Korea’s Stewardship Code and the Rise of Shareholder Activism

In recent corporate governance scholarship, institutional investors’ stewardship is one of the most frequently discussed concepts and phenomena. As a response to the 2008 global financial crisis, the stewardship movement initially started in the UK in 2010. Since then, the trend of stewardship gained momentum globally as many jurisdictions adopted stewardship codes. Korea also joined the movement by officially instating its Stewardship Code in 2016.

Our paper elucidates the features, impacts, and implications of stewardship in Korea and its related shareholder activism. In terms of the language it uses and the principle of comply-or-explain, the Korean Code is remarkably similar to—if not exactly the same as—the UK Code. However, there are notable differences between them. A major concern that prompted the adoption of the UK Code is the dormancy of institutional investors in ‘ownerless corporations’, a phenomenon found in a regime with widely-held shareholding. On the contrary, the typical ownership structure of Korean corporations is characterised by the presence of strong controlling (family) shareholders. One of the primary purposes of stewardship in Korea is to keep such controlling shareholders in check, particularly by curbing tunnelling. In other words, stewardship was introduced as a policy tool to reduce the so-called ‘owner risks’ which have exacerbated the systematic discount of the Korean stock market.

The Korean Code contemplates not only the participants’ active voting, but also on-going engagement and consultation with the board of directors of the investee companies. Stewardship activity ‘is not limited to the exercise of voting rights’ but extends to the ‘monitoring of the core management matters such as strategy, performance, risk management, and governance’ and further towards ‘consultation with the board of directors, shareholder proposals, and participation in litigation’. It also states that ‘stewardship activity does not mean intervention in the daily operation of the investee companies’ and that ‘the institutional investors may consider selling the shares of the investee companies if it is the best alternative for the benefit of the clients and the beneficiaries’.

In Korea, in the past, institutional investors tended not to exercise their voting rights vigorously in general meetings of shareholders in their investee companies. Since the inception of the Korean Code, however, the rate of dissension of institutional investors, when they exercise their voting rights, has significantly increased. Since the Korean Code was initiated, another newly observed phenomenon is that some institutional investors began to send opinion letters to the investee companies requesting them to reform their corporate governance. In sum, since the Korean Code was introduced, it has been argued that institutional investors engage more frequently in discussions with their investee companies.

In relation to stewardship, another unique feature in Korea is the presence of the National Pension Service (NPS). In the Korean capital market, which is relatively small compared to the US and China, the NPS—the largest institutional investor in Korea and the third-largest public pension fund in the world—plays a crucial role as a significant investor in virtually all listed companies. In essence, the NPS is ‘a whale in a well’, and this feature marks the stark difference between the NPS and other active institutional investors overseas. The NPS became a participant of the Korean Code in 2018. Even before its official participation in the Korean Code, the NPS was more active as a shareholder than many other institutional investors. Regarding the NPS’s role in stewardship and shareholder activism in Korea, there are two opposite assessments.

On the one hand, shareholder activism in Korea is now emerging, if not fully developed. Reports show that institutional investors including hedge funds engage more actively with their investee companies by way of, for example, making shareholder proposals and opposing the board’s proposal at a shareholders’ meeting. It seems that this trend was triggered, at least partially, by the introduction of the Korean Code. The presence of the NPS—a significant investor in the domestic capital market and a powerful advocate of shareholder activism—acts as a catalyst in spreading stewardship and contributes to developing shareholder activism in Korea in a more effective and sophisticated manner. Regarding the NPS’s shareholder stewardship and activism, our paper examines important examples such as Korean Air and Namyang cases.

On the other hand, since the NPS is a quasi-government agency, it is possible that the government, under the name of stewardship and shareholder activism, may intervene in the decision-making process of corporate policies and strategies even in private corporations. In essence, the autonomy of market players may be damaged. A related concern is that the government may use stewardship as a powerful policy and regulatory tool to guide or, to put it more bluntly, to guide the private sector in a direction associated with a certain socio-political agenda which has less to do with the financial benefits of the NPS’s beneficiaries. In other words, the NPS may create an agency problem and, in turn, injure the interests of its own ultimate beneficiaries.

Regarding the NPS’s stewardship and shareholder activism, our paper also emphasizes environmental, social, and governance (ESG) aspects. According to the National Pension Act, in principle, the Minister of Health and Welfare should manage the fund to maximize its profitability. To make long-term and stable profits, however, the Act clearly allows the NPS to take into account ESG factors. Accordingly, the NPS, as a significant shareholder of almost all listed companies in Korea, can engage and have conversations with its investee companies about ESG investment. In addition, the NPS Fund Management Guidelines confirm that ESG factors can be considered in the NPS’s investment.

However, our paper points out that ESG indices are often subjective, less transparent, inconsistent, and even clumsily based on a rule of thumb. Besides, the NPS’s messages about ESG investment could be rhetoric. For instance, compared to the financial performance of a company that is indicated by return on equity (ROE) and earnings per share (EPS), it is difficult to measure the level of the welfare of society and to recognise whether it is improved after a specific ESG investment has been adopted.

In order to boost the burgeoning stewardship in Korea in a constructive way while addressing the concerns about NPS’s activism, our paper highlights the importance of the NPS’s independence from the government’s influence. The next step forward for stewardship in Korea is to establish the independence of the NPS in its decision-making process.

Sang Yop Kang is a professor of law at Peking University, School of Transnational Law.

Kyung-Hoon Chun is a professor of law at Seoul National University (SNU) School of Law.