Be afraid of the NPS
The author is a columnist of the JoongAng Ilbo.
I tend to hold my breath when President Moon Jae-in discusses our economy. He has bewildered many with his casual, misleading or misrepresentative comments about the economy. It makes us wonder whether he has some ulterior motive or if he really knows what he’s saying. The latest comment concerned stewardship codes. On Jan. 23, he said the National Pension Service (NPS) should be more “aggressive” in practicing stewardship codes to rein in the excesses and wrongdoings of major shareholders of large companies. He vowed to make the owners “pay the price” for irregularities. Stewardship is simply a set of guidelines that make big institutional players exercise their voting rights to ensure better governance and higher shareholder returns in the companies they invest in. They should not be used as a punitive tool or threat.
President Moon does not seem to fully understand the stewardship code. The movement began in Britain in 2010 following the Wall Street financial meltdown. It was designed to enhance the quality of engagement between investors and companies to better respond to long-term risks.
Companies have become vulnerable due to attacks from hedge funds in the 1990s. They were nagged and forced to sell off their strong assets, launch buyback programs and expand dividends instead of focusing on strengthening long-term viability. Their stocks shot up at the expense of reduced resources for R&D spending and innovation. The code requires institutional shareholders’ managing funds on behalf of others, to protect their assets as estate custodians.
The NPS manages the funds of 22 million subscribers. No matter how actions are justified, punishing companies cannot be the role of a steward or wishes of asset owners. Correcting or punishing companies for their wrongdoings should fall under the jurisdiction of law enforcement, tax, antitrust and financial authorities, not a pension fund. It’s why some in the business community suspect the government is out to nationalize companies.
The timing is also poor. When the president made his comment, the fund’s outside advisory committee — whose duty is the oversight of capital investments — was holding its first meeting. The 14-member committee discussed the scope of the NPS’ voting rights at the Korean Air shareholder’s meeting in March. They were against overstretching the NPS’ role. The fund’s top decision-making Fund Management Committee, chaired by the Ministry of Health and Welfare, will decide its action on Korean Air later this month. In theory, it should follow the advisory committee’s recommendation. But it may not do so after the president specifically demanded the NPS play a more active role. The ministry finds itself in a sticky situation. It had to reverse the outline on national pension fund reform after the president disapproved of it last year. The president may get his way again this time around.
The action may end up helping a local activist fund. It purchased shares in Korean Air’s holding company to take aim directly at the management of the family-run conglomerate. The activist fund demanded that Hanjin Group Chairman Cho Yang-ho step down and sell some of his assets. If Cho rejected the demand, it threatened to go into a proxy war. Despite owner family-related scandals, Korean Air is in better condition than the other full-service carrier Asiana Airlines. The fund may be recruiting the NPS to be on its side. To avoid any other controversies, Health and Welfare Minister Park Neung-hoo said the national fund should not form an alliance with a socially-focused fund. Yet now he would have to consider the president’s thoughts.
The liberal administration also contradicts itself, as seen in its excessive meddling in the NPS. Former NPS head Moon Hyung-pyo was put behind bars for complying with impeached President Park Geun-hye’s call to aid Samsung Group in its proxy war against U.S. activist fund Elliott on the merger of Samsung C&T and Cheil Industries after she received donations from the conglomerate. Park’s criminal count also includes her ordering the NPS to help defend a Korean company against outside predatory force. How is President Moon’s order to punish “bad companies” through the NPS exercising its voting rights any different from what Park did?
These actions can further exacerbate corporate investment and hiring. According to a study by the Korea Economic Research Institute, companies under attack by activist funds cut their hiring by 4.8 percent in the first year and 18.1 percent the following year. Their investments also fell by 2.4 percent in the first year and 23.8 percent the following year. Meanwhile, their treasury stock buyback increased by 20.3 percent. A company whose management is exposed to meddling by institutional shareholders must spend more to protect its management rights with its capital reserves that would otherwise have gone to recruitment and investment. Companies must be confounded by the president’s turnaround overnight from encouraging them to invest and hire more, to warning them to watch out for their managerial rights.
JoongAng Ilbo, Jan. 25, Page 30