Korea University is one of the schools that reported heavy losses from their investments of cash reserves in financial derivatives. Private colleges have emerged as key institutional investors but how they are managing their funds is largely unknown. / Korea Times file

Korea University's board chairman resigns over investment failure

By Na Jeong-ju

Korea University (KU), one of the biggest private schools here, is embroiled in an internal dispute over huge losses from poor investments in financial derivatives.

According to a financial report of KU’s assets, recently made public by the school, the evaluated loss of its investments in equity-linked financial products was some 20 billion won ($17 million) as of last year.

Kim Jeong-bae, chairman of the school’s board, resigned last week with two years of his five-year term still remaining following allegations that he directed the investment using a cash reserve that had rapidly grown thanks to surges in tuition income and outside donations. The school’s President Kim Byoung-chul, a descendent of the de facto founder Kim Sung-soo, as well as associations of professors and students had forced him to take full responsibility for the failure.

The case sheds light on poor management practices at the country’s private colleges. A number of Korean schools were found to be “poor investors,” but their exposure to risky assets has increased despite repeated warnings from educational policymakers.

“The investment failure at KU was made public in the midst of a power struggle between board members. Otherwise, it would have been kept secret,” an education ministry official said. “A pledge to conduct a full audit into investment practices at private schools is necessary, but they don’t allow us to look into their coffers. They think that it’s none of our business.”

Nobody taking responsibility

Private schools have emerged as key stock investors, but how they manage their funds is little known. After cases of investment failure were first revealed a few years ago, some lawmakers proposed measures to enhance transparency in the use of university cash reserves and the creation of an independent committee to monitor their investments. However, such moves have made little progress due to die-hard resistance from the schools’ administrations.

The schools that have reportedly posted investment losses include KAIST; POSTECH; Ajou University in Suwon, Gyeonggi Province; Pusan University of Foreign Studies; Sunmoon University in South Chungcheong Province; Seoul Theological University; Sogang University; and Soongsil University.

KAIST is known to have incurred a 30 billion won loss after investing some 110 billion won in financial products in 2006. POSTECH also invested some 50 billion won in a mutual savings bank but lost all the money after the lender went bankrupt.

So who has taken responsibility for such financial fiascos? No one.

School officials say they are now in the process of learning from trial and error to become competent institutional investors. They claim that the government should focus on laying solid investment groundwork for universities rather than enforce strengthened restrictions.

“Take a look at Harvard University. It is now a major player in the financial industry with funds of some 30 trillion won. It wouldn’t have become such an investor if it was restricted by the government,” a KU staffer said. “Korean schools have drastically reduced investments in high-risk, high-end financial products, and instead increased the portion of savings and bond investments. They are now learning how to manage risks.”

Most KU students and faculty members disagree. Their associations have called for the punishment of those responsible for the investment loss. The board’s chairman Kim, 72, had been in the hot seat since the issue was made public.

The case first surfaced in October last year when an auditor alleged during a board meeting that more than 87 percent of the school’s liquid assets were secretly invested in derivatives on Kim’s instruction, and the estimated deficit amounted to over 50 percent. The school’s president, who has been feuding with the chairman over school affairs, revealed what was discussed in the meeting, triggering concerns from KU students and professors.

There are also rumors circulating that the beleaguered chairman might have received kickbacks from financial firms in return for giving them the right to manage the school’s funds.

In the case of American universities, according to education officials, they are increasingly becoming entrepreneurial to offset some of the losses in financial support from the public and endowments. However, they have placed greater emphasis on innovation, rather than engaging in “financial gambling,” the officials said.

“They tend to patent and license new technologies developed by themselves to create revenue sources. They put greater emphasis on becoming economic engines in the industrial sectors. That’s a new opportunity to create new revenue streams for American schools,” another ministry official said.

Students suffer potential damage

The issue should be dealt with more seriously not just because a reckless stock investment will damage universities’ financial health, but because it could raise the financial burden on students in the form of a tuition hike. Korean schools have accumulated cash reserves by raising tuition and accepting more outside donations.

Students’ groups have claimed that most schools have collected more tuition than necessary to boost their reserves and such practices have continuously increased college education expenses. Last year, the Board of Audit and Inspection revealed that universities have inflated expenditure estimates when drawing up yearly budgets in order to collect more tuition. Colleges have been collecting 18.7 billion won ($16.6 million) more in tuition on average each year, the auditor said.

The government has pressured schools to lower fees, reflecting demands from students and civic groups that the household burden for college education has been growing rapidly. Universities have protested the government’s tuition-cut drive.

The expenditure and management of endowments also remain shrouded in secrecy. Schools have attracted billions of dollars from businesses in recent years under the pretext of long-term development plans. Despite the rapid growth of outside donations, civic groups say tuition fees and other schooling expenses for students have jumped. A recent audit by the government revealed that owners of five private universities misappropriated some 6.3 billion won from 2006 to 2010.

There is enough reason to strengthen monitoring of funds at private colleges, some lawmakers say.

“The government’s monitoring of the funds at private schools has been lax. It’s time to revise rules to strictly deal with private college owners who are found to have misused the funds,” said Rep. Ahn Min-seok of the Democratic United Party, a member of the National Assembly Committee on Education, Science and Technology. “It’s urgent to close loopholes to protect students from being victimized by the schools’ unchecked investments.”