National Pension Service to take more active role as an institutional investor

Adoption of a stewardship code to protect investment returns expected to occur next year

The National Pension Service (NPS), a majority shareholder in major listed South Korean companies, officially announced plans to introduce a “stewardship code” for next year, heralding active involvement in decision-making as an institutional investor. Among the detailed guidelines expected to be introduced are the designation and publication of a list of targets for “focused management” when the value of companies receiving NPS investment is judged to be threatened.

The Ministry of Health and Welfare (MOHW) held interim reports and discussions on “research into responsible NPS investment and a stewardship code” in a seventh meeting of its NPS fund management committee on Dec. 1. Minister Park Neung-hoo officially recognized the need for a code system.

“Adoption of stewardship codes is a global trend, with the US, UK, and around 20 other advanced economies already adopting them in the interests of protecting investment returns and enhancing medium- and long-term fund profitability,” Park explained.

Talking to reporters after the committee meeting that day, Park said the system would be introduced “as early as the second half of next year.” As of late 2016, the NPS owned shares of at least 5% in 276 listed South Korean companies, including Samsung Electronics.

An industry-academia cooperation team began drafting interim reports in July, which were then delivered to the fund management committee and submitted to a policy discussion on Nov. 15. Their major findings include calls for the NPS to analyze companies in areas such as environmental management, socially responsible management, and company governance structure of investment target companies in addition to their management performance and other financial elements.

In cases where the inspection findings raise concerns that company value is threatened, the NPS is to first attempt to discuss the matter with the board of directors; if the areas of concern are not resolved, the service is to publish a list of companies designated as “targets for focused management.” The report also proposed nominating outside directors and auditors for listed companies where governance structure is a subject of concern. It further advises shareholder representative action and securities-related compensation suits to provide direct and indirect restitution for damages resulting from illegal actions by directors.

Additional targets include expansions in the scale of the NPS’s social responsibility consigned funds, with the amount of domestically consigned assets to be raised incrementally to 30%. As of July 2017, consigned funds for responsible investment amounted to around 6.2 trillion won, or 10.8% of consigned stocks. After a first-stage increase to 20% over the next one to two years, the rate is to be raised to 30% in five years.

To prevent the NPS from being influenced by the administration, the research findings also suggested expanding and reorganizing the current expert committee on voting rights into a “consignee responsibility committee,” which would be empowered to decide all matters related to socially responsible investment and the exercise of shareholder rights.

During the fund management committee meeting on Dec. 1, the MOHW also reported on plans to institute an expert committee on socially responsible investment. The committee’s role would be to provide stronger monitoring from a socially responsible investment perspective, recommending investment restrictions or changes to the fund management committee for companies with issues in environmental, social, or governance structure terms.

With the NPS stating official plans to institute a stewardship code as South Korea’s biggest institutional investor, other pensions and asset management companies are expected to follow suit. Experts predicted the adoption could prove a turning point in improving corporate governance structures as institutions abandon their “rubber stamp” role to exercise proactive decision-making on shareholder meeting items and work together with managers to increase the long-term value of the companies receiving investment.

By Han Gwang-deok, senior staff writer

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