quick Service

May 7, 2014 3:45 am

[FINANCIAL TIMES]

 S Korea pension head rejects governance fears

By Song Jung-a and Simon Mundy in Seoul

With a portfolio of more than $400bn that already includes 6.4 percent of the Seoul stock market, the domestic clout of South Korea’s National Pension Service is rivalled by few other investors around the world.

This dominance has prompted hopes among some analysts and investors that the NPS will lobby South Korea’s chaebol conglomerates to improve their erratic standards of corporate governance – a problem seen as a factor behind the country’s relatively low equity valuations.

But the fund will take a “very cautious stance” in acting on such concerns, says Choi Kwang, who this month marks one year as chairman of the world’s fourth-biggest pension fund after his appointment by President Park Geun-hye.

“Exercising shareholders’ voting rights can potentially exert influence on the management of the company, which can cause fears of pension socialism,” says Mr Choi.

“I’m not saying we are not interested in better governance. But the major business of the NPS is not making better governance systems,” he adds. “Our main interest is in getting more return on our investments.”

Lee Ji-soo, a lawyer at the Centre for Good Corporate Governance, says that pushing against bad management is part of the NPS’s duty to maximise returns, and that “in the long run, corporate governance and performance go hand in hand”.

This is an increasingly prominent argument in Europe and the US, where investors have become more assertive after lax shareholder oversight was condemned as a contributing factor behind the 2008 financial crisis.

But Mr Choi’s remarks reflect concerns voiced by the Federation of Korean Industries, a chaebol lobby group, which has said that greater exercise of shareholder rights by a huge state-controlled investor has the potential to “inflict damage to entrepreneurship”.

The NPS’s voting decisions are overseen by an independent committee, but Mr Choi’s views hint at a tempering of a trend towards greater intervention under his predecessor, Jun Kwang-woo.

At shareholder meetings last year – most of which took place before Mr Choi took over in May – the NPS voted against 10.8 per cent of resolutions, double the rate in 2008. That figure declined to 8.9 per cent in the first three months of this year.

The NPS is one of the biggest investors in most listed South Korean companies, with stakes of about 8 per cent in each of Samsung Electronics and Hyundai Motor, as of the end of last year. That compares with stakes of 3.4 per cent and 5.2 per cent for the companies’ respective chairmen, Lee Kun-hee and Chung Mong-koo. But Mr Lee and Mr Chung maintain effective control over their groups through a complex web of cross-shareholdings.

The chairmen of several chaebol have been convicted of fraud or tax evasion, including Chey Tae-won of SK Group, who was paid Won30.1bn by group companies last year – in spite of spending almost the whole year in prison for embezzling Won45.1bn from two of the businesses. Many investors also voice disquiet on South Korean companies’ low dividends.

Mr Choi says that investor concerns about weak corporate governance have contributed to the “Korea discount” on stock prices – the Kospi average forward price/earnings ratio is 10.4, compared with the MSCI Asia-Pacific Index’s 15 – but adds: “I don’t think the Korean governance system is inferior to other countries.”

Mr Lee at the CGCG says that the NPS has a unique opportunity to push for better management practices in South Korea, calling it “the only power that can maintain the balance against the chaebol families”. He urges it to consider measures such as proposing independent directors and launching derivative lawsuits.

Mr Choi voices scepticism. “Some of the citizens’ movements are more or less making claims based on ideology or political beliefs. So I don’t see why we have to respond to their irrelevant claims,” he says.

The NPS has continued to cast dissenting votes under Mr Choi’s stewardship. In April it voted against the re-election of the chief executive of Mando Corporation, which suffered a share price fall last year after investing Won379bn in a troubled sister company – but it failed to block the motion.

“The Mando case clearly shows the NPS’s limits. Although it has more shares in major companies than their founding families, the fund has no effective tool to protect shareholder value,” says Park Ju-geun, who heads CEO Score, a website that evaluates top executives’ performance.

In spite of the Mando intervention, Mr Choi stresses the NPS’s respect for the “autonomy of corporate management”, and adds: “If there is any management which we do not respect in one way or another, then what we can do is just withdraw our investment.”

This suggestion clashes with the opinion of Kwon Jong-ho, who headed the NPS’s voting decision committee until March. “The NPS is the biggest or second-biggest shareholder in many companies. So it cannot just sell its stakes in those companies because that means huge investment losses,” he says.