As institutional investors at home and abroad have recently adopted a stewardship code, the exercise of stockholder’s rights for financial holding companies is expected to be strengthened further next year. In other words, not only financial factors but also non-financial factors, such as governance structure, social contribution and environmental protection, will affect investors’ judgment in the near future.
According to financial industry sources and the Korea Institute of Finance (KIF) on Nov. 5, a stronger exercise of stockholder’s rights by institutional investors is forecast to have great effect particularly on financial companies in the future.
“Financial companies, which have a distributed ownership due to ownership regulations and no controlling shareholder, are more vulnerable to the stronger exercise of shareholder’s rights than affiliated companies of general conglomerates, which can maintain a high level of control through ownership concentration and cross shareholding,” said Lee Si-yeon, an analyst at the KIF, in a recent report on domestic financial companies’ policy issues regarding institutional investors’ exercise of a stewardship code.
He also said, “Institutional investors, which carry out the stewardship code, take an interest in investee companies’ non-financial factors, including the environment (E), social value (S) and governance structure (G), in addition to financial factors, and involve in corporate management as part of their efforts to make a responsible investment.”
In fact, both the Korea Stewardship Code, a set of guidelines that encourage institutional investors to exert voting rights, and the stewardship code of the National Pension Service (NPS) include the rule of regularly checking non-financial factors of invested companies. According to the office of Democratic Party lawmaker Shin Dong-keun, the number of companies subject to the NPS’ voting rights of objection more than doubled from 67 in 2016 to 162 in 2018.
In March, KB Financial Group’s labor union and the employee's stock ownership association recommended Kwon Soon-won as a non-executive director candidate at a regular general meeting of KB Financial Group. But the NPS, which holds a 9.68 stake in KB Financial Group, voted against the proposal. As a result, it was rejected by obtaining a mere 4.23 percent of the vote in favor. Last November, the NPS voted for lawyer Ha Seung-soo, who was recommended by KB Financial Group’s labor union as a non-executive director. This was also voted down but the agreement rate stood at 13.7 percent, which was much higher than that in March this year.
It may be asked whether the financial industry can properly respond to stockholders’ stronger interest in non-financial factors, which are represented by ESG.
For the E factor, the banking industry doesn’t directly emit pollutants or carbon so banks may be confused about how to handle the issue. Lee said, “It can be important for financial firms to judge risks from deals with businesses that conduct business activities destructive to the environment or sell harmful products. In the past, banks granted loans based on borrowers’ financial status and credit ratings. However, they have to consider what kind of business companies operate and how much it hurts the environment as well.
Lee added, “Currently, investors are not fully aware of the difference in evaluation standards between financial companies and non-financial companies. So, it can lead to distortions in ESG factor evaluations by financial firms, including banks, and shareholder’s activities. Financial companies also have a lack of responsiveness. It is necessary for financial companies to select ESG factors which are relevant to them and strengthen efforts to raise awareness of shareholders and other interested parties.”