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Hyundai set for clash with Elliott over dividend and directors

Automaker's annual meeting will be key moment for shareholder activism

Hyundai's annual meeting is being regarded as a watershed moment for shareholder activism in South Korea.   © Reuters

SEOUL -- Hyundai Motors is bracing for a showdown with activist investor Elliott Management over dividends and a board revamp at its annual meeting on Friday, in what is being regarded as a watershed moment for shareholder activism in South Korea.

Shareholders are widely expected to support the South Korean conglomerate in its campaign to fend off Elliott's call for a special $6 billion pay out to investors, in return for the promise of higher investment in future technologies.

However, some are supporting the demand by the world's largest activist fund for the appointment of outside directors to improve accountability at the country's second largest family-run conglomerate, as it prepares for the succession of vice chairman Chung Euisun.

Experts said Friday's annual meeting will mark the first time that shareholders pursue their rights seriously in a system where families maintain a strong grip over listed companies through opaque systems of cross shareholdings with affiliates.

"Chaebol companies did not care about shareholders’ meetings that much before. But from this year they will face lots of attacks and demands from shareholders. Hyundai's meeting is the start of this trend," said Park Ju-keun, president at CEO Score, a corporate analysis firm.

Hyundai Motor’s AGM will be followed next week by those of Korean Air Lines and Hanjin KAL, when local activist fund Korea Corporate Governance Investment is expected to challenge the family owner of the country’s largest airliner and its holding company.

Although Hyundai is expected to win the vote on the dividend, Park said Elliott was looking at the longer-term gain to be had from improved transparency at the company. 

"Why is Elliott challenging Hyundai even though it will lose the voting? Because it wants to maximize its profits by pressuring Hyundai to reform its corporate governance after the meeting," Park said.

Elliott, which owns 3% of Hyundai, has over the last year gradually stepped up its criticism of the group's leadership for poor governance and failure to manage cash resources effectively. Last year Hyundai was forced to withdraw a controversial restructuring plan after opposition from Elliott. Now the U.S. fund wants the company and its affiliate Hyundai Mobis to increase their proposed dividend payout by more than seven times from 3,000 won to 21,967 won ($19.3) per share. “Hyundai Motor must return substantial excess capital to shareholders,” the activist said in an open letter to the company’s shareholders last month.

The U.S. activist fund is also calling for the nomination of three outside directors to the board. It has recommended candidates that it says have experience in multinational companies, who it believes will help improve Hyundai’s corporate governance. They are John Liu, former vice president of Wanda Group in China, Randy MacEwen, CEO of Ballard Power Systems, and Margaret Billson, former senior executive at BBA Aviation.

Elliott's campaign comes as Hyundai's performance suffers from sharply declining earnings in China, its second-largest market behind the U.S. Hyundai’s operating profit tumbled 47.1% to 2.4 trillion won in 2018, marking one of the worst performances in its history.

Hyundai has rejected Elliott's calls to return a substantial portion of its cash to shareholders, saying that a 3,000 won final dividend payment is the maximum it can afford while also investing for the future. Including the 1,000 won interim dividend, the total payout for 2018 would be 4,000 won.

"Hyundai has maintained the same level of dividend as in 2017, despite weakened profitability in an unfavorable business environment, and the need to increase investment for future competitiveness," the company said in a statement.

Hyundai plans to invest 14.7 trillion won in future technologies for the next five years to narrow the gap with global rivals.

But Elliott has argued that the company still has too much cash compared to its rivals. The fund argues that Hyundai's net  cash balance of 14.3 trillion won last year far exceeds its auto peers by 8 to 10 trillion won.

"Affiliates of Hyundai Motor have been mismanaging these funds, investing in questionable projects that have only heightened the alarm and frustration of shareholders as well as the markets," said Elliott.

Investor representatives, such as Glass Lewis, a proxy adviser, have rejected Elliott's argument, saying it is time for Hyundai to invest, not to spend.

"We remain reluctant to recommend shareholder support for such a large one-time dividend payout at this time," Glass Lewis said in a report. "Given... rapidly evolving nature of the auto industry, which we acknowledge will require significant R&D spend and potential M&A activity by the company in order to enhance its competitiveness and long-term financial returns."

The state-run National Pension Service, which owns 8.7%, has also said it will support the company in the vote. Hyundai Mobis, an auto parts affiliate of Hyundai Motor Group, is the largest shareholder of Hyundai Motor with 21.43% stake and is also expected to support the company.

Nevertheless, Hyundai's own plans to reform its corporate governance are expected to meet opposition at the annual meeting. The group has proposed enlarging the board from nine directors to 11, with six from outside the group. The automaker has also nominated three candidates.

They are Yoon Chi-won, vice chairman at UBS Wealth Management, Eugene Ohr, former partner at Capital International, and Yi Sang-Seung, economics professor of Seoul National University.

But International Shareholder Services, a proxy advisor, recommended that shareholders should vote against Ohr and Yi. Instead, ISS suggested investors should support two of Elliott’s three nominees, Liu and MacEwen.

"John Y. Liu brings relevant ICT experience as a former COO of a technology company and vice president of Google," said ISS in a report. "MacEwen brings extensive executive, board and innovation experience from serving as a CEO and board member of clean tech and solar technology companies."

The proxy group said Ohr and Yi would "add little value [to the board] in terms of diversity in experience and background." ISS has also expressed doubt about Hyundai's medium term investment plans.

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