National Pension Service Puts Muscle Into Corporate Governance Reform (and Fails)
by Brendon Carr
Day by day, it begins to look like President Lee Myung-bak, product of Korea Inc., and his band of advisors may be those bold reformers Korea needs to make the move to the next level of prosperity. Last week the JoongAng Ilbo English edition reported that the National Pension Service, a major institutional investor, declared its intention to vote its shares against convict CEOs of two major conglomerates. A major step forward in corporate governance!
NPS made its move at the urging of the government:
The Health and Welfare Ministry said yesterday that the pension fund, which is under the ministry, will vote to oust both Chung [Mong-Koo] and Park [Yong-soo] from the boards of Hyundai Motor and Doosan Infracore [respectively].... The decision is even more remarkable since the new Lee Myung-bak administration is presumed to be more friendly to large conglomerates than was the liberal-leaning Roh Moo-hyun administration.
A Health Ministry official who refused to be identified said, “Business-friendly policies are different from overlooking managers with problems.”
However, there was some doubt as to whether the effort to impose consequences onto chaebol “owners” would be successful. It was posited that only foreigners and the LMB administration (mostly foreign-educated) care about corporate governance:
The move, combined with a call by ISS Governance Services for Chung to step down, could prompt other institutional investors, especially foreigners, to threaten the embattled chairmen, some market observers said. ISS, a global investor-advisory service, said Chung’s conviction last year hurt the company’s interests.
More analysts, however, doubt that the pension service decision will bring down either boss.
“Foreign shareholders now account for only 30 percent of Hyundai Motor after the recent selling spree of Seoul stocks,” said Suh Sung-moon, an auto industry analyst with Korea Investment and Securities. “So the pension’s decision will not be influential enough to actually oust Chung from the board.”
The National Pension Service held a 4.6 percent stake in Hyundai Motor and a 2.9 percent stake in Doosan Infracore as of December.
And they were right: Like clockwork, Chung Mong-koo and a host of other chaebol chairmen were re-elected Friday, along with slates of directors proposed by the “owners”. I haven’t found whether Park survived the vote, but imagine that such news would be so shocking as to have made all the papers if he was ousted.
However, fear not! According to the JoongAng story last week, both Chung and Park are ready to do better:
Both conglomerates expressed regret. An unnamed representative of Hyundai Motor said Chung, whose father founded the company, “can manage the company with more sense of responsibility than an employed CEO. Our company is making efforts to correct the wrong practices of the past.”
A spokesman for Doosan, who also refused to be identified, said Park is doing his best for the company.
In other news, Warren Lichtenstein has had enough of KT&G, and will quit the board.
I don’t have a position on whether Chung, Chey, Park, or any other chaebol chairman (except for that Hanwha guy) are or are not good for their companies. Chung Mong-koo, in particular, seems to be a hell of a good manager for Hyundai Motor—relentlessly driving the company forward in quality and sales. Doosan, too, is a group strongly on the ascendant under Park’s leadership.
But the fact is, in the United States or United Kingdom, these guys would be toast as chief executives of publicly-traded companies. In the West, the standard for corporate executives’ ousters is not the fact of impropriety, but the appearance of impropriety. The so-called “Korea Discount” will continue to depress asset values here in Korea—affecting the National Pension as well as other domestic investors—as long as management remains so strongly entrenched that no form of misconduct (embezzlement, stock-price manipulation, fraudulent accounting, beatings with lead pipes etc.) can result in their removal.
I don’t agree with the unnamed Hyundai man who says that family managers do better for the company because they feel a sense of responsibility. My take is family managers feel a sense of entitlement and impunity. Family managers will do much better if they feel a sense of fear that if they screw the shareholders or behave inappropriately, they’ll be out.
Want to ensure the solvency of the National Pension, and goose returns for the future? Require higher standards of corporate governance. I think the government is on the right track here.
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