Defending against the funds
*The author is a columnist of the JoongAng Ilbo.
“Activist investor” is a clever moniker, but Elliott Management is essentially a corporate raider. Its job is to attack weak links and get as much dough as possible. It especially likes a big and fat company with weaknesses. It is obvious how Hyundai Motor Group became one of its targets after Samsung. Hyundai Motor has tens of trillions of won, or tens of billions of dollars, in cash, and it needs to change its management structure. Also, the corporation is faced with a third-generation dynastic succession. There is no better prey for a vulture fund. Elliott learned from Samsung that a Korean company is more vulnerable during a succession period, just like a pregnant animal.
And now Hyundai Motor’s management structure reform has been canceled. Vice Chairman Chung Eui-sun said he would seek a more shareholder-friendly option. That means Hyundai Motors will need more time and money to disentangle its cross shareholdings. In the meantime, a considerable sum could go to Elliott. In fact, it was money that was supposed to be used to pay tax, make investments, expand employment or offer raises to workers.
We cannot simply blame Elliott’s greed. Carl Icahn, Bill Ackman and David Einhorn were even more ruthless. Due to Icahn’s threat, Apple had to spend $200 billion to buy back its stock and offer dividends to shareholders. Dell, Yahoo, JCPenney, General Motors and Hewlett-Packard also suffered. From 2005 to 2015, when activist hedge funds became powerful, American companies spent $7 trillion on such buy-backs. Apple bought back $22.8 billion worth of its shares in the first quarter, the biggest in history. The funds are preying on Asia. Activist funds’ expansion to Asia grew by more than ten fold in six years. Elliott’s series of greedy moves may be a signal that activist investors’ hunting of Korean companies became a common practice.
First, the families that control Korea’s conglomerates need to change their mind-sets. They must accept that they cannot unilaterally decide successions and ownership structure changes with governmental approval alone. For Hyundai Motor’s governance reform, Chairman of the Korea Fair Trade Commission Kim Sang-jo showed a positive reaction. On Elliott’s demands, Kim sided with Hyundai by saying its proposal did not take into account Korea’s principle of the separation of banking and industrial capital. Hyundai Motor ended up not taking the recommendations of the Institutional Shareholder Service (ISS) — the world’s leading provider of corporate governance solutions — partly thanks to Kim’s support. But the market did not recognize the “bromance” between the government and Hyundai Motor.
Second, it is about time we seriously review the exercising of voting rights of the National Pension Service (NPS) through the so-called stewardship code, which refers to institutional investors taking care of companies like stewards. The code emerged after vulture funds’ rampant buyouts reached a peak in the 1980s and 1990s. It is institutional investors’ jobs to monitor companies and review alternatives together. As the NPS owns 6 to 9 percent of the shares of the four major business groups in Korea, it can have critical influence on major issues. But the NPS has remained unengaged so far, and on sensitive issues, it has entrusted the decision to an external experts’ committee for exercise of its own voting rights. That is irresponsible and undesirable. Here, the premise would be political neutrality. If the NPS lacks it, that would be even worse than being swayed by activist funds.
Third, Korea needs a proper advisory firm for shareholders. There are three firms in Korea, but they haven’t even produced a quality paper in English. So foreign investors depend on the ISS, which is owned by a private equity fund. Ryu Young-jae, CEO of Sustinvest, said that two ISS employees cover 900 to 1,000 Korean companies. “Structurally, it is hard to provide precise advise,“ he explained. Korean companies cannot be left to be swayed by such advice. The homework is very challenging.
JoongAng Ilbo, May 24, Page 30