When Hanjin Group Chairman Cho Yang-ho failed to be re-elected as an in-house director at a shareholders' meeting of Korean Air, a key affiliate of the group, on March 27, the stock market assessed it as a "historic event."
Some experts called it “a candlelight revolution in the capital market,” which has corrected wrong management practices.
In a regular shareholders' meeting, the proposal for Cho’s second term as an in-house director was voted down with 64.1 percent in favor and 35.9 percent against it. He needed support from at least two thirds of the shareholders to be reelected.
Cho lost management control of the national flag carrier 20 years after he became its CEO following his father, the late Hanjin Group chairman Cho Joong-hoon, in 1999. He became the first chaebol chairman in Korea to be deprived of managerial control of a key subsidiary.
Previously, domestic and foreign proxy advisory companies advised shareholders to vote against Cho’s reappointment as an inside director. They included the Korea Corporate Governance Service (KCGS), which is an advisor for the National Pension Service; the ISS, the global voting rights advisor; Sustinvest, a research institute that provides advice on investment strategy; and the Institute for Good Corporate Governance. The People's Solidarity for Participatory Democracy also launched a campaign to delegate voting rights to oppose Cho's second term.
However, no one could easily predict the outcome of the Korean Air shareholders' meeting, as there has been no precedent in which the head of a large business group was stripped of his managerial rights in a proxy battle. Even stock market insiders took the outcome of the shareholders’ meeting as a surprise.
Experts on voting rights, who were against Cho's reappointment, gave a relatively positive assessment of the outcome.
In particular, Ryu Young-jae, head of Sustinvest, described Cho’s loss of managerial control as “a historical event” and “a candlelight revolution in the capital market” that was staged by minority shareholders, in cooperation with the National Pension Service, to correct the mismanagement of Korean Air.
He added that chaebol owners should take it as a stern warning that they should step down from their posts if they fail to receive support from the public and shareholders. He added that the incident will serve as an opportunity for people to clearly understand why it is important for institutional investors to embrace a stewardship code and actively exercise their shareholder rights, and where the “Korea discount” takes place.
The case is meaningful in that it was the first time that the National Pension Service won support from shareholders for a proposal related to chaebol owner families, said Ahn Sang-hee, head of the Daishin Governance Research Institute.
"In Hanjin Group’s case, the damage to corporate value inflicted by its owner family was too starkly visible to shareholders," Ahn said. "In the future, companies will become cautious about filling board seats with owner family members who have a history of damaging corporate value."
"In the past, it was taken for granted that the agendas of shareholders’ meetings were passed without being screened out," said Song Min-kyung, director of the Stewardship Code Center at the Korea Corporate Governance Institute.
"Now, more institutional investors and minority shareholders are actively exercising voting rights on issues that cause concern among market participants. Majority shareholders can no longer go their own way at shareholders’ meetings.” Song said.