The upcoming general shareholders' meeting of Hanjin KAL Corp. in late March will determine the fate of Hanjin Group chairman Cho Yang-ho’s family. Private equity fund Korea Corporate Governance Improvement (KCGI) and the National Pension Service (NPS), which are both a major shareholder of the group, have declared to participate in management of Hanjin KAL, the group’s holding company. In particular, the KCGI intends to keep up the pressure by strengthening solidarity with minority shareholders.
The beleaguered group is seeking to placate disgruntled shareholders with a comprehensive plan to reform corporate governance and improve shareholder value. The group seems to have accommodated most of the KCGI’s demands but stopped short of accepting its demand for an overhaul of the business structure.
The KCGI released a report on Jan. 21 to analyze Hanjin Group’s current management situation and unveil measures to raise its valuation. The company offered a shareholder proposal in three areas, including governance reform and establishment of a responsible management system, shareholder value improvement, and social trust enhancement.
Hanjin Group’s five-year improvement plans reflect the KCGI’s suggestions. To be sure, it has rejected demands which can affect the current ownership structure. With regard to governance reform and a responsible management system, Hanjin Group is not planning to form a corporate governance committee or a compensation committee as demanded by the KCGI. However, the group will increase the number of non-executive directors from three to four to enhance independence of the board of directors, strengthen the outside director recommendation committee, and raise management transparency by tightening accounting supervision.
For shareholder value improvement, the group accepted the KCGI’s proposals that it establish a five-year plan and sell off idle real estates. It announced a plan to sell a hotel site in Songhyeon-dong by the end of this year to maximize the corporate value. In addition, the group has pledged to maintain its debt ratio at 300 percent and times interest earned ratio at 4.0 and improve its credit rating, as demanded by the KCGI.
However, the group rejected the KCGI’s demands that it establish a rule to restrict Korean Air’s investment expansion to areas other than the airline business, prepare a plan to list its aerospace business division and enhance risk management through external agencies consultation.
Instead, Hanjin Group has pledged to use about 50 percent of its net profits in 2018 for dividend payout to improve shareholder value. The KCGI has not included dividends in its demands because it can cause a misunderstanding that the activist equity fund is aiming for short-term gains, including dividend. However, the group has dramatically increased its payout ratio from the current 3.1 percent to 50 percent in order to win minority shareholders’ votes.
Reflecting the KCGI’s demand for a clear development path for Hanjin Transportation Co., the group has also come up with plans to enlarge its logistics terminals, invest in automation facilities and apply information technology (IT) to its operations.
The five-year improvement plans of Hanjin Group reflect its intent not to change the current owner management system. For this reason, it rejected the KCGI’s demand for the establishment of a corporate governance committee.