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Benefits of transparency

The stewardship code could be a game-changer in the Korean capital market.
July 08,2017
Korean shares have shown exceptional strength. The main Korean composite stock price index (KOSPI) has risen 18 percent this year, making the biggest gain among major stock markets across the world. Korean stocks remained resilient to a series of shockwaves — the presidential impeachment, the sudden change of ruling power, missile provocations from North Korea, and talks of renegotiation of the Korea-U.S. Free Trade Agreement. The market would have to take a breather after galloping throughout the first half, but the upward momentum is expected to stay intact for most of the year.

What has happened over the year? On the façade, Korea Inc. has performed remarkably, but that alone does not fully explain the phenomenon. A hidden winning appeal has been the revival of voting rights in the stocks. Voting rights in Korea so far had been restricted to the major shareholders, or the owner family members. But institutional and minority shareholders now have a greater say in management affairs.

Since late last year, institutional players have begun to adopt the so-called stewardship. The code first introduced in the United Kingdom in 2010 encourages institutional investors to take a more active role in management and oversight. Stewards are guardians of the properties of their landlords. Pension funds and other institutional players are asked to exercise their voting stocks in major management decisions.

Until recently, Korean institutional players pulled out their money if they were not happy with the underlying companies of their stocks. But financial institutions, under the stewardship code, must act tantamount to their interests in the companies. The system was promoted and groomed by two financial chiefs Shin Jae-yoon and Yim Jong-ryong under former President Park Geun-hye. It coincides with the philosophy of just and transparent corporate governance pursued by liberal President Moon Jae-in. Timed with the birth of a progressive government, institutions have rushed to adopt the system. Those in compliance with the code total 50, and the country’s institutional behemoth National Pension Service is expected to join the bandwagon in the second half of the year.

The stewardship code could be a game-changer in the Korean capital market. Not only does it have full backing from the government, it also is welcomed by retail investors. Individual investors have become smart enough to believe that stricter checks are necessary to rein in recklessness and greedy pursuits of managing owners of Korean companies and protect the value of their stock assets.

Experts believe Korea Inc. is still about 30 percent undervalued against its global counterparts. Part of the reason is the outdated ownership structure of family-run chaebol entities. Undervaluation means that Korean shares have that much more potential to grow.

Institutional stewardship alone won’t provide traction to Korean shares. Voting rights are exercised twice a year during regular shareholders’ meetings. Although owner family members command 3 to 4 percent of listed Korean companies, they can muster up to 44 percent rights if they pull up all their interests in affiliates. Institutional shareholders’ say therefore could be limited.

Another option could be the adoption of a cumulative voting system which would give each shareholder one vote multiplied by the number of board directors to be elected. Through the system, individual investors can join forces to seat their director on the board and represent their voice in management affairs.

The weighted voting system had been promised by Moon during his campaign. It is strongly contested by companies as they fear abuse by foreign predatory forces. But one or two outside directors cannot have a decisive say in a board of eight to 10 members. Still, they can keep watch on irregularities and management decisions.

The cumulative voting system is included in the revised bill for the commerce act. Together with the stewardship code, the system can help lift the value of Korean shares. The National Assembly should do its part to remove the “Korea discount.”

JoongAng Ilbo, July 7, Page 28

*The author is the head of the Economy Research Institute of the JoongAng Ilbo.

Kim Kwang-ki