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Concern over ‘Pension Fund Socialism’ Growing in Korean Business Community
Business Leaders on Alert
Concern over ‘Pension Fund Socialism’ Growing in Korean Business Community
  • By Michael Herh
  • March 28, 2019, 10:54
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Korean business leaders are in shock as Hanjin Group chairman Cho Yang-ho lost his managerial control of Korean Air Lines Co. in a proxy battle. 

The Korean business community is in shock as Hanjin Group chairman Cho Yang-ho lost his managerial control of Korean Air Lines Co. by failing to secure support for his reappointment as an inside director at a general shareholders’ meeting on March 27.

Business leaders are surprised as their worst fears had been realized. They are hurrying to begin an in-depth study of the stewardship code and are raising their voices for arrangements to defend their management rights from foreign capital.

The Federation of Korean Industries (FKI) made a statement of regret in the name of executive director Bae Sang-geun. It said, “We believe that the National Pension Service played a crucial role in depriving the Hanjin Group chairman of his managerial control. We are concerned that the NPS voted against the reappointment of Cho, swayed by controversies surrounding him and his family, though it had to maintain a cautious attitude in consideration of the interest of shareholders and shareholder value. It is a shame that the NPS did not act cautiously, given the market fears of ‘pension fund socialism.’”

In fact, a considerable number of companies can experience what has happened to Korean Air. The NPS owned more than a 5 percent stake in as much as 294 listed companies in South Korea and over a 10 percent in 90 firms, such as Korean Air, as of the end of the third quarter of last year, according to financial market researcher FnGuide.
 

Out of these, the largest shareholders holdings of a great number of conglomerates, including major Samsung Group’s subsidiaries such as Samsung Electronics Co., Samsun SDI Co., Electro-Mechanics Co. and Hotel Shilla Co., is lower than Korean Air. However, it cannot completely rule out the possibility of the NPS exercising the stewardship code on these companies.

Moreover, there is no way that even the NPS and foreign capital can gather shareholders to the level of appointing another memberofboardofdirectors. Accordingly, there is a concern that it can be a viciouscircle of simple dragging down. It means that Cho’s board removal cannot affect the governance structure but it can cause only side effects of unstable management rights.
 

An official from the business community said, “A head of a company shows his will for responsible management by sitting on the board. The latest decision may have given him indulgence instead.” In short, the head of the company still has practical management rights but he can shift legal obligations to the board of directors.

In addition, there is a growing concern that there is no device to protect domestic conglomerates from shareholder activists when foreign hedge fund operators and global proxy advisory firms, including Elliott, and the ISS, attack them with the similar methods. Hyundai Motor Group dropped its attempt to overhaul its governance structure last year as Elliott opposed to the move and the Korea Corporate Governance Service, the main advisor of the NPS, joined force.