Activist Investors Are Getting a Warmer Welcome in South Korea

  • Watchdog says foreign investors should ‘bring money in’
  • Chaebol scions should limit their roles to board chairmen: Kim

Kim: Shame Foreign Investors So Passive in S. Korea

Attention activist investors: You may no longer be pariahs in South Korea.

President Moon Jae-in and his deputies have met with overseas money managers to change perceptions that Korean markets may be rigged to favor the nation’s family-run conglomerates, Fair Trade Commission Chairman Kim Sang-jo said during an interview in Seoul. Some of those meetings were held by Moon during a recent trip to the U.S.

“It’s a shame foreign investors have been so passive in Korea and haven’t displayed levels of activism they would otherwise engage in developed markets,” said Kim, 54, a former shareholder activist who now supervises the conglomerates known as chaebol. “Bring money in, I promise to make it bigger."

Kim Sang-jo

Photographer: Jean Chung/Bloomberg

The meetings are part of a broader government effort to take on the dynasties that have fended off foreign activists and dominated Korea’s economy for decades. Moon’s plan also includes giving the nation’s $530 billion pension fund a greater say at shareholder meetings of companies it invests in.

Heightened discontent over the government’s cozy ties with big business swept Moon into power this year after predecessor Park Geun-hye was impeached in an influence-peddling scandal that embroiled the biggest chaebol -- Samsung Group.

Read more: QuickTake explainer on Korea’s chaebol

New Blood

Since his inauguration, Moon brought in Kim -- who was once was dragged out of a Samsung general meeting after confronting executives -- and hired another shareholder activist as his chief policy maker. Samsung heir Jay Y. Lee was sentenced to five years in prison for bribing his way to gain greater control as part of a broader scandal involving Park.

“I can promise to foreign investors that the Korean government will consistently enforce the law without distinguishing between local and foreign investors,” Kim said during a meeting before last week’s holidays. “In turn, we’re hoping foreign investors will be more aggressive and have a long-term view.”

Though Kim isn’t in charge of attracting investments, his office is taking steps to rein in potential chaebol misdeeds. The combined market capitalization of the five biggest chaebol’s listed companies accounts for about half of the total Kospi, according to data compiled by Bloomberg.

His commission is creating a new bureau to investigate matters such as whether the chaebol are using charities to help retain control of their empires without having to pay inheritance taxes, he said. The FTC also is looking at getting more information on the chaebol’s overseas units, he said.

Still, the commission’s powers are typically limited to fining companies for violating existing laws, which is why Kim said he’s in talks with other officials -- such as the justice minister, the financial regulator and the welfare minister -- to coordinate efforts.

The welfare ministry is particularly important in enhancing activism in Korea’s capital markets because it oversees the National Pension Service, the third-largest fund of its kind, Kim said. The head of the Financial Supervisory Commission and Moon’s chief policy maker share those views, he said.

This QuickTake video explains the challenges faced by South Korea’s family-run conglomerates known as chaebol.

(Source: Bloomberg)

‘Whale in Pond’

The NPS, a “whale in the pond” that’s governed by rules devised three decades ago, needs to be equipped with more financial expertise and a stewardship code to push through governance reforms, said Kim, who has a doctorate in economics from Seoul National University.

The previous chairman of the NPS was convicted and jailed in June for pressuring the fund to support a merger between Samsung Group affiliates in 2015. He’s now appealing.

Billionaire Paul Elliott Singer contested the deal but ultimately lost out in a proxy fight, giving Samsung Group’s Lee a tighter grip over the business empire his grandfather founded. Had the pension fund withheld its vote, the multibillion-dollar deal would have collapsed, blocking Lee from expanding his stakes in Samsung units and marking an unprecedented victory for activists in South Korea.

Jay Y. Lee is escorted by a prison officer on Aug. 25.

Photographer: Chung Sung-Jun/Pool via Bloomberg

Lee is appealing his conviction. Asked whether such executives are fit to run their groups, Kim said anyone who pushes their own interests at the expense of minority shareholders isn’t qualified to do so.

Corporate-governance activists such as Kim have long argued that chaebol families are the primary reason why the country’s stocks trade at lower valuations than in other markets -- a phenomenon called the “Korea discount.” The Kospi, which climbed to a record on Wednesday, trades at one of the lowest multiples for a benchmark index in the world based on estimated earnings, and at less than half the global average based on book values.

Singer’s challenge of Samsung was the latest in a string of defeats for activist investors in a country that’s never seen a hostile takeover. Foreign investors account for more than 30 percent of Korea’s stock market, above levels in Japan, India or China.

In 2006, billionaire Carl Icahn and Warren Lichtenstein failed to sway local fund managers to endorse proposed changes at cigarette-maker KT&G Corp. Previously, Sovereign Global Investment Ltd. unsuccessfully tried to oust SK Group Chairman Chey Tae Won, who was jailed for his role in a billion dollar-plus fraud at a group unit.

“Looking back at the Sovereign, Carl Icahn and Elliott cases, they were probably very disappointed by the Korean government’s unpredictability and inconsistency,” Kim said.

Despite his activist roots, Kim said he doesn’t want to dismantle the chaebol. Rather, he wants to tackle what he considers their main problem -- founding families wielding immense power without transparency and accountability.

Kim Sang-jo

Photographer: Jean Chung/Bloomberg

Kim said his goal is for Korea to emulate Western Europe, which is about 30 years ahead in terms of governance standards, and to close that gap within a decade.

Like in Europe, conglomerates such as Samsung and Hyundai Motor Group should have “control towers” that set broad strategy, with family scions -- many of them preparing for a third generation of power -- limiting their roles to being chairmen of boards.

Representatives at Samsung and Hyundai Motor had no comments for this story.

Groups also should have truly independent directors and allow individual units the freedom to review directives coming from the top, Kim said.

“We need to push for chaebol reform in sustainable and irreversible ways so as not to repeat the past failures,” he said.

— With assistance by Bruce Einhorn, and Heejin Kim

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