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Set to oppose reappointment of Chairman Cho Yang-ho as board director
The National Pension Service (NPS) appears committed to proactively asserting its authority as a shareholder in Hanjin KAL and Korean Air, opposing the reappointment of Chairman Cho Yang-ho as a director in the wake of damage to company and shareholder value from illegal and corrupt actions by his family members. The NPS’ first foray into management involvement following the adoption of its “stewardship code” is expected to emerge as an effective curb on chaebol family abuses going ahead. In a Jan. 16 meeting at the Plaza Hotel in Seoul’s Jung (Central) district, the NPS Fund Management Committee, which serves as the service’s top decision-making body, voted to have its stewardship expert committee review and report back on whether and to what extent the service should actively exercise its rights as a shareholder of Korean Air and its holding company Hanjin KAL. An expanded and reorganized version of the voting right exercise expert committee that previously advised the NPS on its use of voting rights, the stewardship expert committee makes determinations on the exercise of shareholder rights in cases of actions that compromise shareholder value, including embezzlement, breach of trust, and other fraudulent profit-seeking acts by majority shareholder family members and managers as well as improper support to affiliates. The Fund Management Committee is set to hold another meeting on Jan. 31 to hear the stewardship expert committee’s report and make a final decision on whether to exercise shareholder rights with Korean Air and Hanjin KAL. It marks the first time the NPS has moved to involve itself in management activity through the exercise of its shareholder rights. While observers had anticipated the Fund Management Committee would finalize plans to actively assert its rights and order the expert committee to examine the particulars, its actual decision fell short of that. But with most of the meeting’s attendees agreeing that the NPS needs to take active steps in response to the damage done to corporation and shareholder value by Cho’s family members, the commitment to actively exercising rights appears definite. First instance of NPS enforcing “stewardship principle” “The National Pension reiterates once again that it will exercise its shareholder rights in a transparent and fair matter to increase the fund’s long-term profitability,” Fund Management Committee Chairman and Minister of Health and Welfare Park Neung-hu said at the meeting. “I anticipate today’s discussions on the matter of exercising shareholder rights for Korean Air and Hanjin KAL will be the first instance of us enforcing our ‘stewardship principle,’” Park added. Another Fund Management Committee member, People’s Solidarity for Participatory Democracy Executive Committee Director Lee Chan-jin, noted, “An absolute majority of those attending the meeting agreed on the NPS actively exercising its shareholder rights.” “Since this will be the first instance following the stewardship code’s adoption, I anticipate it will be discussed and handled with the utmost care,” Lee added. Only three organizations opposed the move, including the Korea Employers Federation and the Korea Chamber of Commerce and Industry. The NPS’ adoption of a stewardship code was originally an election pledge by then-candidate Moon Jae-in. As efforts to establish a “sound market order,” Moon pledged to have the NPS actively exercise its authority as a shareholder on matters including the prevention of illegal and questionably legal governance and inheritance activities by corporations, violations of minority shareholder interests, and the appointment of outside directors. Criticized in the past for being “passive” with its shareholder authority, the NPS cast opposing votes on 524 of 2,561 motions, or 20.5%, at general shareholder meetings in the first half of 2018; its percentage of opposing votes had previously hovered around 10%. Cho’s family caught in string of controversial incidents in 2018 Korean Air and Hanjin KAL found themselves at the center of controversy last year amid revelations of abusive behavior by Cho’s daughter, former Korean Air Senior Vice President Emily Cho Hyun-min, and his wife, former Ilwoo Foundation Director Lee Myung-hee. Prosecutors have indicted Cho Yang-ho on charges including breach of trust, fraud, and embezzlement for allegedly collecting transit duties from purchases on board Korean Air flights and earning hundreds of billions of won in illicit profits from the illegal operation of a pharmacy in the name of a hired pharmacist. The resulting dive in Korean Air share value translated into major losses for the NPS, which owns 11.70% of Korean Air, 7.34% of Hanjin KAL, and 7.41% of Hanjin. NPS’ more assertive approach to herald change in chaebol behavior Many sources in and around the Hanjin Group pointed to Cho’s complacent response as the reason for the NPS’ decision to more proactively assert its shareholder rights. Last year, the NPS sent an open letter to Korean Air ask it to share details about actions by members of the Cho family and its plan for their resolution; the service also held closed-door meetings with managers and outside directors. In response, Korean Air merely said that was “making every effort toward management normalization.” The NPS’ more assertive approach with its shareholder rights is predicted to herald a change in the behavior among chaebol chairmen, who have avoided taking responsibility in the past for serious damage to their companies and shareholders from illegal and improper behavior. The same yardstick would have to be applied in other future instances similar to Hanjin’s case. The active assertion of shareholder rights would open the door for the NPS to issue advance attendance announcements, recommend outside director candidates, adopt a more confrontational stance on voting right delegation, and take legal action on behalf of shareholders. The chances of a showdown in voting over whether to re-appoint Cho Yang-ho as a director appear higher when Korean Air holds its general shareholder meeting in March. While some business world observers have objected to what they describe as “pension socialism,” many maintain that the NPS needs to be even more proactive about safeguarding the public’s post-retirement funds and boosting long-term corporation value. “The board of directors has never addressed the use of the major damage done to company value by the ruling family,” said attorney Kim Nam-geun. “They need to consider active shareholder proposals and legal action on behalf of shareholders to improve the governance structure of the board, which has devolved into a rubber-stamping mechanism,” Kim suggested. By Kwack Jung-soo, business correspondent, and Shin Min-jeong, staff reporter Please direct comments or questions to [english@hani.co.kr]
