NPS gets new marching orders on investments

The government laid out ways the National Pension Services (NPS) can be a more aggressive investor, such as unseating CEOs who have committed crimes like embezzlement.

It wants the NPS to be more active in other major decisions by companies it invests in, including dividend policy, limiting executive compensation and the selection of outside directors and auditors.

The goal, according to the Ministry of Health and Welfare, which the NPS is under, is to take greater responsibility for the companies it invests in, ultimately for greater long-term profitability.

The NPS is Korea’s largest institutional investor with 120.3 trillion won ($103 billion) invested in local stocks as of the second quarter of this year, in such leading companies like Samsung Electronics (of which it owns 10 percent), SK Hynix (9.1 percent), Hyundai Motor (8.2 percent) and Naver (9.5 percent).

But some analysts think there are ideological issues involved beyond the companies’ bottom lines and criticize the government for excessive intervention in private businesses.

The Ministry of Health and Welfare on Wednesday held a public hearing to announce new guidelines for the NPS to exercise its shareholder rights.

The ministry plans to take a more aggressive role in exercising its rights as a shareholder of local companies starting next year and expand that control over shares it owns in overseas companies and overseas bonds in 2022. The greater control over overseas stocks and bonds will come after it sets up environmental, social and corporate governance (ESG) investment guidelines.

Yang Seong-il, head of the ministry’s office for population policy, said responsible investing contributes to long-term profitability, which aligns with the NPS’s investment philosophy.

“It is already a global trend that major overseas pension funds, when making investments decisions, consider other factors [such as social responsibility issues] that are not reflected in a company’s accounts,” said Yang.

Some overseas pension funds have drawn up ESG guidelines for their investment decisions. As a result, some have stopped investing in companies with controversial businesses including coal manufacturers and tobacco companies.

“While some are raising concerns about stronger [government] control [of private] businesses, the NPS will only act in cases in which the corporate value is damaged and results in [negatively] affecting the shareholders,” Yang said. “In particular, we will make dialogue with the companies our priority and only exercise our rights as shareholders in a limited form when there is no improvement [after a dialogue] has taken place.”

He said the new guidelines will help the market have a better idea of how the NPS will behave as a shareholder.

Yet there were still concerns.

“It looks as though [the government] is trying to nationalize every company by determining who will be selected on the board of directors of all companies,” said Kim Yong-ha, a finance and insurance professor at Soonchunhyang University, who was a panelist at the public hearing. “It seems like the beginning of pension fund socialism.”

Kim said if a company fails to satisfy any NPS suggestion, instead of intervening in management, the pension fund should sell off its stake like any other investor.

“It is best to sell shares if a company fails to meet expectations,” Kim said.

“Intervention in companies could be effective in improving corporate governance,” said Kwak Kwan-hoon, a Sun Moon University law and police professor. “But it does not guarantee the [pension] fund’s profitability or stability.”

He raised concerns about the impact of NPS demands on a company that could lead to lawsuits from other shareholders — or even the management of the company itself.

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