The National Pension Service (NPS) has decided to introduce a stewardship code and start exercising its shareholder rights against companies that undermine the interests of minority shareholders by funneling corporate funds to their owner families.
The NPS will start implementing a stewardship code in late July. It plans to use its shareholder rights against business groups where corporate owner families line their own pockets through sweetheart deals between group affiliates and their privately held businesses.
Currently, the NPS refrains from exercising its voting rights on issues other than those related to dividends, but it plans to act on issues that can damage shareholder value and corporate value.
Companies that cross the red line on these issues will be privately requested to fix the problems first. If they fail to address the problems, the NPS will take public action such as sending public letters to the companies or opposing the appointment of a director with the right to vote.
If the stewardship code is implemented for these purposes, the government hopes that it could put the brakes on the practice of business groups to provide favors to the private companies run by the members of their owner families.
Kim Sang-Jo, chairman of the Fair Trade Commission (FTC), who is called the pioneer of chaebol reform, calls for strict crackdown on such a practice and requested large conglomerates to abandon it voluntarily, but there have been no signs of improvement.
In fact, according to CEO Score, a website that evaluates the management performance of companies, in an analysis of 225 subsidiaries belonging to 60 large corporations, which are subject to the regulations on internal transactions, the scale of such practice reached close to 13 trillion won in 2017.
It is 13.6% of the total sales of these companies (94.9 trillion won) last year, which is higher than the 12.1% of 2015, when the regulation just started to be carried out.
Under the Monopoly Regulation and Fair Trade Act, a listed subsidiary of a large conglomerate with assets exceeding 5 trillion won is subject to FTC sanctions if its transactions with other affiliates within the group surpass 20 billion won or 12% of its annual sales.
Out of the 225 regulated companies, 35 companies’ internal transactions exceeded 50% their sales last year.
According to the results of FTC's “2017 analysis of publicly held stocks,” out of the 57 business groups with assets worth more than 5 trillion won, 38 (66% of the total) had at least one unlisted subsidiary where the owner family held more than 20% of its shares.
This means that two out of three chaebol owner families have at least one unlisted subsidiary where they have more than a 20% stake.
These subsidiaries are highly likely to be used by chaebol owner families to line their own pockets at the expense of their groups.
Regarding this, Kim Sang-Jo, chairman of FTC, urged the members of chaebol owner families who participate in management to just own the shares of key subsidiaries and sell off their stakes in other affiliates.
Kim said, "If it is difficult to sell the stakes, please separate the subsidiaries. If you maintain the stakes of non-major unlisted subsidiaries and there is a controversy over internal transactions, you will be subject to FTC investigation."