South Korea’s National Pension Fund decided in a meeting on Monday to take a more activist stance in the companies it has invested in – a move that could impact the consistent misgovernance of chaebol, the family-founded conglomerates that dominate the economy.
The NPS Management Committee announced yesterday that it would adopt a stewardship code – a move that had long been expected under the Moon Jae-in administration, which took power in 2017, and which had promised to protect the rights of small shareholders and to clamp down on abuses by big business.
“The adoption of the stewardship code will enable the NPS to have a constructive conversation with businesses that are feared to be hurting corporate or shareholder value,” said Health and Welfare Minister Park Neung-hoo, according to the Korea Times. “It will pull up investment returns of the fund in the long run and help protect the fund.”
The stewardship code calls for the NPS to take issue with the management of companies it has invested in, to elect board members, to vote on its shares and to ask for higher dividends.
Although there have been concerns that the NPS – a government-run organization – could intervene in business, these concerns are ameliorated by the fact that the NPS operates under the health ministry, rather than finance- or industry-related ministries.
Last institutional check on conglomerates?
The NPS manages some US$570 billion, making it one of the top three pension operators in the world. It holds significant stakes in such leading Korean blue chips as Samsung Electronics and Hyundai Motor.
The announcement of the activist approach by the NPS is “of huge import,” said long-term, Seoul-based financial adviser Hank Morris. “Having an NPS that is an activist investor and seeks to guard the interest of non-family shareholders at large corporations suggests that they will have greater focus than before on obtaining value,” he said.
Given the oft-repeated failures of the political, media and judicial spheres, the NPS is perhaps the last organization in a position to provide a check on the endless scandals which blot Korea’s corporate landscape.
Many publicly listed conglomerates have, historically, taken decisions that favor their founding family members over their shareholders. Although chaebol “royal family members” generally hold minimal stakes, they retain group control via cross shareholding structures, control over professional staff and with the support of related “white knights” – all of which allow them to stave off activist shareholders.
White collar crimes conglomerate family members have been accused of include embezzlement, bribery, tax evasion, fraud and leveraging insider information. While senior Korean corporate figures are frequently found guilty by courts, they are as frequently given suspended or light sentences by judges, or released by presidential pardon.
This situation has become a source of frustration for many Koreans, who consider the chaebol above the law.
Historically, the NPS has not only failed to speak up against misgovernance, it has even defended local companies against the demands of foreign activist shareholders and funds.
Most notably, in 2015, the NPS was at the center of a scandal which saw the downfall of a president two years later. Although it was found not to be in shareholders’ interests, the NPS backed a controversial merger of two Samsung units, which favored the ruling Lee family.
That decision was made under the direction of the presidency. Both the president at the time, Park Geun-hye, and the minister responsible for the NPS at the time, were subsequently jailed, as was the head of Samsung, Lee Jae-young – though Lee walked free after a year with a suspended sentence.
In May this year, a foreign hedge fund, Elliot Management, announced it was seeking compensation from the Korean government for the losses it incurred on the merger.
Business pushes back against local activism
Unsurprisingly, the NPS announcement drew a swift response from a business lobby group, the Korea Employers Federation.
“Since the NPS takes nearly 7% of market cap, it could be a burden on businesses if it actively exercises its shareholder rights,” the federation said in a statement. “It should not meddle excessively in the corporate activities of each company.”
But there is still a big question: Would the NPS actually side with an activist foreign shareholder against a homegrown chaebol?
“They might: Remember the last time they were on the same side as Samsung and the top guys wound up going to jail?” said Morris. “I am sure the NPS want to do the right thing now, as the pressure is on them to enhance investment results.”
This is particularly the case given that the investment returns from the NPS – a largely domestically invested fund – have been consistently lower than those of the national sovereign wealth fund, the Korean Investment Corporation, which invests exclusively in overseas assets.
Overseas investors in Korea speak of the “Korean Discount” in which Korean stocks are traded at lower price-to-earnings ratios than their counterparts in other markets.
While some Koreans insist this discount factors in North Korea risk, investors – usually speaking off the record – say it is due to governance risk and due to the low dividends Korean firms have customarily paid out.