The Financial Times, 19 March 2007
South Korea's fund managers are becoming increasingly vocal about corporate management issues and are actively casting their ballots to get themselves heard at annual shareholders' meetings.
This is a sea-change from only a couple of years ago when domestic asset managers were criticised for being a rubber stamp on most corporate policies, ignoring their fiduciary duty to protect the interests of their investors.
The transformation of Korean fund managers from silent partners into active investors has been sparked by their growing influence in the local stock market due to the rising popularity of mutual funds.
"Our responsibility has become bigger as our fund size grows with more long-term investments. Investors are more aware of the importance of shareholder activism, because whether or not shareholder value is looked after often leads to different investment returns," says Kang Shin-woo, chief investment officer at Korea Investment Trust Management.
Domestic asset managers' equity funds have ballooned to Won49,610bn ($52.6bn, €39.9bn, £27.3bn) and Korea's National Pension Service plans to invest Won29,708bn in the local market this year. Local institutions take up almost 20 per cent of the country's total market capitalisation.
Shareholder activism began to draw attention in South Korea only a couple of years ago with Sovereign Asset Management, a Dubai-based investment fund, asking for a management change at SK Corp, the country's largest refiner. The issue came to the fore last year as Carl Icahn, the US activist investor, threatened to take over Korea Tobacco and Ginseng after the cigarette maker refused to accept some of the activist's plans to boost share prices.
Still, Korean companies had not paid much attention to shareholder value until domestic activist funds began to appear last year. Jang Ha-sung, the dean of Korea University's business school and a corporate governance guru, is leading domestic shareholder activism with his $200m Korea Corporate Governance Fund. The fund is managed by Lazard Asset Management and invests mostly in small-cap companies that are undervalued due to poor corporate governance.
KCGF is pressuring management to stop opaque business deals with related parties of controlling shareholders, to strengthen public disclosures and reinforce investor relations activities. Cash-rich companies with no promising investment plans are criticised due to their low capital efficiency.
Mr Jang says KCGF has gained consent from most of the eight companies in which it owns stakes of about 5 per cent in appointing outside directors and auditors recommended by the fund. "They often find our requests annoying but most of them have agreed to our reform measures. If they fail to implement such agreements, we will wage a proxy fight," says Mr Jang.
Under KCGF pressure, Taekwang Industrial promised to set up a holding company by 2009 to improve its corporate governance and return assets taken by controlling shareholders. Daehan Synthetic Fiber, Taekwang's textile subsidiary, also agreed to come up with plans this year to utilise its huge idle real estate.
Inspired by KCGF, other domestic fund managers are becoming more active. Most recently, Shinyoung Investment Management cast a dissenting vote on an outside director candidate at Ilshin Spinning, saying that the company's candidate missed more than half of its board meetings.
Mirae Asset, the biggest domestic fund manager, recently set guidelines on voting at AGMs, including a clause that it should consider long-term shareholder value during management disputes. "We basically respect managerial rights, but we will express our opinion when shareholder value is undermined," says Sohn Dong-sik, Mirae's chief equities manager.
Analysts say rising shareholder activism would help resolve the "Korea discount" that restrains share prices. "The biggest reasons for the Korea discount are poor corporate governance and a lack of management transparency. Domestic fund managers' active stance could lower the discount rate and bring a re-rating of the local stock market," says Lee Chai-won, chief investment officer at Korea Value Asset Management.
However, critics say big asset managers are changing slowly due to their business relations with their corporate customers and the National Pension Service also remains a passive investor, stressing its "public" role. Domestic asset managers voted for more than 98 per cent of the AGM agenda last year, casting dissenting votes only in exceptional cases, according to the Korea Exchange.
"Domestic shareholder activism is still at an infant stage with most big institutions lacking an active stance. These big asset managers have a conflict of interests due to many corporate finance deals. But they will be forced to change as competition intensifies in the market with the emergence of more small activist funds," says Mr Jang.
Source: The Financial Times
