Stewardship or meddling?
The author is a columnist of the JoongAng Ilbo.
Ryu Young-jae, chief executive of Susinvest, which is devoted to promoting socially responsible investment, is a champion of the so-called stewardship code. He became infatuated with the concept of requiring institutional investors to be transparent in their investment and act proactively to improve corporate governance from the time it spread among British companies following the financial meltdown in 2008. He translated “Other People’s Money: The Real Business of Finance,” the 2015 book by Oxford University professor John Kay, who devised the stewardship standards.
Ryu’s company has been acting as a proxy for a British pension fund since 2012 to practice stewardship on 18 Korean companies that the fund has equity interests in. As the word suggests, stewardship means an act of supervising and managing the funds under its control as a steward watches over estates. “Companies at first responded as if we were snooping around. Now, they are willingly discussing their management strategies and vision with us,” he said.
He laughed at the hyped concerns from the business sector and conservative media about so-called “pension fund socialism” and the government trying to tame chaebol through the National Pension Service (NPS) after the pension fund formally adopted the stewardship code. “A steward’s role is to safeguard the interests of his owner no matter what,” he stressed. The owners of the NPS are 22 million subscribers, and the guardian will naturally uphold the interests of pension contributors in times of conflict with the government, he argued.
He expounded on how the stewardship code was born and its design. Activist funds flourished since the 1990s, greedily chasing immediate profits by forcing companies to sell lucrative assets and carry out shareholder reward programs like stock buybacks and dividend payouts. Their demands helped push up stock values, but weakened corporate fundamentals. Apple is the best case, he said. Apple’s R&D investments sharply fell after it succumbed to billionaire business magnate Carl Icahn’s buyback demands in 2015. The tech giant’s innovations lost luster ever since. The stewardship code can prevent such poor management decisions, Ryu said.
Although persuaded by his lecture, I cannot but think him overly naïve. It is not that the business sector is unaware of the merits and positive design of the code. What they fear is not the steward, but what can be expected from the largest local institutional investor masked as a steward or a puppet for a political force. The risks — and symptoms — of contamination have already surfaced.
Health and Welfare Minister Park Neung-hoo, who is responsible for the operation of the national pension fund, said the fund will exercise its voting rights if “public consensus builds up on the serious damages to corporate value.” That means the NPS — which holds 5 percent or more in major companies — will use its power to dismiss board members of companies it invested in. But the grounds of “social consensus” are very ambiguous. Who is the judge of a public consensus? It’s no wonder companies are worried about Big Brother watching over their shoulder. Park said companies that do not have “desirable governance or ownership structures” or “desirable dividend programs” will be targeted. What exactly is a desirable governance structure or dividend program? Is the health minister an expert on those? How does he know something that even companies cannot figure out? Park’s comments suggest bureaucratic influence.
Park is merely speaking for the Moon Jae-in administration. During his campaign, Moon vowed to strengthen the voting rights of the NPS to combat bad practices of chaebol families. But why should a fund overseeing the post-retirement savings become instrumental to reform the chaebol? There are a number of regulators — law enforcement agencies, the tax office, and financial watchdogs — for that job. The business sector suspects the government is using the NPS more to intimidate than watch over the chaebol and their irregularities.
The health and welfare ministry denies it. If so, it must prove so by fending off any bureaucratic influence. The NPS’s top decision-making fund management board should be reorganized. Out of 20 members, eight are from the government. Their seats should be filled by neutral and professional figures. The records of the meetings also should be made public. Without such mechanisms, it must throw away the mask and bare its true face so as not to betray genuine and sincere supporters of the stewardship code like Ryu.
JoongAng Ilbo, Aug. 2, Page 30