Chaebol Tolerance Tested in Pension Fund’s Mando CEO Vote

South Korea’s $400 billion National Pension Service made a stand against the Halla Group, in a test of investor tolerance toward the nation’s family-run chaebol businesses. It lost.

The pension fund failed to get enough votes to block the extension of Shin Sa Hyeon’s term as chief executive officer of Halla Group’s Mando Corp. (060980) at the auto-parts maker’s annual general meeting today. As Mando’s second-biggest shareholder, the fund opposed Shin’s extension on the grounds he should be held accountable for Mando participating in last year’s bailout of the group’s unprofitable construction unit, which then sent Mando’s stock tumbling 29 percent in five days to a record low.

While Korea’s biggest institutional investor said it didn’t expect to win, the move signals that the family-run industrial empires that run most of the nation’s business activity will increasingly face scrutiny over their governance. The pension fund, overseen by the nation’s health ministry, is building on President Park Geun Hye’s pledges to clamp down on chaebol practices that undermine the interests of minority shareholders.

“NPS’s announcement signals that Korean companies will come under more and more scrutiny going forward, and that will lead companies to reconsider their decision,” Lee Sung Won, senior executive vice president at Truston Asset Management Co., which owns 11 percent of Mando, said before the vote. “The NPS gave a warning to the company.”

Photographer: SeongJoon Cho/Bloomberg

The logo of the National Pension Service is displayed atop the headquarters in Seoul, South Korea. Close

The logo of the National Pension Service is displayed atop the headquarters in Seoul, South Korea.

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Photographer: SeongJoon Cho/Bloomberg

The logo of the National Pension Service is displayed atop the headquarters in Seoul, South Korea.

One Ally

Mando shares fell 0.7 percent to 135,500 won at the close in Seoul trading.

Of the votes counted, about 70 percent were in favor of Shin’s re-appointment, Mando said today.

The pension fund, the world’s third largest, has a 13 percent stake in Mando, making it the second-largest stakeholder of the company after Halla Corp.’s 17 percent, according to data compiled by Bloomberg. Assetplus Investment Management Co., owner of 46,343 Mando shares, and Truston joined the pension fund in opposing the re-appointment of Shin, who was absent in today’s vote.

Halla Group, headed by Chairman Chung Mong Won, said yesterday it secured 25 percent of shares and would exercise rights delegated by most of its institutional investors in a vote that needed majority votes from shareholders attending the meeting. As of 4 p.m. today, 12 investors, including Mirae Asset Global Investments Co., Woori Asset Management Co., Baring Asset Management Korea Ltd., Tongyang Asset Management Corp., and KB Asset Management have filed statements with the Korea Exchange that they would vote for Shin.

Connected Family

“We are aware that the vote is likely to pass in the company’s favor,” Kwon Jong Ho, the Konkuk University professor who heads the pension fund’s decision-making committee on voting rights, said in a phone interview yesterday. “Still, we thought it was the right thing to do.”

Mando’s chairman, a cousin of Hyundai Motor Co. Chairman Chung Mong Koo, is the biggest shareholder in Halla Corp. with 24 percent, according to data compiled by Bloomberg. Mando also owns 16 percent of Halla through Meister Inc., according to the data.

The pension fund’s opposition traces back to a transaction last year, where Mando bought 378.5 billion won ($355 million) of new shares in Meister, which in turn invested 338.5 billion won in Halla Corp., then called Halla Engineering & Construction.

That deal drew opposition from investors including Midas International Asset Management Ltd. and Truston, and defied government calls for limiting cross shareholdings in family-controlled groups.

Big Fund

The pension fund, whose shareholdings account for about 7 percent of Korea’s benchmark Kospi index, said last month it plans to be more active in exercising its shareholder’s rights. Last year, it rejected about 11 percent of proposals put to shareholders by Korean companies, according to a statement released by the health ministry on Feb. 26. That compares with 7 percent in 2011.

“The NPS move will force the company to run a more transparent business and play by the rules,” said Suh Sung Moon, a Seoul-based analyst at Korea Investment & Securities Co. “This is inevitably good news for Mando’s investors.”

Still, the fund’s heft has spurred concern from the Federation of Korean Industries, a lobbying group for the chaebol, which has said the fund could be used by the government to meddle in markets.

‘Korea Discount’

Corporate governance concerns aren’t new to Korea. Although companies have emerged as global powerhouses -- think Samsung Electronics Co. and Hyundai Motor (005380) -- they still trade at lower multiples than comparable stocks in the U.S., Europe or Japan amid, in what’s been known for decades as the “Korea discount.”

The top 10 chaebol, the biggest being Samsung Group, had revenue equivalent to 84 percent of Korea’s gross domestic product in 2012 and employed just 5 percent of paid workers, according to data from CEOSCORE, a Seoul-based organization that monitors the chaebol.

“NPS’s decision will have a positive impact on other investors, encouraging them to also voice their rights when needed,” said Chae Yi Bai, a researcher at the Center for Good Corporate Governance, a Seoul-based private organization that monitors Korean business groups.

To contact the reporters on this story: Rose Kim in Seoul at rkim76@bloomberg.net; Sharon Cho in Seoul at ccho28@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net; Michael Patterson at mpatterson10@bloomberg.net

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