Sovereign acknowledges the announcement by SK Corp of 23rd February 2004 and is encouraged that the Board has finally yielded to shareholders' repeated calls for the accountability of criminally convicted directors, as well as a higher standard of corporate governance.
However, the continued presence of a director who has been found guilty of breach of fiduciary responsibilities and accounting irregularities diminishes the company's reputation, creditworthiness and credibility.
James Fitter, Chief Executive of Sovereign Asset Management, said, "This is a step in the right direction, but needless to say, we were disappointed to see the inconsistent application of principles of accountability. In particular, we note that a director with a criminal conviction has been given the option to remain on the board."
SK Corp proposes to disqualify convicted criminals acting as outside directors, yet remains silent on applying this fundamental principle to inside directors.
While Sovereign notes SK Corp's decision to try and emulate GE as a role model for global corporate governance, a review of GE's board confirms that none of their directors have criminal records. The continued involvement of Chey Tae-won at SK Corp would only contradict his own promise to emulate GE's corporate governance standards.
Given that Mr. Chey continues to demand for himself a central role in management, it once again falls to shareholders to say what no-one at the company seems willing to state: Mr. Chey is currently on bail having served only seven months of a three-year sentence for his role in the 4.4 trillion Won (US$3.7 billion) accounting fraud at the firm's trading arm, SK Networks, and for defrauding SK Corp shareholders in a stock swap with the Walker Hill hotel.
Moreover, suggestions of a family "management right" are not supported by the family's small, fully-diluted shareholding of 6.5%. Indeed, such a concept is inconsistent with the Korean commercial code, which provides for one share to represent one vote and all shareholders both domestic and foreign to be treated equally. Calls for leadership accountability at SK Corp benefit all investors, Korean and foreign, equally.?The institution of true corporate accountability can only strengthen Korea's companies and its economy.
Mr. Chey has recently been promising SK Corp employees and shareholders that he wishes to make SK Corp into a role model for corporate governance. One year ago, he said exactly the same thing, and gave this his personal commitment on the company's website. Sovereign initially accepted and believed Mr. Chey's promises, which is why Sovereign invested in SK Corp. at that time.
While waiting for the promised reforms, we have seen three SK Corp directors receive criminal convictions for accounting fraud, the 850 billion Won bailout of SK Networks, a 200 billion Won political slush fund scandal, a 788 billion Won loss through unauthorised futures speculation, and the insider sale of SK Corp. treasury stock to Mr Chey and his friends.
Sovereign believes that SK Corp requires a board comprised of independent, ethical leaders. While respectfully acknowledging the calibre of candidates put forth by SK Corp, we remain convinced that the candidates supported by Sovereign are able to offer the greater level of independence required to give the company a new direction.
SK needs a board that enjoys the market's complete trust. The regular use of "Enron-esque" false accounting within the SK Group has resulted in a series of "unforeseen" losses, each one of which is promised to be the last. Even in 2003, SK Corp made a loss of around 500 billion won (US$425 million), which the company reported as a profit of 8 billion won ($6.8 million) after improperly treating 512 billion won of the SK Networks bailout as an imaginary asset called Goodwill, instead of properly writing it off as an expense. This type of misleading accounting and capital destruction must not be permitted to continue.
SK Corp needs a fresh start. It must be liberated to properly allocate its resources, in order to fulfil its true potential and represent Korea in the competitive global energy market. Its financial resources must no longer be systematically misdirected, on a massive scale and without explanation or accountability, into ventures that have nothing to do with SK Corp's energy business.
For all of these reasons, Sovereign continues to support the five, new independent non-executive board nominees announced on 29 January 2004 as well as the proposed amendments to the Articles of Association.
We look forward to the March 12 annual general shareholders meeting, and we continue to urge all holders of record to exercise their rights to vote.
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