South Korea's shareholder activism revolution remains stuck in the slow lane

This year’s proxy voting season was supposed to be a watershed for South Korean corporate governance, with 11 companies targeted for activism, versus just two in 2018.  But with Elliott rejected by Hyundai Motor shareholders and KCGI, Korea’s biggest activist fund, blocked from submitting proposals at next week’s Hanjin KAL vote, it appears activism in Korea will only advance at a pace dictated by Korea’s financial establishment.

In Seoul on Friday, shareholders for carmaker Hyundai Motor and affiliate car-parts maker Hyundai Mobis resoundingly rejected Elliott’s call for a combined 7 trillion won ($6.15 billion) in dividend payouts and five board seats.

Failure of the dividend proposal was not unexpected. It had been publicly opposed by Korea’s National Pension Service (NPS) and several international pension funds that were swayed by Hyundai’s promise of a smaller, yet significant, dividend, as well as by arguments that the company needs to invest more in automotive technology related to electric and self-driving cars.

— Mobis disappoints —

But the failure to win any board seats, especially at Mobis, was a disappointment. Elliott’s proposals to expand the Mobis board from nine to 11 seats and to add two independent directors were widely supported by international funds, including CalPERS and CalSTRS, as well as by proxy advisory firms Institutional Shareholder Services and Glass Lewis. Elliott’s Mobis nominees reportedly won support from around 25 percent of voters.

Importantly, the Mobis proposals were opposed by Korea’s NPS despite Elliott’s efforts to win over the influential pension fund.

Friday’s vote sets the stage for Elliott’s next effort to influence an anticipated vote on the broader restructuring of Hyundai Motor Group, which includes Hyundai Motor and Mobis. Possibly referring to that vote, Elliott said in a statement it was encouraged by the shareholder support they did receive Friday and expressed confidence that “the future holds further improvements at Hyundai.”

— KCGI shot down —

A possibly more significant setback for Korean shareholder activism was a court ruling Thursday preventing Seoul-based fund Korea Corporate Governance Improvement (KCGI) from submitting proposals for a March 29 vote by shareholders of Hanjin KAL, which owns Korean Airlines. KCGI is seeking the right to select two outside board directors and one auditor, and to limit salaries for board members.

Upholding a lower court ruling, the Seoul High Court sided with Hanjin KAL in its argument that KCGI had not met a requirement under the Commercial Act that an investor must hold a company’s stock for 6 months prior to making such proposals. KCGI disclosed its investment on Aug. 28 and announced its proposal on Jan. 31.

KCGI had countered that it met another Commercial Act rule which states that a shareholder with more than a 3 percent stake can exercise their shareholder proposal rights until six weeks before a regular general meeting, citing a 2004 precedent.

The Seoul High Court’s ruling has significance beyond Hanjin KAL as it effectively rules out the event-driven activism commonly practiced in the US, where funds initiate stakes in companies following market-moving events such as earnings restatement or merger announcements and then agitate for changes.

If held to the same standard, current proxy contests in the US such as Starboard Value’s opposition to the merger of Bristol-Myers and Celgene or BlueMountain’s campaign for board seats following the bankruptcy of PG&E would be impossible.

— Dalton diplomatic —

The next vote to watch will be Hyundai Home Shopping (HHS) on March 28, which is under pressure from Los Angeles-based fund Dalton Investments.

With more than 20 years’ experience in Korea, Dalton appears to be taking a slower, more diplomatic approach than Elliott. Rather than make formal proposals for shareholder consideration, it has only announced its objection to the appointment of two independent directors and two audit committee members proposed by the company’s board.

Dalton noted that all of the 146 voting items presented at HHS’s board meetings last year were approved unanimously by every attending independent director.

Despite the announcement, and a broader publicity effort by Dalton to educate the Korean public and policymakers on the benefits of good corporate governance, people close to the campaign are not optimistic that the annual general meeting will lead to significant changes, MLex has learned.

— NPS sets pace —

Ironically, the only significant corporate reshuffle that may resulting from this year’s proxy season in Korea could be forced by NPS, the national pension fund that helped scuttle Elliott’s campaign at Hyundai.

The fund has put forward a motion for the dismissal of Suk Tae-soo, the president of Hanjin KAL, who faces allegations of breach of trust and embezzlement, along with one director. Unlike KCGI, the Seoul High Court has allowed NPS to proceed with its campaign against Hanjin KAL.

It indicates that the pace and direction of governance in Korea will not be decided by international activists, or even domestic ones, but by the quasi-governmental financial institutions that have continued to support the nation’s family-controlled corporation, known as Chaebol, despite evidence that their dominance of the economy and stock market undercuts Korean investors, including the national pension fund itself.