Shareholder activism in South Korea to grow further following NPS guidelines

17 January 2020

Shareholder activism is expected to strengthen even more in South Korea this year on the back of the government’s approval of the National Pension Service’s (NPS) finalized guidelines for shareholder activists’ rights, dealmakers told this news service.


The guidelines, despite only applying to the NPS and its external asset managers, are likely to spur further activism among other institutional investors in South Korea, given the pension fund’s size and influence in the country.


As of July 2019, 100 institutional investors in South Korea including the NPS have mandated the stewardship code, which was introduced by regulators in 2018 as per data from Korea Corporate Governance Service.


As an extension of the stewardship code, the NPS had been looking to set guidelines for its asset managers, which were approved on 27 December 2019 by South Korea’s Ministry of Health and Welfare.


Under the guidelines, the NPS will target investee companies with so-called “major concerns” and “unexpected concerns” by exercising voting rights to engage in management of a company. Shareholder proposals from the NPS will be approved by the pension fund’s management committee. External asset managers will retain an independent decision-making process, as per the stewardship code they adopted.


These guidelines reinforce the NPS’ responsibilities to exercise the stewardship code against issues like a corporation’s dividend policy and executive remuneration, as well as companies that have committed serious crimes such as embezzlement or breach of trust. The NPS must evaluate companies that score poorly on environmental social and governance (ESG) issues and exercise their rights if corporations cite the same reason (at least three times) for opposing investors’ suggestions for director appointments.


While there were several activism campaigns in 2019, more activity is expected from March 2020, when annual general meetings of shareholders are usually held in South Korea, because the NPS guidelines set an encouraging tone for other shareholder activists, one of the sources said. Shareholders will also be encouraged by generally low dividend rates and disappointing operating profit, some of the sources said.


South Korean companies are considering taking pro-active measures including the pursuit of non-core asset sales or hiring legal advisors and consulting firms, in preparation for the shareholder activism “attack”, the dealmakers said.


Activist targets in 2020


The 2018-2019 campaigns by local hedge funds KB Asset Management and Korea Corporate Governance Improvement (KCGI), which were respectively aimed at SM Entertainment and Hanjin Group, marked the beginning of activism by domestic investors.


SM Entertainment is now expected to declare initiatives such as a dividend pay-out this year, as reported by Mergermarket in December.


In January 2019, KCGI submitted a shareholder proposal to Hanjin Group and called for the disposal of loss-making businesses to improve its efficiency. KCGI held a 10.81% stake in Hanjin KAL and an 8.03% stake in Hanjin Transportation at the time, but now holds 17.29% of Hanjin KAL as of January 2020.


Adding to this is an emerging feud within Hanjin Group’s founding Cho family. Cho Hyun-ah, who holds 6.49% of Hanjin KAL, is fighting her brother, Chairman and CEO Cho Won-tae, for management over the airline and is hoping to gain the support of KCGI and fellow 8.28% shareholder Bando Engineering & Construction, local media reported in January. Cho Won-tae, who is currently the only family member on the Hanjin KAL board, faces re-election in March.


Investors will continue to look at Hanjin Group subsidiary Korean Air Lines closely, the sources noted. The NPS owns an 11.36% stake in Korean Air Lines as of 31 December 2019, according to Korean Air’s financial report.


Meanwhile, Taeyoung Engineering & Construction’s second largest shareholder, local hedge fund Must Asset Management, gradually increased its stake from 12.12% to 18.85%, based on Taeyoung’s financial report, seeking involvement in Taeyoung E&C’s management.


In December, Must Asset Management requested the set-up of an internal governance committee; it’s expected to receive the answer on this from TaeYoung soon in January, two other sources familiar with situation said.


Taeyoung E&C and Must Asset Management declined to comment on the situation.


South Korean construction and chemical trading company Daelim Industrial could also be targeted for corporate governance issues by its shareholders, after local activist hedge fund KCGI acquired a 32.65% stake for KRW 120bn (USD 99.8m) in September 2019 to become the second largest shareholder, as reported. Daelim Group Chairman Lee Hae-wook was indicted for allegedly engaging in unfair business practices.


Hyundai Mobis, the automotive components manufacturing unit of Hyundai Motor Group, announced in January it will hire an outside director for protecting shareholders’ interests and strengthening the transparency of the parent’s governance structure.


Textile and chemical conglomerate Hyosung Group is another possible activist target. Hyosung Chairman Cho Hyun-joon was prosecuted in December 2019 for illegally providing financial assistance to Hyosung affiliate Galaxia Electronics, of which Cho is the largest shareholder, via a total return swap (TRS) in late 2014, as reported in December 2019.


Concerns from corporates


The updated NPS guidelines have raised concerns among South Korean companies, which now expect to allocate money to defence strategies instead of investing in new business, the sources explained. Different views between the NPS and company boards on corporate governance and broader company strategy could lead to judicial disputes including injunctions, litigations and hostile takeovers, the sources continued.


The Federation of Korean Industries (FKI), a non-government organization consisting of major South Korean conglomerates, expressed concerns and called for revisions to the new NPS guidelines on 27 December, shortly after the new guidelines were approved by the government.


The Korea Corporate Governance Forum, a body that launched on 12 December and supports shareholder activists, has about 25 founding members including asset management firms, lawyers and professors. It showed support for NPS’ new guidelines for exercising shareholder activism as reported on 31 December.


Since the introduction of the stewardship code, approximately 10 domestic asset management firms have submitted proposals to companies on corporate governance matters, according to stock exchange filings: KB Asset Management, Mirae Asset Management, Truston Asset Management, Korea Investment Management, VI Asset Management (former Hi Asset Management), Meritz Asset Management, Heungkuk Asset Management, Korea Investment Value Asset Management, Hyundai Investments , Multi Asset Global Investments, as reported in August 2019.

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