Governance Continuing to Display Quality Improvement
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Disclosure of corporate governance reports is taking root. Expectations are high that Korean firms will enter into a responsible investment virtuous cycle via strengthening of disclosure targets, ESG management systems, and ESG funds.
Disclosure of corporate governance reports taking root
In order to enhance corporate value by offering uniform and detailed information on corporate governance, Korean firms have been mandated since 2019 to provide corporate governance reports. Their compliance rate with key indicators is highly correlated with ESG ratings, serving as a simple governance (G) rating table.
The mandatory disclosure target of corporate governance reports has been expanded from 2022 to Kospi-listed companies with assets of W1tn or higher (versus previous: W2tn). Guidelines are being improved to clarify disclosure. The mandatory disclosure target for 2022 is 304 firms (up 129 y-y).
Governance (G) continuing to display quality improvement
The average compliance rate with key indicators has dropped from 64.5% last year to 60.6% this year. But, we point out that the main reason for this decrease is that the average compliance rate for companies with assets of W1tn~W2tn was only 50.4%, as such firms just started making disclosures from this year. For companies with assets of W2tn or higher, the average compliance rate was 66.7%, a 2.2%p y-y rise.
Efforts are being made to strengthen shareholder’s rights. In keeping, firms with assets of more than W2tn are showing improved compliance rates with indicators, including: ③ General shareholders’ meetings being held on a day other than the day on which most general shareholders meetings are held; ② Electronic voting being conducted; ④ Dividend policy and future dividend plans being provided to shareholders at least once a year; and ① Convocation notices being given four weeks ahead of general shareholders’ meetings. As for firms with assets of W1tn~W2tn, they were comparatively weak on indicators such as: ⑭ Internal auditing bodies holding meetings with external auditors more than once a quarter without the attendance of management; ⑤ Preparing and executing succession policies (including contingency appointment policies) for CEOs; ① Convocation notices being given four weeks ahead of general shareholders’ meetings; and ⑪ Providing education on internal audit systems at least once a year.
POSCO Holdings reported the highest compliance rate (100.0%). Among corporate groups, the LG Group showed the top average compliance rate (82.2%). The Hanwha Group displayed the strongest level of improvement, from 58.3% in 2020 to 70.0% in 2021.
A rising number of companies are establishing ESG committees (39.8%) and appointing female directors (68.1%). On the other hand, 6.0 out of an average of 7.1 of directors were in their 50s or 60s.
Responsible investment being expanded
The NPS’s responsible investment assets accounted for 13.7% of its total assets as of end-2021(+1.5%p y-y). AUM for publicly offered equity-type ESG funds is around W1.9tn, managed by 18 asset managers. With responsible investment expanding since 2021, domestic ESG indexes (which had previously not been reporting consistent results) have turned to outperform the market. In line with the above-described efforts, expectations are high that Korean firms will enter into a responsible investment virtuous cycle.