South Korea: Shareholder activism unnerves chaebol

KCGI seeks to force Cho out of Hanjin management

Shareholder activism has emerged as the centerpiece of the nation’s capital market. A growing number of shareholders at large Korean companies or chaebol are trying to have a bigger say in their management and to influence the owner families’ behavior by exercising their rights as partial owners. The move is drawing caution in the market as it is regarded as a double-edged sword for companies and their investors. On the one hand, it can provide the impetus for ensuring transparent management and enhancing shareholder value. But, on the other, it could undermine companies’ bottom lines by affecting business decisions through excessive intervention. The new trend is spearheaded by the National Pension Service (NPS), Korea’s largest institutional investor, which introduced a stewardship code in 2018 to strengthen its influence as a major shareholder. Similar to the concept of shareholder activism, the stewardship code, the bringing in of which was a pledge of President Moon Jae-in during his election campaign, is a set of guidelines that encourages major shareholders to push for better corporate governance and higher dividends from the companies they invest in. President Moon reiterated Wednesday that his administration wants the NPS to aggressively exercise its rights against the management of companies committing serious breaches of the law. “For a fair economy, large companies should act responsibly. The government will ask the NPS to aggressively execute its stewardship code and fulfill its responsibility as a shareholder,”?Moon said at a meeting with economic ministers Wednesday.

 
The NPS is now mulling whether to exercise its rights against Hanjin Group led by Chairman Cho Yang-ho. With a 7.34 percent stake, the NPS is the third-largest shareholder of Hanjin Kal, the group’s holding company. Following the agency’s lead, asset management firms and equity funds are now actively exercising their management rights. The Korea Corporate Governance Improvement (KCGI), a homegrown private equity fund led by CEO Kang Sung-boo, recently 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 as its Grace Holdings subsidiary now owns 9 percent of the group. It later expanded its stake to 10.81 percent and bought an 8.03 percent stake in Hanjin Transportation. Currently, Cho and his family are the firm’s largest shareholders with a 28.95 percent stake. The KCGI’s suggestion is seen as a de facto demand for Cho’s resignation. The chairman’s family has made headlines since Heather Cho, his daughter and a vice president of the firm’s subsidiary Korean Air, forced an airplane to return to its departure gate because she was upset in the way her favorite nuts had been served in the cabin.

 
Since the so-called “nut rage” incident, Cho’s family members, including himself, have been involved in a series of scandals involving criminal activities such as bribery, embezzlement and smuggling. “We believe professional executives with expertise and integrity should push to clean up the group, to avoid a repetition of the owner family’s illegal and abusive practices,” the KCGI said in a statement Monday. It also demanded Hanjin Kal consider selling its loss-making hotel business, which includes the Wilshire Grand Hotel in Los Angeles and the Waikiki Resort Hotel in Hawaii. “Excessive expansion into the hotel business worsened the company’s profitability and financial soundness. It will face more serious financial problems if it does not improve its poor risk management system,” the fund said. Hanjin Group declined to comment on the KCGI’s demands, but industry observers say the move is believed to be aimed at removing Cho. “The KCGI’s demands are probably unacceptable to Cho,” a market observer said. “The matter is likely to be raised at the shareholders’ meeting scheduled for March.” KB Asset Management, a subsidiary of KB Financial Group, has also taken similar action. In December, the firm demanded that Gwangju Shinsegae pay dividends. Gwangju Shinsegae is a subsidiary of retail giant Shinsegae. Chairman Chung Yong-jin owns a 62.5 percent stake in the company.

 
The asset management firm owns a 9.76 percent stake in the subsidiary, and Gwangju Shinsegae immediately said it will gradually increase its dividends to shareholders. Macquarie Korea Asset Management (MKAM) also announced last week it will slash paying incentives to its executive members while raising dividends to shareholders. Immediately after the announcement, the stock price of Macquarie Korea Infrastructure Fund (MKIF) closed at 9,650 won Jan. 21, up 2.22 percent from the previous session. MKAM is MKIF’s management firm. It was also a record-high price since the fund was listed on the benchmark KOSPI. Platform Partners, which claimed MKAM’s management fees were too high and attempted to overthrow the management firm last year, only to fail last, said Platform’s efforts to improve the fund’s management have come to fruition. Platform owns a 4.99 percent stake in the fund.

By Jhoo Dong-chan

(Korea Times)