Korean investors’ lip service to corporate governance

A month after a financial scandal involving South Korea’s largest public pension fund helped topple its president, the country’s institutional investors remain uncommitted to corporate governance.

The Korea Times reports that, according to the Daishin Corporate Governance Institute, 112 domestic institutional investors voted against just 563, or 2.8%, of 20,169 issues raised at general shareholders meetings this year. That percentage was well below the 20.9% it argued that they should have voted against, after analysing them. `

It’s also of particular concern given the weak shareholder structures of Korea’s leading conglomerates, or chaebols. The families behind these groups are notorious for ensuring the sub-companies hold stakes in each other, allowing them to exercise overall control while holding only minority stakes themselves, and avoiding much in the way of corporate transparency or accountability.

This is a long-standing problem that has led to a ‘Korean discount’ in the share valuations of major companies in the country. It is clearly exacerbated by the often close relationships between corporate leaders and politicians, and the largely supine nature of the big local investors.

The country’s main asset owners, and particularly its public pension funds, tasked with the responsibility of earning enough money to support the retirees of this fast-ageing nation, should be leading the charge to improve accountability and governance. Unfortunately they have often proven to be toothless shareholders and have even supported dubious  suggestions by chaebols. And the largest, the National Pension Service (NPS), has been among them.

The $510 billion fund was at the heart of the political scandal last year that led to former president Park Geun-hye’s impeachment and imprisonment. Former NPS chairman Moon Hyung-Po had, when he was minister of health in 2015, instructed the fund to vote in support of a move to let two Samsung Group divisions in which it was a shareholder merge at a valuation well below what their market capitalisations suggested.

The merger was a disaster for shareholder value. The consolidated company, which operates as Samsung C&T Corp, still hasn’t seen its share value recover almost two years later. They were trading at W179,000 when the merger was approved on July 17, 2015 and stood at W145,000 on Friday.

Moon was arrested in December 2016 and imprisoned for two-and-a-half years in June.

To its credit, NPS appears to have taken steps to improve its image this year. The Daishin Corporate Governance Institute found that the fund did vote against resolutions 11.4% of the time this year, well above the market average – though still well below the Institute's suggested level. 

What's more, NPS still hasn’t signed up to the Stewardship Code that the country introduced in December. Indeed, according to Mondaq Business Briefing, only three local institutional investors have.

Time for clarity

At a time when the country’s new government, under President Moon Jae-In (no relation to the former NPS chairman), is striving to demonstrate its independence from the country’s huge corporate interests, some clarity around governance would make a lot of sense.

Especially at a time when the largest chaebol, Samsung Group, is reeling from its involvement in the recent political scandal, which led to family heir-apparent Jay Lee being arrested for bribery and embezzlement in February, and being embarrassed by exploding batteries in its Note 7 mobile phone. The company has apologised to shareholders for the problems said it would aim to improve shareholder returns.

There are quick steps institutional investors can take.

First, NPS should sign up to the Stewardship Code. That would indicate the fund’s desire to put the needs of its ultimate beneficiaries over shorter-term political expediency. It would also encourage other institutions to follow suit and recognise that they need to be better stewards of their assets.

Second, the investment teams at NPS and other public pension funds should be made independent of the broader operations and management of such state institutions, and kept at arm's length from direct political oversight. Only then can the teams focus unfettered on generating long-term value, as doing so will sometimes stand in direct opposition to the shorter-term, often profit-motivated goals of corporate executives.  

It would also be wise for these teams to prioritise the need for more transparency, both in their own processes and governance, as well as in those of their investee companies. Dark deeds are usually performed in the shadows, so it’s best for investors to hold a torch.

These are serious issues, which stand to affect the welfare of a fast-ageing populace. Korea's baby boomers depend on its pension funds in particular to have sufficient capital to meet their needs when they retire. Meeting required rates of investment return is already proving a big challenge at a time of low local interest rates, and has forced many local funds (including NPS) to bet big on foreign alternative assets.

It seems a supreme irony for domestic investors to take overseas risk at least partly because their unwillingness to challenge local companies' malpractice makes those very firms less valuable.