Hyundai under Pressure

Elliott Management demands a detailed reform roadmap from Hyundai Motor Group.
Elliott Management demands a detailed reform roadmap from Hyundai Motor Group.

 

Elliott Management, a U.S.-based activist hedge fund, is again pouncing on a Korean conglomerate that has weaknesses in corporate governance.

A couple of years ago, the hedge fund mounted an attack against Samsung Group as its vice chairman, Lee Jae-yong, sought to change the group’s governance structure following the hospitalization of Lee Kun-hee, the group’s chairman and his father, for a heart attack in 2014.

The attack was successful as Samsung was forced to increase shareholder returns in 2017.

This time, the U.S. fund is eyeing Hyundai Motor Group, which is pushing for governance reform under pressure from the Korean government.

The automotive giant recently announced a plan to eliminate cross shareholdings among its key affiliates, including Hyundai Mobis, Hyundai Motor and Kia Motors.

Under the plan, Hyundai Mobis, a car parts producer, will occupy the top rung on the group’s governance ladder. Yet the company will be forced to give away its two most lucrative businesses -- domestic module and after-service parts -- to Hyundai Glovis, a logistics affiliate where the group’s owner family has a large stake.

The group’s chairman, Chung Mong-koo, and his son, Chung Eui-sun, who is vice chairman, will sell off their stakes in Hyundai Glovis to acquire the shares of Hyundai Mobis from other group affiliates.

These transactions are meant to unwind the circular shareholdings among the group’s key subsidiaries. This plan was welcomed by critics and officials of the Fair Trade Commission (FTC), the Korean government’s anti-trust watchdog, as cross shareholdings undermine governance transparency and amplify financial risks of the firms involved.

Elliott also welcomed Hyundai Motor Group’s push for governance reform. Yet it noted in a statement that “more needs to be done to benefit the companies and stakeholders.”

The hedge fund did not make detailed demands, leaving many wondering what it is up to exactly. It called for a “more detailed roadmap” on how the Korean automotive group will “improve corporate governance, optimize balance sheets, and enhance capital returns" at its three key units where it holds some US$1 billion worth of stocks.

Elliott’s demand for additional measures to benefit shareholders must be an unwelcome surprise to the Hyundai owner family as it will raise the cost of executing the proposed governance reform.  

Yet the automotive group needs to talk with the U.S. hedge fund patiently to find out what its demands are and to see whether they need to take extra measures to protect the rights and interests of minority shareholders of its affiliates.

In fact, some stock analysts say that the group’s restructuring plan could face opposition from Hyundai Mobis minority shareholders as it lacks measures to protect their interests.

The scheme benefits the group’s chairman and vice chairman who hold controlling stakes in Hyundai Glovis as the logistics affiliate’s value will rise following its acquisition of the lucrative businesses from Hyundai Mobis.

But the group did not come up with measures that would increase the stock prices of Hyundai Mobis. This explains why Elliott calls for additional measures to benefit the companies and shareholders.

In this regard, Elliott’s move needs to be looked at in a positive light, although it will put pressure on the Chung family and their business empire.

The hedge fund said it holds some US$1 billion worth of shares in key Hyundai units. This small shareholding suggests its primary aim is not to threaten the owner family’s control of the business group but to force them to pay more dividends to minority shareholders.

The owner family will have to study measures that would benefit not only minority shareholders but the companies involved in the governance reform. If increased benefits to shareholders boost the stock prices of the companies, it would ultimately benefit the owner family.

Elliott’s assault must also be somewhat embarrassing to the FTC officials who pushed Hyundai Motor Group toward reform, given that their reform campaign made the group a target of the hedge fund

Yet Elliott’s attack cannot be a pretext for stopping the reform drive. Korean conglomerates still have a long way to go to raise their corporate governance standards in line with international standards and best practices.

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