Private equity fund proposes that Hanjin establishes corporate governance committee of outside directors

Hanjin Group Chairman Cho Yang-ho

Second shareholder’s proposal comes after NPS’ suggestion of stewardship code

Hanjin Group Chairman Cho Yang-ho

Amid private equity fund Korea Corporate Governance Improvement (KCGI)’s power struggle with Hanjin Group Chairman Cho Yang-ho leading up to the general stockholder meetings at group affiliates this March, KCGI has publicly proposed that Cho set up a “corporate governance committee” composed of outside directors, which would enable KCGI to participate in management.

With South Korea’s National Pension Service (NPS), a major stockholder, pondering the option of exercising its stockholder rights more aggressively in order to prevent Cho’s family from engaging in legally dubious behavior, the next question is whether Cho will accept KCGI’s proposal.

On Jan. 21, KCGI announced a five-year plan for restoring trust in the Hanjin Group. KCGI is the second largest stockholder in Hanjin KAL, the Hanjin Group’s holding company, with a 10.81% stake.

KCGI’s plan has four goals: improving corporate governance, raising corporate value, increasing customer satisfaction and building social trust.

“We believe there are several reasons that the stock of Hanjin Group affiliates is undervalued: the backward corporate governance epitomized by the tyrannical behavior, embezzlement and professional negligence by members of the controlling family; an excessive debt ratio resulting from unreasonable subsidies to affiliates; the unnecessary retention of idle assets; and lax management,” KCGI said.

To begin with, KCGI proposed setting up a committee to improve corporate governance and create a system of responsible management. This six-person committee (composed of one company director recommended by the management, two outside directors recommended by KCGI after canvassing the opinions of ordinary stockholders, and three outside experts) would be responsible for carrying out a preliminary assessment and review of matters that would have a major impact on stockholder value.

KCGI’s management participation would limit Cho family’s grip on group

The proposal also calls for the establishment of an executive recommendation committee that would include independent outside directors and a compensation committee that would be wholly composed of outside directors. The creation of such committees would put a check on the appointment of executives and compensation decisions, which are a key source of power for the chaebol’s controlling family.

In its proposal, KCGI also urged the group to go back to the drawing board on its hotel investments, including the loss-making KAL Hotel Network and the stalled hotel development in the Songhyeon neighborhood in downtown Seoul. It also proposed introducing a program to restore Hanjin staff and executives’ presence and self-confidence at the group.

“We conveyed our proposal confidentially, but the hesitance displayed by Chairman Cho and the management prevented us from reaching an agreement. We will seek the approval of stockholders, company staff and executives and the public at large,” KCGI said.

KCGI had not previously released a detailed plan for management participation. The apparent reason it made its 12-page plan public on Monday is because it concluded there was no more possibility for reconciling its disagreement with Cho. KCGI has also launched a website called “Value Hanjin” aimed at encouraging the participation of stockholders at other Hanjin Group affiliates.

The Hanjin Group declined to provide immediate comment about KCGI’s public proposal.

“Today’s proposal ties together what was brought up during our unofficial meetings with KCGI,” said a source at Hanjin KAL, who said the company is currently considering whether or not to make an official response.

Cho has been staying in Los Angeles since the end of last year.

By Lee Wan and Shin Min-jung, staff reporters

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