Concerns are growing over the planned adoption of a stewardship code by the National Pension Service (NPS). In particular, critics say that the government is rushing to introduce the stewardship code, though the current laws have ambiguities regarding what kind of shareholder activities constitute intervention in the management of companies.
According to the NPS on July 10, the Ministry of Health and Welfare (MOHW) said clearly that the NPS would only exercise its shareholder rights, not management rights, at a meeting for a final review of the stewardship code a day earlier. The ministry has taken a step back due to public opposition. Previously it vowed to make the NPS participate in the management of companies where it holds stakes with the introduction of the stewardship code. Strengthening the NPS’ shareholder rights was one of President Moon Jae-in’s campaign promises. He pledged to make the NPS the play the role of a watchdog for conglomerates, or chaebol.
The NPS has thus far only exercised its voting rights at general shareholders’ meetings of the companies it has invested in. It hasn’t proposed an agenda or any detailed plans to expand dividends. This is because the NPS can face criticism for intervening in management if it makes suggestions. However, Minister of Health and Welfare Park Neung-hoo said during the recent Korean Air incident, “The NPS should play its role as the second largest shareholder.” This remark spawned speculation that the government was trying to make Korean Air an example of the NPS intervention in corporate affairs in a bid to justify its next move to use the NPS as a means of chaebol reform.
Even NPS officials are confused by the government’s separation of shareholder rights from intervention in management. An official from the NPS asked, “If the NPS recommends a non-executive director, how are we supposed to determine whether it constitutes an intervention in management or not under the current laws?” He added that if the NPS does not take action on companies like Korean Air, it would not be able to do anything regarding the remaining companies.
The government has also put the brakes on the NPS plans to assign more than half of its voting rights to the asset management firms that manage its assets. The Health Ministry's recommendation is that the NPS gives extra points to private asset management companies that introduces the stewardship code when it selects asset management companies for entrustment of its assets. This would in fact force asset management companies to adopt the stewardship code. Critics question whether it would be effective even if asset management firms introduce the stewardship code.
An official from the industry said, “Only South Korea’s top two asset management companies will be able to keep employees who are exclusively responsible for that work. The remaining companies will purchase a 100,000 won (US$90) report per case from the private consulting companies specializing in exercising voting rights and then copy everything it says.”
The private voting right consultants don’t have a higher degree of specialization either. Institutional Shareholder Services (ISS), the world's leading provider of proxy advisory research and voting recommendations and also provides consulting services to the NPS, has only two employees in charge of South Korea. In addition, the Korea Corporate Governance Service, which is most active in the area, usually has less than 10 employees. in charge of corporate governance structure which is the most active sector in South Korea. Practically, only the two organizations now decide on the voting rights of most South Korean listed companies.
As an alternative plan, the voting right advisory committee of the NPS recommended that the stewardship code is considered only when the NPS decides on whether to transfer the voting rights to private asset management firms and consider the rate of returns as before when to make a decision on general asset management on consignment basis. It also recommends that the NPS provide relevant costs to help private asset management companies to introduce the stewardship code and promote private voting service consulting companies, such as accounting firms or law firms.
The government will hold a public hearing on the 17th and the National Pension Fund Management Committee will vote on the final plan at a meeting on August 26.