Elliott’s spear vs. Samsung’s shieldThe proxy contest between Samsung and the U.S. hedge-fund manager Elliott Associates has dominated the conversation in the corporate sector. Calls were raised for stronger measures to protect corporate management against predatory foreign funds, particularly because some dared to attack even a giant like Samsung.
One option raised was a dual stock offering - common stocks and those with voting rights. The other was a poison pill that would allow existing shareholders, except for the potential acquirer, to buy shares at a discount or buy the acquirer’s shares at a discounted price after the merger. These options are already commonplace in advanced markets, but unavailable here. Most family-owned conglomerates here need a shift in leadership. The stake of the owning family will inevitably be reduced when it is handed down, making it prey to corporate predators. The public family feud between the sons of the Lotte Group founder underscores the weaknesses in the ownership structure of Korea’s quintessential corporate design.
Yet, Korean companies have a unique defense weapon that is rarely found among their foreign counterparts. They are protected by an army of individual shareholders with nationalist loyalty. Samsung was able to win the proxy battle with Elliott Associates all thanks to Samsung C&T’s steadfast individual shareholders.
Minority shareholders may not be pleased with corporate management, but they still can’t tolerate a foreign fund taking it over. Elliott, which has usually been able to buy its way out of proxy battles, was likely confounded by this aspect. Although neglected, these minority shareholders are still reliable foot soldiers when their companies are under attack.
But blind loyalty from infantry cannot last forever and can quickly turn into resentment if individual shareholders feel unappreciated. The mix of nationalism in economic and financial trade can come across as narrow protectionism. To stigmatize a legitimate enterprise like Elliott as being a predatory vulture doesn’t help Samsung or the economy.
Samsung is a multinational company, and Korea relies on exports to drive its economy. But Korean companies have a fleet of reliable white knights, and the National Pension Fund, with its ample riches and farsighted stock investment, is the biggest one.
The National Pension Fund has been less aggressive in the local market because it reaped bigger returns from savings and bonds. The paltry stock dividends have made stocks less attractive. But bank savings today yield just 1 percent. The average stock dividend rate of 1.69 percent of listed companies has exceeded the 1.5 percent benchmark interest rate.
The state pension would have to increase stock investment to sustain revenues. But the pension fund can only make safe investments. If listed companies increase their dividend returns, many state funds will be willing to invest. The dividend rate of public companies affiliated with the country’s 10 largest business groups stop in the 1 percent range, lower than the offering by U.S., European and even Chinese companies. They have instead stacked up their cash hoards, but can help themselves if they use some of these riches to attract allies.
Korean companies also have a skill unrivaled by any company in the world. They are experts in cross-affiliate investment. Stake-holding among owning families in Korean conglomerates amounts to less than 1 percent. But they can exercise governing power up to 50 percent through cross-affiliate investment among their intricate network of group units.
It’s a safety net that even the Ford family - which holds a 40 percent voting stake with just 7 percent of shares due to its differentiated stock system - would appreciate.
Conglomerate owners could be indestructible if their voting power increased through a dual-class stock system on top of their cross-affiliate investment framework. But at the end of the day, Samsung and other large companies must not forget their shareholders.
They must appreciate them with the same dedication shown by Samsung’s employees, who toured across the nation gathering votes in the proxy war. Appreciating shareholders is indeed the best defense.
JoongAng Ilbo, July 31, Page B5
*The author is the business news editor of the JoongAng Ilbo.
by Jung Kyung-min