[Cover Story] Shareholder activism pushes chaebol to evolve

Growing trend opens up for better corporate governance

By Jhoo Dong-chan

Shareholder activism has been emerging as a catalyst bringing changes to the local business world by forcing large Korean companies, particularly chaebol, to renew their business focus and strategies.

This comes as a growing number of activist shareholders are flexing their muscles to drive positive change at companies, which many expect will end up improving corporate governance of conglomerates and maximizing shareholder value.

"A series of activist shareholders' moves will pressure firms not only to raise dividends and oust scandalous management but also to ultimately improve their governance," NH Investment & Securities researcher Kim Dong-yang said.

"Not to mention their recent tug of war with PEFs, institutional investors are also seeking to engage more actively in corporate management following the lead of the NPS. Now, firms need to voluntarily strengthen their governance unless they want to provide fodder for their challengers."

Shareholder activism has gained momentum after creating a stirs at a number of general shareholders' meetings in March.

During Korean Air's meeting, March 26, the National Pension Service (NPS) played an important role in ousting the late Chairman Cho Yang-ho from his board seat. The nation's largest institutional investor also voted against appointment of outside and inside directors at Samsung BioLogics and Hyosung.

In a bid to exercise its shareholder rights more actively, the NPS introduced a new stewardship code in July 2018. As a campaign pledge of President Moon Jae-in, the code is a set of guidelines that encourage shareholders to push for better corporate governance and higher dividends from firms in which they invest.

The pension fund is likely to expand its influence on various corporate matters, including unfair business practices, management misbehavior and excessive payments to executives.

Following the NPS' lead, other investors have also started to raise their voices in firms' decision-making processes and governance.

In September, Platform Partners Asset Management (PPAM), a domestic shareholder activist fund, sought to remove Macquarie Korea Asset Management (MKAM) from managing the Macquarie Korea Infrastructure Fund, the nation's only infrastructure fund, citing reckless management and excessive fees.

The fund suggested changing the fund's asset manager to KORAMCO REITS Management & Trust, replacing MKAM, but its efforts ended in failure as only 31.1 percent of shareholders participating in a shareholders' meeting were in favor of the proposal.

In February, the Korea Corporate Governance Improvement (KCGI) exercised its influence on Hanjin KAL to improve its governance structure and suggested ousting Hanjin KAL's executives, including Cho, if they violate the law or hurt the firm's reputation.

The KCGI is Hanjin KAL's second-largest shareholder with a 10.8 percent stake after Hanjin Group Chairman Cho Yang-ho and his family with a 28.95 percent stake.

Reflecting the growing influence of activist shareholders, firms started raising their payouts in 2018.

Of the nation's top 30 firms by market capitalization, eight major companies, including Samsung Electronics and POSCO, paid combined interim dividends of 8.34 trillion won ($7.38 billion) between January and September last year, more than double that of the same period the previous year of 3.97 trillion won.

Korea's big four financial groups, which had been stingy in paying dividends, also gave out record payouts of 2.52 trillion won.

"The movement will eventually be able to disrupt Korean conglomerates' longstanding circular-shareholding practices, which have often been subject to public criticism as they make them vulnerable to foreign capital," NH Investment & Securities researcher Park Joo-sun said.

"There have been similar movements in Japan where shareholders exercised their rights to improve corporate governance. It was helpful for business."

In January, Japanese optics maker Olympus announced it would comply with U.S.-based activist fund ValueAct's demands. After acquiring a stake of more than 5 percent, the fund requested a rise in dividends and the replacement of the firm's outside directors.

Olympus promised to improve the firm's profitability while appointing three new outside directors as the fund demanded.

Since its January announcement, the share price of Olympus has jumped nearly 30 percent.

"Japan introduced a stewardship code about three years before we did. So far, operators of the code are finding their proper place in the market," Park said.

"Compared to Japan, Korea's corporate culture has been very closed. Firms still consider such activist funds' moves as a direct challenge to their ownership."

Sungkyunkwan University law professor Choi June-sun said the trend could impact a firm's management rights in the future.

"The stewardship code itself is a self-regulating norm. It will be okay if it operates as it was intended," he said.

"However, it is highly likely a stewardship code could be used as a tool of the government and ruling party to change a firm's governance structures."

Businesses also raised their concerns on the rise of shareholder activism.

"There is some foreign capital with malicious intent," said a conglomerate official, asking not to be named.

"It investors are allowed to do whatever they want, it could become a threat to Korean businesses in the near future. I hope the government understands what is really going on under the surface."