This Time Around, Goliath May Strike Back

The chaebol are taking steps to block shareholder activists

Only a year ago, South Korea's shareholders were savoring victory. Fed up with inscrutable management decisions, shareholder activists showed up en masse and noisily upset the meetings of some of Korea's top conglomerates, or chaebol. At Samsung Electronics Co. annual gathering, they turned a 30 minute rubber-stamp session into a grueling 13-hour marathon where they forced management to listen to demands for more accountability. The shock tactics catapulted the movement's leader, Korea University finance professor Jang Ha Sung, into the headlines and stunned Korea's complacent tycoons.

This year, the tycoons are fighting back. Five key affiliates of Samsung, Daewoo, Hyundai, and other chaebol all scheduled their annual meetings on the same day, Mar. 20. That makes it impossible for Korea's small band of reformers to turn up at all the meetings. Shareholder activists are crying foul, calling it an attempt to squash their demands for more transparency in corporate practices. "It's deliberate collaboration," fumes Jang. Although the chaebol deny that, they clearly hope their divide-and-conquer strategy will blunt the shareholders' onslaught.

UNSHAKEN. Yet Jang is not giving up, and his demands have powerful support. President Kim Dae Jung, who held a secret 90-minute session with Jang on Mar. 8, has made opening the chaebol's books a top priority. Kim has already forced conglomerates to hire more outside directors and publish consolidated financial statements. But having built empires on the unilateral decisions of their founders and chairmen, the chaebol are reluctant to allow dissent into the boardroom.

Because Jang's People's Solidarity for Participatory Democracy has just 30 core members, he lacks the manpower to raise a stink at five simultaneous meetings. So Jang has decided to concentrate on Samsung Electronics and SK Telecom, the chaebol units with the biggest foreign stakes. Jang will concentrate on efforts by Samsung and SK to get around a new law that gives minority shareholders extra voting clout in electing a member to the board. But according to a loophole, if a majority of shareholders agree, a company can go back to the old system of one share, one vote. That gives more power to the founding families, who exercise control through complex cross-shareholding arrangements. Says a Seoul-based foreign executive: "Everyone is on the bandwagon to get around the new law."

But Jang's strategy is to win over enough shareholders to block the resolution, and he has even sent letters to 3,000 local individual investors. "This will be the litmus test for whether we can change corporate governance among the chaebol," says Jang. The activists also have the backing of foreign institutional investors, including Scudder Kemper Investments Inc. and Templeton Emerging Markets Fund, which have sizable stakes in Korea (table). Last year, they forced mobile-phone operator SK Telecom to put outside directors on its board to guard against the common practice of allowing a parent company to siphon off funds from profitable units. Jang is still fighting that battle elsewhere. "The companies are trying to do everything they can to block shareholders from expressing their views," says J. Mark Mobius, president of Templeton Emerging Markets.

FAR-REACHING. The chaebol counter that they have tried to placate minority shareholders through such moves as setting up an independent audit committee. Chang Il Hyung, a vice-president at Samsung Electronics, admits last year's meeting "was really a shock." This time around, the company can claim credit for abolishing the ceiling on outside directors. "We have accepted the general trend [of Jang's proposals]. I think that should be duly appreciated," comments Chang. "To some extent they're not aware of the business realities."

But Jang counters that he's well aware of those realities, and his far-reaching support proves it. The chaebol's small concessions so far, he says, leave Korea's minority shareholders far short of the rights they have in the West. "If we don't win, it will be another year before we see change," warns Jang. That's time Korea cannot afford to lose as it struggles to reform.

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