Korean shareholder activists push for interests of real owners

Shareholder activism 2.0 has hit Korea. The first wave, which involved foreign hedge funds, failed to achieve much, as they aimed too high and ran up against a variety of hurdles. The current wave is led by domestic investors and has already...

Lee Soo-man, the founder of SM Entertainment [SM ENTERTAINMENT]

Shareholder activism 2.0 has hit Korea.

The first wave, which involved foreign hedge funds, failed to achieve much, as they aimed too high and ran up against a variety of hurdles. The current wave is led by domestic investors and has already succeeded in causing a storm of activity in the all-important K-pop business.

A little-known and newly-formed fund, Align Partners Capital Management, bought 1.1 percent of SM Entertainment and demanded that a relationship between a private company owned by SM Entertainment founder Lee Soo-man be checked for conflict of interest and connected-party transactions.

In a flash, SM Entertainment was in play and the stock went through the roof.

In the early 2000s, foreign hedge funds bought big stakes in Samsung Electronics and other large corporations, claiming poor governance and a litany of other infractions. Now, local companies are buying up stakes in an effort to resolve the Korea discount — the phenomenon in which Korean shares trade at lower price-earnings ratios than global comparables — and have the support of other local shareholders keen to lift the value of their portfolios.

The starting point goes back to a general meeting of shareholders in March as Align Partners collected votes from small shareholders to challenge Lee’s “dictatorial management” as the largest shareholder of the K-pop powerhouse.

It called for more outside directors and a cutting of ties with Like Planning, a company owned by Lee that was collecting up to 6 percent of SM's annual revenue under the pretext of "production fees."

Shareholder activists aim to get equal treatment for all shareholders and end the practice of the largest shareholders acting like they own the companies, even though their holdings are normally less than half.

A total of 47 Korean companies were affected by activist shareholder actions in 2022, according to Insightia. The number is a considerable jump compared to 2021’s 27 and 2020’s 10 companies.

In the United States, Insightia counts 511 companies hit by activist shareholder actions, Japan 107 companies, Australia 61 companies and Canada 53 companies.

Requests from shareholders in 2022 included new directors and auditors, alterations in memoranda of understanding, limits on board compensation and higher dividend payout ratios. Analysts predict the picture will be similar for this year as well.

On Thursday, Truston Asset Management, which owns 5.8 percent of Taekwang Industrial, requested the company to increase the dividend payout ratio by 20 percentage points and appoint an independent director.

“Although Taekwang Industrial’s financial structure and its main business are stable, its average dividend payout ratio is 0.3 percent, the lowest out of all listed companies,” said Truston’s Vice President Lee Sung-won. “We need to reform the policies on capital management that puts pressure on the shareholders to cover up their losses.”

Last December, Truston opposed and ultimately stopped Taekwang’s proposal to invest 400 billion won ($313 million) in Heungkuk Life Insurance.

Flashlight Capital Partners (FCP) recently sent a letter to KT&G for a business overhaul to separate its ginseng unit from its tobacco business. FCP owns 1 percent of KT&G's total share.

“If market capitalization of KT&G’s main affiliate Korea Ginseng Corporation is revalued, shares on KT&G will jump considerably,” said FCP’s CEO Lee Sang-hyun.

Align also targeted financial corporations. Earlier this month, it sent a letter to seven corporations including KB Financial Group “to increase the dividend payout ratio by more than 50 percent.”

Financial firms are lining up policies to meet the demand ahead of shareholder meetings in March. For 2022, KB Financial Group's dividend payout ratio was 33 percent, followed by Shinhan Securities and Woori Financial Group at 30 percent, and Hana Financial Group at 27 percent.

The number grew seven percentage points for KB compared to 2021, while it was an increase of four percentage points for Shinhan Financial. At a recent conference call, the latter announced plans to increase the ratio up to 40 percent.

Shareholder activism is not completely void of criticism, due to a negative example set forth by former presidential policy chief Jang Ha-sung and Lazard Asset Management in 2006. Dubbed as “Korea Corporate Governance Fund,” it debuted as the first-ever domestic activist fund aimed at investing in healthy but undervalued companies and raising their values by improving their corporate structures.

The fund, which once managed a 300-billion-won investment fund, failed to produce significant profits and liquidated the fund in 2012 after registering a 19.4 percent loss in 2011.

Foreign hedge funds were scathed as dine-and-dashers instead of providing solutions, such as the unsuccessful attempt by Elliott Management Corporation’s shake-up on Samsung Electronics in 2016. Elliot Management, which acquired a 7.12 percent share of Samsung C&T in 2014, quietly disposed its holding the following year.

Growing attention to social and institutional changes in corporate environment, social and governance (ESG) management is seen as a plus.

“Before, shareholder activism was difficult to gain momentum unless it acquired 51 percent of the shares,” said Lee Sun-kyung, the head of Korea ESG Research Institute. “Now public sentiment can affect the corporate as ESG managements are being prioritized.”

Some say shareholder activism is pressuring management too much.

“It’s a positive sign that the movement is helping on the expansion of dividend payout policies,” said an anonymous insider from Korea Institute of Finance. “However, their demands seem a little too much to ask to assign so much dividends back to the shareholders despite regulator requests to slim down demands amid economic slowdown. People have to be cautious and see, sector by sector, if the purpose of the movement is actually for the growth of the company or whether it’s for short-term profits.”

BY BAE HYUN-JUNG, LEE JAE-LIM [lee.jaelim@joongang.co.kr]