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Shareholders push for corporate reforms in South Korea

Samsung Electronics faced discontent among investors at its March 11 annual shareholders meeting.

SEOUL   South Korean investors fed up with sagging earnings and opaque management are making themselves heard at shareholders meetings, calling for corporate governance reforms to shine more light on family-run conglomerates, known as chaebol.

     The atmosphere at Samsung Electronics' annual general shareholders meeting on March 11 was far from the cheery norm. Investors grumbled at the company's financial report, upset by insufficient explanations and the lack of any apology for unimpressive earnings by the company's mobile phone division and other operations. Opposition to the traditional approval-by-applause for the appointment of directors forced a laborious vote count. Though all proposed measures were eventually approved, the process took three hours and 20 minutes, about twice as long as last year's meeting.

     Leaders at LG Display and steelmaker Posco were also taken to task for slumping earnings at shareholders meetings the same day.

     Investors' discontent is not unfounded. Share prices at Hyundai Motor and chipmaker SK Hynix have fallen around 40% from their highs within the past two years. Samsung has dropped nearly 20%.

     A high-profile tantrum by the daughter of Korean Air Lines' chairman over a bag of nuts, and the ongoing leadership scuffle between members of the Lotte founding family, have further exasperated investors in the country.

     At its general meeting on March 18, Korean Air was bitterly criticized by shareholders for its continued failure to pay dividends. The management pledged efforts to resume dividend payments as early as possible. While air carriers globally are reporting strong earnings thanks to plunges in crude oil prices, Korean Air logged a group net loss of 705 billion won ($606 million) in 2015, blaming the Korean currency's appreciation.

SAMSUNG MERGER   Impenetrable management structures at Samsung and other conglomerates run by their founding families leave much to be desired in the way of transparent corporate governance. At about 30% of South Korea's 40 largest conglomerates, owners do not serve on the board as deunggi isa, or "registered directors," whose responsibilities are stipulated by law. Instead, they direct operations from the outside.

     Neither Samsung Chairman Lee Kun-hee, who is confined to bed due to illness, nor his eldest son, Vice Chairman Lee Jae-yong, is a deunggi isa. After the 1997 Asian currency crisis, the South Korean government demanded that owners of chaebol should become registered directors to clarify their responsibilities. Lee Kun-hee complied with the government request but resigned from all management posts in 2008. In 2010, he returned to the post of chairman but declined to become a registered director again.

     According to findings by the Korea Fair Trade Commission last year, conglomerates' leaders, their families and affiliated companies control a 55% stake on average, letting them silence calls for reform.

     A major restructuring of the Samsung group last year, perceived as a design to cement family control over the enterprise, sparked a surge in awareness of corporate governance concerns. U.S. hedge fund Elliott Associates mounted strong opposition to the deal -- in which Samsung C&T merged with Cheil Industries, making the resulting entity a de facto holding company for the group -- arguing that the shift benefited only the conglomerate's founders. The merger was narrowly approved at an emergency shareholders meeting, helped by support from South Korea's National Pension Service.

     Many criticized the pension body's position as contrary to the interests of the country's current and future recipients, and a major U.S. proxy adviser recommended opposing the merger. One shareholder said, "I approved the company's proposal out of my patriotism, but the fund's claim was reasonable."

     At the March 18 annual meeting of SK Holdings, which owns major semiconductor maker SK Hynix and other companies, shareholders approved a proposal for its chairman, Chey Tae-won, to become a registered director. Chey, a leading member of the company's founding family, was a registered director but resigned from his top management post in 2014 after a court found him guilty of crimes including embezzlement. He returned to the post after he was granted a special pardon last August.

     SK said Chey and other executives will become registered directors for the sake of improving the transparency of management. Still, the National Pension Service, which owned an 8.58% equity stake in SK at the end of 2015, voted against the proposal.

CHANGE IN THE AIR   Despite lingering issues and the slow pace of progress, some market observers say companies are headed in the right direction. Members of the Samsung group have revised their articles of incorporation to let outside directors hold the position of board chairman, previously open only to representative directors, in a bid to bolster transparency. Hyundai Motor, at its March 11 meeting, announced a new corporate governance charter, increasing the board's independence and pledging to advance the interests of shareholders and customers. Samsung Electronics and Posco have instituted quarterly dividends.

     SK also said at the general meeting that it will establish a governance committee, made up entirely of outside directors, under its board of directors. Important managerial proposals, such as large-scale investment and deals with affiliated companies, will be subject to approval by the committee. Similarly, the board of directors at Kia Motors, which belongs to Hyundai Motor, decided after its general meeting on March 18 to establish a "transparent management committee." The committee will be made up of five outside directors, who will examine whether deals, such as mergers and acquisitions and purchases of large assets, meet shareholder interests.

     Hyundai Motor already introduced a similar system last year. This was seen as a response to Hyundai's decision in 2014 to spend 10.5 trillion won, or triple the appraisal value, on a parcel of land to house its new headquarters -- an outlay criticized by many as a unilateral decision by Chairman Chung Mong-koo.

     "If Samsung entrusts the post of board chairman to an outside director, authority and responsibility will be transferred as well," said Ahn Sang-hee, a researcher at Daishin Economic Research Institute. "I take a positive view of recent moves, including Hyundai Motor's." 

     Pressure from overseas will likely be a key driver of further improvements, although foreign investors control only a little more than 10% of shares in South Korean companies -- on a par with Japan's corporate sector in the 1990s, when cross-shareholding and corporate payoffs ran rampant.

     As corporate founders prepare to hand the reins to their successors, many in South Korea see a chance to institute governance policies similar to those in the U.S. and Europe. The end of the conglomerates' run as the main drivers of economic growth has also made them more vulnerable to criticism from investors and the public.

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