Stewardship Code Opens Way for NPS to Participate in Management of Listed Companies

The Korean business community is taking a sigh of relief as the state-run National Pension Service (NPS) has decided to adopt a stewardship code that allows it to participate in management of companies only restrictively. However, there are still concerns that the NPS could override management decisions as the stewardship code stipulates its participation in management of companies depending on circumstances.

The NPS decided to introduce a stewardship code on July 30 in a bid to strengthen the exercise of its voting rights on companies where it has a stake. The code states that the NPS will in principle refrain from participating in management. But it allows the NPS to get involved in management when the Fund Operation Committee, which is the highest decision-making body of the NPS, deems it necessary. This virtually opens the way for an unrestricted participation of the NPS in management of companies, since the head of the Fund Operation Committee is the minister of health and welfare and the trustee committee consists mainly of workers and pension subscribers.

The stewardship code allows the NPS to restrictively exercise its shareholder rights on appointment and dismissal of the members on the board of directors, an activity which is viewed as management participation under the current Capital Market Act.

Under the law, management participation is defined as exercise of substantive influence on issues such as appointment and dismissal of executives, suspending them from performing their duties, change of the articles of association, change of capital, merger or spin-off or merger after spin-off, exchange or transfer of stocks, transfer of a business, disposal of assets and dissolution of a company.

The Ministry of Health and Welfare, which supervises the NPS, said, “The NPS participation in management of listed companies is needed to ensure that the precious assets of the public are managed in a safe manner. So, we are planning to discuss the scope of shareholders’ management participation with the relevant authorities, including the Financial Services Commission.”

The NPS will also actively exercise its shareholder rights on issues that are not regarded as management participation, including disclosure of the companies that can inflict harm on the profits of the NPS, sending out an open letter, the voting rights of stockholders on other shareholders’ proposals or items on the agenda and prior disclosure of the voting rights.

When the law is modified in the future in order to ease concerns over the NPS’ excessive leverage, the NPS will delegate its voting rights to fund management companies to which it entrusts part of its assets. However, it will recollect the voting rights when they are exercised in a way that adversely affects NPS profits.

The NPS shareholder activities will be managed by the Special Committee for Trustees consisting of 14 members, which is reorganized from the existing Special Committee for Exercising Voting Rights consisting of nine members. The new committee, which excludes government officials and includes mainly representatives of pension holders, will be divided into two divisions – exercise of stockholders’ rights and responsible investment – and review and decide on major issues.

Starting from 2020, it will release the name of companies that haven’t shown improvement despite private meetingsand send out an open letter as well as exercise the right against the issues related to the companies. It will also recommend the candidates for outside directors when a company makes a request.

The Korea Employers Federation said, “When the NPS actively exercise its shareholder rights, it can put much pressure on businesses. The NPS should not excessively intervene businesses’ management and disrupt the market in order to fairly and transparently involve in management in the future.”

There are still concerns among the business industry. An official from a conglomerate said, “The measures that can maintain an objective point of view in maximizing shareholders’ profits, not the government’s political profits, are needed.” Another official from the business industry said, “The stewardship code itself has been introduced with political goals of conglomerate governance structure reform and chaebol reform. It is surely the pressure on businesses.”