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보고서 1
Guidelines for Managing Outsourcing Risk of Financial Services Firms: Overseas Cases [20-01]
Senior Research Fellow Cho, Sung Hoon / Dec. 07, 2020
Outsourcing, which means allowing a third party outside the company to perform activities or functions that the company has performed internally, is a strategic decision-making aimed at reducing costs, enhancing management efficiency, and strengthening core competencies, and this importance is the same in the financial services industry. In particular, outsourcing is becoming more important as the value chain of the financial services industry changes according to the recent rapid technological development called the ‘4th industrial revolution.’ However, in Korea, there have been opinions that the statutory regulations on outsourcing are rigidly operated, limiting financial services firms’ use of outsourcing, and thus failing to respond to rapidly changing environments, and outsourcing regulations are on the trend of easing.

Major foreign countries, such as the United States, European Union, United Kingdom, and Singapore do not regulate outsourcing of financial services firms by law. Instead, regulatory or supervisory agencies have created and provided guidelines or guidances for outsourcing management of financial services firms. The guidelines of these agencies commonly emphasize the roles and responsibilities of the board of directors and top management in making and managing outsourcing decisions. In addition, the management process leading to outsourcing risk management, due diligence and selection of outsourcing suppliers, design and conclusion of outsourcing contracts, and supplier monitoring is presented in a similar manner.

All global financial services firms have developed a ‘Code of Conduct’ to manage their outsourcing and apply them to their suppliers. The Code of Conduct commonly contains matters concerning business ethics and integrity, labor and human rights, environment and sustainability, diversity and inclusion. This report also introduces the contents of JP Morgan’s ‘Minimum Control Requirements’ as a specific internal guideline for outsourcing management, which are very specific and detailed as defining minimum control requirements to effectively control IT outsourcing and manage related risks.

If Korea’s outsourcing regulations are continuously eased and ultimately shifted to principle-based, guidelines as soft norms will be needed, and these guidelines should be specific and specialized to provide practical assistance to financial services firms. Financial services firms’ internal outsourcing management guidelines should also be specialized, detailed and technical, and efforts should be made to secure the technical capabilities of their own personnel to create and implement these internal guidelines. With the increase of IT outsourcing, the importance of risk management related to data and information of customers and firms is growing, and firms need to raise awareness of the responsibilities of the board and top management for outsourcing management.
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보고서 1
Analysis of Securities-based Crowdfunding Markets in Korea [19-02]
Research Fellow Park, Hyejin and others / Jan. 21, 2019
This paper studies the characteristics of Korean securities-based crowdfunding markets and the behaviors of investors during the crowdfunding campaigns, thereby providing policy implications as to improve the current system. Securities-based crowdfunding is a new financing method for startups that are too small to be funded by angel or venture capital and financing from their friends and family are not enough to cover their financing needs. Besides, securities-based crowdfunding has other benefits. For example, professional investors such as angels and venture capitalists can use the crowdfunding outcome to predict the future of demand of the goods or assess the future returns of their investement projects. 

First, we review the concept of securities-based crowdfunding and its relations to other venture investors, and then discuss some features of main participants of securities-based crowdfunding markets such as entrepreneurs (issuers), individual investors, and platforms. Majority of issuers that attempt to raise capital via crowdfunding are early ventures, but some of them tend to be more suited to crowdfunding than others. For example, very high-tech firms whose business models are based on complex technology are less likely to be a good fit since unexperienced individual investors without knowledge in that area may be hesitant to commit their money to that venture’s project. In terms of crowdfunders, we focus on their investment behavior during crowdfunding campaign. We observe herding behaviour of the investors in the early days of funding windows, implying that the early performance has significant effects on the final funding results. Regarding platforms we overview the crowdfunding process operated by these platforms and compare their business models.

Next, we investigate the role of signals about hidden quality of the project and campaign-related information on funding success and investors’ decisions to commit financing. Our results show that backing by professional investors,  funding target, and campaign duration play a significant role for the funding outcome. However, we also find that hard information about the issuer’s ability such as performance in the past crowdfunding campaigns, certification as social company or venture firms have little or not impact on the funding outcome. Furthermore, we find that backing by professional investors have the opposite effects on funding success and the other small investors’ participation in crowdfunding; receiving more funding from professional investors contributes to funding success but it might decrease the chances that other small investors participate in that project. Finally, we discuss the policy implications of these results.
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보고서 1
CEO Tenure and Performance in Korea’s Securities Industry [18-03]
Senior Research Fellow Lee, Seokhoon and others / Apr. 24, 2018
A chief executive officer (CEO) is a firm’s ultimate decision maker and is responsible for developing and executing corporate strategy and allocating resources consistent with strategic direction. In addition, the CEO acts as an agent for shareholders, the principals of the firm, with the authority to make decisions that are in the best interests of shareholders. Therefore, it is one of the most crucial decision in a firm as well as the core duties of the firm’s controlling shareholder and board of directors to appoint a competent CEO who can develop and implement the right strategy for the firm, to timely replace an incompetent CEO, and to provide reasonable remuneration.
The importance of the CEO is no exception to the securities industry. In order for Korea's securities industry to advance to a higher level with global competitiveness, it is essential to have a CEO who can establish a management strategy to achieve the vision of the firm and consistently pursue the strategy over a long period of time.
Based on this motivation, this report is prepared with the following objectives.  First, in order to obtain accurate description of CEO appointment, tenure and turnover (replacement) in Korea’s securities industry, we collect and analyze related statistics. Second, we analyze the relationship between CEO tenure and performance. Third, we examine the efficiency of CEO selection and turnover in domestic securities firms, ie, whether a competent CEO is appointed, and whether CEO turnover reflects management performance. And we draw some implications from these results.
The 'two to three year tenure' of professional CEOs (those who are not controlling shareholders) appears to be the norm in the domestic securities industry, and this tenure is shorter than that of major investment banks and securities firms CEOs in the US and Japan. However, while short-tenure CEOs with two to three year tenure account for a large proportion, at the same time, there are some long-tenure CEOs with tenure longer than six years as well.
Long-tenure CEOs generally showed better performance than short or mid-tenure CEOs, and their performance improved steadily as the year progressed. In addition, the effect of long-term management performance on CEO turnover decision was not significant. This suggests that CEO turnover in domestic securities industry does not have the effect as discipline (corporate governance) mechanism. And the week relationship between management performance and CEO turnover decision is more apparent in securities firms whose controlling shareholders also have a significant stake in other industry (securities firms belonged to business groups, for instance). This suggests that group situations other than CEOs’ management performance may have been taken into consideration in CEO turnover decision in those securities firms.
The results of this report provide some implications for the tenure, appointment and turnover of CEOs of domestic securities firms. First, the rigid framework of 'two to three year tenure’ causes some problems. At present, many CEOs of securities firms have to leave the CEO position before producing visible results from their own management strategy reflecting their vision and philosophy due to their short tenure, and their successor must start again from the scratch. The absence of investment for long-term capacity accumulation such as differentiated services or networks of securities firms is likely due to the short tenure of the CEO. The unique capacity of a securities firm to differentiate itself from other firms can be achieved when a consistent management strategy is pursued over a long period of time. Therefore, the practice of replacing CEOs every two or three years needs to be changed.
The superior performance of long-tenure CEOs can be attributed to the fact that a good candidate with excellent management expertise has been appointed to the CEO and that controlling shareholders gave him trust and opportunity. In other words, an effective CEO selection process is an important precondition for producing a successful long-tenure CEO.
During two to three years immediately after the CEO is appointed, the performance of the CEO may be influenced by the legacy of his predecessor, including the management activities and organizational structure. In addition, it takes time for new management strategies to be recognized in the market. For this reason, it may be very difficult or even undesirable to evaluate the CEO with the performance of two or three year period right after his appointment. At the same time, however, the CEO turnover policy is an important discipline mechanism that induces the CEO's best efforts. In summary, securities firms should wait patiently during the early period of their CEOs’ tenure, and after that, they should establish a solid CEO turnover policy based on their performance and encourage CEOs to exert their full potential.
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보고서 1
Facilitating shareholder engagement in Korea [18-03]
Senior Research Fellow Song, Hong Sun / Feb. 21, 2018
Since the adoption of the Stewardship Code, the question has been raised as to how much Korean Stewardship Code facilitates shareholder engagement. And what else shall we prepare more for skilled and experienced corporate engagement by institutional shareholders, along with the adoption of Stewardship Code? Given these questions, this study examines the evolving history and current status of shareholder engagement by overseas global institutional investor, and hence endeavors to draw some lessons and tasks for Korean institutional investor and policy-makers to activate corporate engagement in Korea. 
Learning from experiences or relevant laws and regulations in other countries, Korea has a long way to go in terms of  corporate engagement by institutional shareholders. The pressing challenges facing the country are the lack of investor experience in shareholder engagement, the inflexibility of relevant laws and regulations, and the lack of infrastructure, which ensures impartiality as well as expertise and knowledge. The stewardship code embraces shareholder engagement through company-friendly, informal and private measures such as letters, private dialogues with the board of directors or management, and shareholder proposal. Unfortunately, however, such kinds of shareholder rights have never been used by any Korean institutional investor, even the world-largest National Pension Fund.
We find the large gap in engagement experience between domestic investors and overseas institutional investors. Public pension funds such as CalPERS have gained their engagement experience through informal private dialogues and shareholder coalitions, rather than formal shareholder proposals. Private pension funds including TIAA have been more active in making shareholder proposals in collaboration with labor unions, instead of relying on private dialogue. Mutual funds, which are said to take a rather passive approach to exercising their shareholder rights, have actively engaged with investee companies by supporting pension funds’ shareholder engagement or working with them since the global financial crisis. In terms of subject matters that shareholder proposals deal with, public pension funds and defined benefit (DB) pensions have superior experience and know-how on social or environmental issues, mutual funds on corporate governance matters, and hedge funds on financial or management strategies.
Based on findings from these case studies, this report makes some recommendations. First, Korean institutional investors should endeavor to build their own philosophies, strategies and know-how of the engagement. The mutually beneficial exercise of shareholder rights definitely requires them to have their own philosophies, strategies and know-how. The collaboration with foreign shareholders including CalPERS could be a good strategy to build it. It will be the chance to share and learn their relevant philosophies, strategies and know-how. 
Second, The shareholder proposal regime plays a critical role in making various means of constructive shareholder engagement more effective. It is required to improve the relevant legal and regulatory frameworks in order to ensure the variety in the subject of proposals including the ESG subject. Another area for improvement is the legal nature of shareholder proposals. The key lies in whether shareholder resolutions are binding or precatory (non-binding) on the company and its management. What is at issue is which regime is more desirable and useful in facilitating the exercise of shareholder rights and enhancing the effectiveness of shareholder rights as a tool for market discipline. A study shows that despite the same legal tradition shared by the US and UK, precatory shareholder engagement in the US is far more active than binding one in the UK.
Third, Proxy advisory firms should be subject to more stringent regulation on their business. Many institutional investors in Korea are also highly likely to use proxy advisory firms while they implement the stewardship code. To ensure that proxy advisers have their relevant expertise and independence, they should be regulated as investment advisers given the nature of their business. As regards non-profit advisory firms that cannot be registered as investment advisers due to their economic nature, the constructive application of the investment adviser regulation, as in the US, is worth considering. What is more, the problem of fairness or independence can arise from their corporate governance attributes. This warrants a different regulatory approach to nonprofit proxy advisers, for example, by establishing an independent committee to deliberate on voting recommendations.

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