NPS adopting stewardship code

The National Pension Service (NPS), Korea’s largest institutional investor, is adopting a stewardship code that will allow it to engage in management decisions of the companies it invests in.

The decision is getting strong opposition from the business community.

After holding two meetings since last week, the National Pension Fund Management Committee decided to exercise limited rights when companies it invests in are hurting the interest of its clients, which is the Korean public with pensions, according to the Ministry of Health and Welfare on Monday.

“While we will in principle not get involved in management, we will exercise our rights in a limited fashion when special conditions are met,” said Health and Welfare Minister Park Neung-hoo. “In order to enhance long-term profit as well as independence and transparency from political and economic powers, we have decided to adopt the stewardship code.

“This will create a new opportunity for companies that are managed soundly and transparently to raise corporate value and to grow and develop. But for companies that not only damage their corporate values and inflict harm on the precious assets of the public, the national pension fund as trustee [of the public] will exercise its rights actively as a shareholder in enhancing the share value and the people’s profit.”

Under the stewardship code, the NPS will be allowed to exercise its voting rights in management decisions such as selecting or firing executives if the committee sees the need to get involved. Additionally, through legal changes including the revision of related laws, the NPS will be raising its role in monitoring management of companies it invests in.

Additionally, the NPS will be allowing fiduciary companies to exercise its voting rights. However, this right could be stripped away if the companies’ votes harms the profitability of the fund.

One of the first steps that the NPS will be taking in the second half will be expanding the number of companies that it will be asking for bigger dividend payments. Currently four to five companies have been asked to improve their dividends and starting in the second half of this year that number will increase to eight to ten.

Starting next year, the NPS will create monitoring lists, which will focus on embezzlement and profiteering by the families that control companies and excessive compensation for executives, and hold undisclosed meeting with the companies that are found to indulge in shady practices. In 2020, if the companies fail to make improvements, the NPS will release their names and take action, including exercising its voting rights.

The national pension fund is the largest institutional investor in the country and manages 635 trillion won ($568 billion) worth of investments. It owns shares that are the equivalent of 7 percent of the market capitalization on the local stock markets.

The business community was not pleased with the decision. The Korea Employers Federation said the stewardship code intrudes on management and disrupts markets, according to a statement released Monday.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]