A warning to Korea Inc.

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A warning to Korea Inc.

According to the current account balance data for April released by the Bank of Korea, the surplus figure shrank to a six-year low due to record cash dividend withdrawals. Payout amounted to $7.57 billion, or over 8 trillion won, when converted at the average exchange rate of 1,067.8 won against the U.S. dollar in April. The deficit in the dividend income balance increased by more than 20 percent from $5.23 billion in April last year — the previous record-high — to $6.51 billion, resulting in the lowest current account surplus of $1.77 billion in six years.

Samsung Electronics and other blue-chip companies, where foreign stakeholding is significantly high, bumped up dividend payouts this year. Korean stocks were deemed undervalued because foreign investors found the dividend ratio too stingy. The increased dividend ratio suggests that Korean companies also are turning shareholder-friendly in line with global trends.

At the same time, companies with a high ratio of foreign shareholders have become vulnerable to management meddling by U.S. activist hedge funds. They must indulge shareholders with generous dividends and buyout programs to bolster shareholders’ value. The National Pension Fund, which is under the health and welfare minister’s authority, vowed to be more assertive in exercising its shareholders’ rights under stewardship code. Large companies are under pressure to keep shareholders happy by spending their cash reserves and profit on them instead of future investments. Elliot Management demanded Hyundai Motor return 40 to 50 percent of its net income in dividend payouts.

Companies have a duty to share profits with shareholders. But if cash resources are overly used to please shareholders, companies cannot spend that much on future growth. If Hyundai Motor spends half of its net earnings to pay shareholders, can it keep up sustainable growth? It may keep shareholders happy for now, but what about its future? At the end of the day, a company earns confidence from current and future investors with a solid vision for the future. A company must invest for future growth to help the economy and make jobs.

To convince shareholders, a company should stick to the principle of upgrading corporate value through investments and business opportunities instead of using up cash reserves for shareholders. The surge in dividends is another proof that Korea Inc. is losing vitality. Foreign investors are demanding immediate returns because they are not convinced of a promising future. Authorities must lift regulations and allow for a liberalized business environment so that companies can turn their attention to new ventures instead of trying to appeal to their shareholders with fat dividend checks.

JoongAng Ilbo, June 6, Page 26
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