Korean Japanese shareholders losing control over Shinhan

Shinhan Financial Group Chairman Cho Yong-byoung, left, and the late Shinhan Bank Honorary Chairman Lee Hee-gun / Korea Times file

By Park Jae-hyuk

Shinhan Financial Group's recent decision to attract investment from two Hong Kong-based private equity firms (PEFs) will weaken the influence of ethnic Koreans living in Japan over the banking group, according to analysts, Monday.

They said the possibly reduced influence of the Korean Japanese will help Shinhan improve independence in its governance and prevent the financial authorities from interfering in its management.

The financial holding company's board of directors last week approved a plan to issue new shares worth 1.15 trillion won ($966 million) to Affinity Equity Partners and Baring Private Equity Asia.

After the announcement, several local brokerages lowered their target prices for Shinhan shares claiming the purpose of the company's decision was uncertain, as it had only cited possible cooperation with the foreign PEFs in global capital markets.

Kiwoom Securities analyst Seo Young-soo, however, regarded the recent capital increase as “good news” for Shinhan shareholders.

“The main reason Korean banks have been underestimated, compared to banks in developed countries, was their vulnerable governance,” he said. “Shinhan seems to have made the decision to establish a developed system as U.S. banks did.”

Hana Financial Investment analyst Choi Jung-wook said: “Once the new foreign shareholders join Shinhan's board of directors, the composition of the board will be more diverse and the company will have the upper hand in minimizing the effects of any looming regulatory risks.”

Affinity and Baring will each have a 4 percent stake in Shinhan and the right to recommend a non-executive director to the Shinhan board.

Given that BlackRock and IMM Private Equity have a 6.09 percent and a 3.66 percent stake in Shinhan as of June, respectively, the influence of the four international PEFs over the financial group will become stronger as a result of the issuance of the new shares.

In contrast, Shinhan's Korean Japanese shareholders, who are known to collectively have a 17 percent stake, will hold a smaller total share.

Market observers expect Shinhan Chairman Cho Yong-byoung, known as the hidden force behind attracting the investments from the global PEFs, will have stronger control over the company, as the PEFs will hold similar voting rights to the Korean Japanese shareholders.

According to sources familiar with this issue, a meeting between Cho and Affinity Chairman Park Young-taeg was behind the recent deal. Sources said Park visited Korea last month to meet Cho and decided on the investment as he considered Shinhan shares as undervalued.

Controversies over Korean Japanese shareholders

Shinhan has offered four non-executive seats of 10 to Korean Japanese over the past decade. The four Korean Japanese non-executive directors are CYS CEO Choi Kyong-rok, Fedora CEO Jin Hyun-duk, Taisei Group Chairman Park An-soon and Primer Korea CEO Yuki Hirakawa.

This was because ethnic Korean shareholders living in Japan invested 25 billion won in Shinhan after the bank was established in 1982 by Lee Hee-gun, an ethnic Korean citizen of Japan.

Shinhan's management has also visited Japan frequently to meet elderly Korean Japanese shareholders and seek approval from them when making important decisions.

The governance has caused a series of controversies, as Korean Japanese have held many non-executive seats, relative to their stake.

In September 2017, the Financial Supervisory Service sent a warning to Shinhan saying its Korean Japanese directors were unsuitable for their positions. The Center for Good Corporate Governance also disagreed with the appointment of the CYS CEO as a non-executive director in 2018, raising suspicions about his relationship with Shinhan management.

Shinhan was also criticized for its shareholder structure during the “Boycott Japan” movement last year, in the wake of the Korea-Japan trade dispute.

Back then, the group emphasized it is a Korean company as the successor to Hanseong Bank, the nation's first commercial bank established in 1897, which was merged with Shinhan in 2006 after changing its name to Chohung Bank in 1943.