Sovereign Asset Management investment in SK Corporation is an opportunity to build a role model for corporate governance and shareholder value for Korean business.
Sovereign Asset Management ("Sovereign"), whose subsidiary Crest Securities has recently become the largest shareholder in SK Corporation ("SK Corp"), is looking forward to working with SK Corp management to develop a corporate governance reform plan for the company. Mr James Fitter, Chief Operating Officer of Sovereign said "We have had several fruitful and constructive discussions with SK Corp management and we look forward to further developing these in the coming weeks."
There has been much press comment and enquiry on Sovereign's corporate governance initiatives for SK Corp. This press release provides background to Sovereign's history and role in promoting corporate governance reform.
Sovereign Believes Corporate Governance and Economic Prosperity Are Linked
In today's global economy, the competition between countries for the international investment capital which is necessary to drive economic development and prosperity is intense. The ability to attract capital and the cost of that capital is dependent on a combination of two things, country and corporate governance. Korea's history of poor corporate governance is undermining its ability to attract the low cost capital and investment necessary for long term prosperity. SK Corp is a unique opportunity to change investor perceptions of Korea and make the country's aspirations to join the club of first world nations a reality.
Sovereign Has Been At the Forefront of Corporate Governance Reform in Russia
Since 1993, Sovereign has been one of the largest foreign portfolio investors in Russia with investments in a number of listed Russian companies. These include Gazprom, the world's largest hydrocarbon producer; Unified Energy Systems, the national electricity company; and Novolipetsk Metallurgical Kombinat (NLMK, Russia's leading steel company.
In each major investment, Sovereign has worked to introduce the highest standards of corporate governance and transparency. Sovereign initiatives have included electing independent directors to the boards of companies; dialogue with management on improving governance and raising shareholder value; and working with regulatory authorities on improving minority shareholder protection in capital markets.
Boris Fedorov, Former Russian Finance Minister and Member of the Board of Gazprom said,
"Sovereign has been playing a significant role in corporate governance reform in Russia for a decade. They have displayed great focus, perseverance and patience in seeking to create a more professional, honest and transparent business culture. When most foreign investors deserted Russia after the 1998 government debt default, Sovereign was one of the few that stayed and continued to promote reform. More than any other institutional investor, Sovereign capital, experience and tireless corporate governance initiatives have helped develop the Russian capital markets thereby attracting further international investment."
Sovereign's Objectives For SK Corp - To Create A Role Model For Change
For international standards of corporate governance to take root in Korea, there must be examples of leadership. A business culture that has operated according to one philosophy for many decades finds it difficult to change, even when their old philosophy no longer continues to work in the new global economy. Successful leadership examples become extremely important in acting as a role model for corporate change. Sovereign intends for SK Corp to become such a model.
The corporate governance reform program that Sovereign will be proposing to SK Corp management is expected to include: a corporate governance charter which deals with related party transactions, a corporate ethics code, the composition of the board and role of independent directors and the composition and oversight role of the audit committee. In addition, Sovereign will be seeking a refocused business plan which sets out clear benchmarks for returns on equity for new investments.
Jim Dannis, Director of Berens Capital Management in New York and Former Head of Citigroup's Investment Banking Activities in Eastern Europe said,
"I worked with Sovereign intensively for many years when they were involved in fighting corporate governance abuses at NLMK, Russia's leading steel company. They refused management's attempts to buy them out and patiently worked to stop transfer pricing and related party transactions at the company. They were the very first investors to use the Russian legal system to enforce shareholders rights and directors responsibilities in the newly-privatised Russia. They were left to fight this battle alone, after every other investor sold their stock. At that time in Russia, this was a very dangerous industry. They showed great courage and commitment to their principles."
Corporate Governance - A Core Part of Sovereign's Mission
Research of companies within emerging market countries has shown that corporate governance has a direct impact on equity valuation and stock price performance. Companies with better corporate governance standards tend to trade at higher valuation multiples and are able to attract a wider investor base. Corporate governance reforms are key to reducing the country risk premium within emerging markets, which can lead to lasting benefits to their overall economies.
Charles Ryan, Executive Chairman of United Financial Group, a leading Russian investment bank which advised BP on its recent USD 6.75 billion investment in Tyumen Oil Company, said,
"Russia has been one of the world's best performing stock markets over the past few years as investor perception of the country has improved. This has been driven in large part by corporate governance reform at companies like Yukos, a leading Russian oil company. Who knows, the SK Corp reform story could lead to the beginning of an investment re-rating for Korea and be a key step in the road to eliminating the well known Chaebol discount. Sovereign is one of the most experienced and active organisations working with corporate governance reform in global markets today. Their unique experiences in Russia have given them special insights which will be helpful in Korea."
In view of the continuing problems at SK Global and new revelations of accounting irregularities at SK Shipping, it is important that SK Corp demonstrate that it is distancing itself from SK Group affiliates. SK Corp shareholders and creditors wish to see SK Corp management focused on restoring the company's profitability and reputation through strong corporate governance reforms. "Enough is enough with the ongoing SK Group scandals. It is time for SK Corp to chart an independent path" said James Fitter.
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