South Korea’s National Pension Service (NPS) will actively exercise its shareholders’ rights over Korean Air Lines Co. and its holding company Hanjin KAL Corp. It is expected to wield power against conglomerates and state-run companies before the proxy season in March.
As the NPS will decide if it will actively exercise its shareholders’ rights over Korean Air and Hanjin KAL for the first time ever, analysts are wondering whether there will be a second and a third Korean Air and Hanjin KAL in the future. However, it remains to be seen whether the NPS will actively intervene in management of listed companies since there is growing criticism that the NPS is being politicized rather than focusing on its proper duty of ensuring a higher rate of return on its investment.
The fund management committee, the highest decision-making body of the NPS, held a meeting on Jan. 16 and decided to let its special committee decide whether to actively exercise its shareholders’ rights over Korean Air and Hanjin KAL and how far it would go in exercising its rights.
Hanjin Group chairman Cho Yang-ho, a major shareholder of Korean Air and Hanjin KAL, is currently on trial without detention on charges of embezzlement and breach of trust. The NPS is the third largest shareholder of Hanjin KAL, the de-facto holding company of Hanjin Group, with a 7.34 percent stake and the second largest shareholder of Korean Air with an 11.56 percent stake.
Accordingly, the fund management committee is planning to determine whether and how to exercise its shareholders’ rights over Korean Air and Hanjin KAL by early February based on the decision of the special committee. The special committee was formed at the end of July last year when the NPS introduced the stewardship code, a set of principles or guidelines for trustee’s responsibility in order to improve transparency and independence in exercising shareholders’ rights.
The business community believes that the NPS has decided to use its power before the termination of Cho’s term of office as chairman of Korean Air in March. When the NPS vetoes the re-election of Cho as chairman at a regular general meeting in March, Cho’s term at the country’s largest airline ends this year and it can greatly affect the company’s corporate governance.
The shameful scandals involving Hanjin Group’s owner family had a negative effect on the price of Korean Air shares as well. Korean Air stock prices plunged from 39,000 won (US$35) early last year to 25,050 won (US$22) in October the same year.
Meanwhile, the Korea Corporate Governance Improvement (KCGI), an activist fund, upped its stakes in Hanjin KAL to 10.81 percent and Hanjin Corp. to 8.03 percent early last year, becoming the second largest shareholder in the two companies. It said that Hajin Group’s backward corporate governance bites into the corporate value of its affiliates and should be reformed. It also announced its plans to put pressure on Hanjin by taking up the post of auditor.
In this regard, Hanjin KAL selected Samsung Securities Co. as its consulting firm to cope with the situation. In particular, Hanjin KAL increased its assets to 2 trillion won (US$1.78 billion) by adding 160 billion won (US$142.54 million) through short-term borrowing, to help Cho defend his management control by replacing the company's standing auditor system with an auditing committee system.
However, the situation is getting worse as the NPS is actively exercising its shareholders’ rights over Korean Air, following the KCGI. The NPS can exercise its shareholders’ rights by voting against the re-election of Cho and his family members as executive directors and appointing new board members through discussion with the fund management committee.
The government also hinted its intention to actively exercise its shareholders’ rights against listed companies through the NPS. “This year will be practically the first year to faithfully fulfill the role of trustee. We will try to strictly obey the principles of the stewardship code and make transparent decisions,” said Health and Welfare Minister Park Neung-hoo, who is also the chairman of the NPS's fund management committee.
However, it remains to be seen whether the NPS will actively exercise its shareholders’ rights. This is because the NPS can face criticism that it goes against the government’s latest move to boost the morale of corporations at a time when the economy has started slowing down. The People's Solidarity for Participatory Democracy, which is the most critical of enterprises, also said, “The Hanjin issue cannot be fixed right away with the NPS’ decision to exercise its shareholders’ rights.,” This suggests a low possibility of the NPS targeting companies other than Hanjin Group in the near future.