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Questionable stewardship (KOR)

Mar 29,2019
Hanjin Group Chairman Cho Yang-ho was forced to relinquish his position on Korean Air’s board of directors Wednesday because he would have failed to secure two-thirds of the votes from shareholders needed to approve an extension of his term. Disapproval by the National Pension Service (NPS), which has an 11.56-percent stake in the company, contributed to his dramatic ouster.

An owner of the founding family was ousted by institutional shareholders for the first time. That demonstrates the power of the stewardship code in Korea. The landmark event is expected to have massive ramifications on the capital market. President Moon Jae-in has demanded the NPS proactively exercise its stewardship code to make large shareholders of major companies pay for their irregularities and excesses.

The government and civilian organizations expect this case to serve as a lesson and a warning to controlling shareholders who harm corporate values. The entire Cho family has come under scrutiny by law enforcement agencies, starting from the older daughter’s nut rage scandal in 2014 to the younger daughter’s tantrum last year. Cho himself is on trial for embezzlement worth 19.6 billion won ($17.2 million).

Although Cho cannot win sympathy, his removal by force cannot be entirely positive. The case set a poor precedent that an institutional player can strip management from a corporate owner if it wants to regardless of a court judgment on their criminality.

Companies can become fretful about management rights if they lose favor with major institutional investors. They may have to stock up treasury shareholding with their cash reserves that otherwise could have been spent on future growth. The Federation of Korean Industries issued a statement voicing concerns about pension socialism with a public entity meddling in management affairs of a private entity.

To appease such concerns, the NPS must ensure political neutrality. An advisory committee, which was set up in October last year to decide its role in each company it invested in, is not enough to fend off state influence. Of nine members in the subcommittee, nearly two-thirds of them are pro-government figures. As a result, they would be in line with the liberal government, which is why there are concerns about state influence behind stewardship.

The final verdict on Cho was decided after a member from another subcommittee was dispatched to reflect the government wishes. The NPS claims that the procedure was legitimate. Yet as long as there are questions about political influence, the NPS could be suspected of acting as a steward for the government and not for the public interest.

JoongAng Ilbo, March 28, Page 30