a real growth area in the energy sector and it requires a significant amount of capital investment to develop,” said Steve Spence, president and CEO of Calgary-based Osum. The agreement gives the KIC’s board observer rights, the right to participate in future equity financings and the right to designate a nominee to the board of directors.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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