[Viewpoint] The return of a state role in banks

“A thief stole my wife’s credit card, but I didn’t report it. Guess why? The thief spends less than my wife!” I got a kick out of this joke, but somehow my wife didn’t share my amusement.

Someone audacious and relentless enough to make such comments publicly is Carl Icahn, the self-described “obsessive” activist investor, who makes a living and hobby out of collecting and selling company shares.

The billionaire and Wall Street’s legendary corporate raider earned $1.3 billion last year alone through his hedge funds. He is the founder of so-called shareholder activism.

Most Wall Street investors buy stocks and later sell them at a profit. But Icahn is no ordinary investor. He buys a large amount of company shares and heads straight into the corporate boardroom. He then twists arms of corporate chiefs to make them sell company assets, pay dividends, and buy back company shares to prop up share value, bringing in hefty returns for his shareholders and himself.

In most cases, talk of such potential corporate moves usually push up share prices. His attack strategy is simple - aggressively get involved with management and force it to take actions to boost the company’s market value. If the managers resist, he goes into a proxy war to sack the recalcitrant executives.

Faced with a proxy fight, most executives surrender and settle for a deal. But like a lone raider, once he gets what he wants, he packs and leaves - often much richer. His targets are left in shambles and in the abyss. State-invested KT&G, Korea Tobacco & Ginseng, a few years ago experienced his gone-with-the-wind act. His critics call him the king of the imperialist shareholder clan.

But his fans and followers are amassing fast. They may not be as aggressive, hostile and obsessive as Icahn, but from a fund manager’s perspective, the idea of shareholders acting on their rights to prop up asset values is truly appealing.

The movement is quickly gaining ground here as well. The country’s largest institutional investor, the National Pension Service, has launched a committee of experts committed to exercising voting rights. The fund plans to push further by getting involved in the management of companies in which it has an interest through a council of shareholders or by seating one of its own members on the board of directors.

There is nothing wrong with the plan. But the problem is that the national pension fund is controlled by the government. The government through the pension fund can get its hands deep into corporate management and even nominate one of the outside board members.

It will be a kind of socialism masked under the pension fund. Such involvement can be lethal to financial institutions whose stock ownership is scattered among various minority shareholders.

That is not all. The government is now writing up legislation to revamp the ownership structure at financial institutions. One of revisions aims to seat more outside directors on the board and strengthen their voice in management.

It also proposes to do away with a permanent auditor and instead organize an auditing committee comprised fully of outside directors. The board will also be given a say in executive appointments. The new bill is designed to establish a powerful watchdog within financial institutions.

The pieces may be in different places - the strengthening of shareholder activism and steps to revamp ownership of financial institutions. But when they are put together, they make a distinct picture. The recent drama at Kookmin Bank and Shinhan Bank only reinforced the government’s resolution.

The government has a reason for intervening to clear up the mess, and the legislation appears to support that effort. Some even talk of a corporate law to cap a bank chief executive’s tenure to a single term.

It is frustrating to see the problems of a few banks boomerang into an all-out government meddling in the governance of banks and the financial industry. Indeed, laissez-faire, when it fails, invites government intervention.

Thus, Shinhan Bank executives must settle their feud before government authorities barge in. It may be difficult and humiliating for the executives, but they must present a strong comprehensive solution and then bow out. It is the only way to appease disappointed shareholders and assure bank customers while at the same time save the entire financial industry from government meddling.

The bank must send a message to its shareholders and the authorities that the bank and financial industry are fully capable of restoring order and solving problems on their own.

But they need to act fast because they don’t have much time.

*The writer is a professor of business administration at the University of Seou
l. Translation by the JoongAng Daily staff.

by Yun Chang-hyun