Who’s afraid of the government?

Lee Sang-ryeol
The author is chief editor of content production at JoongAng Ilbo.

Korean corporations and businessmen fear the government. During the industrialization period, companies were used to corrupt ways and to create collusive connection with the government and political front. Although they have cleaned up much and run businesses to global standards, they still regard political power with apprehension and distrust.

The government and ruling power in Korea are mighty because of their tendency to meddle and wield regulatory weapons. The cap on sales of new apartment offerings and an income-led growth agenda that sets guidelines on hiring and work terms are primary examples. The state has even greater power as a result of the pandemic crisis.

The government can shake corporate management if it wants to. The National Pension Service (NPS) — the largest institutional player with sizeable stakes in all major companies — acts on its behalf. The NPS’ newfound role was witnessed at a shareholders’ meeting of Korean Air in March 2019. The NPS, with 11.56 percent in Hanjin KAL, voted against the extension of the term for Hanjin Group Chairman Cho Yang-ho and ousted him from the management board. Cho had to swallow his pride and exit disgracefully after devoting his entire life onto the flag carrier and retreat. About two weeks later, his illness deepened and he passed away. Companies have witnessed how ruthless the government can be.

The NPS also stunned the market by voicing disapproval to LG Chem’s scheme to separate its battery business into a stand-alone entity.

The NPS, the second-largest shareholder with a 10.3 percent stake in LG Chem, claimed that the spinoff could undermine the interest of shareholders through dilution in the holdings.

But its grounds for opposition are not convincing. The demerger plan proposes to separate the battery operation and make it a wholly-owned entity under LG Chem. Existing shareholders have nothing to lose.

In fact, their holding in the parent company could strengthen as the pure-play company has room for further growth through more eager expansion.

The NPS, which is responsible for increasing the long-term value for the old-age pension assets, should not disapprove of the spinoff. Yet it did due to disgruntled individual investors who were fretful of short-term losses in the money they had primarily invested for the battery outlook. The NPS has been swayed by populist views.

LG Chem’s plan nevertheless passed the shareholder vote. The approval rate was overwhelming at 82.3 percent. That showed how the NPS is becoming estranged from the market. The big institutional player was turning its attention to immediate public sentiment instead of the long-term investment outlook of companies it has invested in. It is also unclear what guidelines the NPS follows in exercising its voting rights.

Companies are uncertain how the NPS will react at their shareholder meetings in spring on outside board and auditor nominations.

The outsized ruling party is pushing ahead with revisions to three major corporate acts. One of them proposes to set the cap of voting rights of major shareholders and other players with special relations with them to 3 percent when voting for an outside auditor. When voting rights of large shareholders in family-owned companies are restricted, they can come under threat by predatory foreign capital. Although the business sector cites an escalated threat from hedge funds, it also fears an even further enlarged power of the NPS. The pension owns more than a 3 percent stake in 423 listed companies and acts as the signal for other institutional players both at home and abroad.

The pension’s stance can influence corporate governance. It is why the business sector is apprehensive of so-called pension fund socialism.

Under the liberal government, the regulatory environment has worsened. Regulations are accompanied by punitive actions. Management faces criminal penalties if it does not comply with the 52-hour workweek or minimum wage rules. A study showed that Korea’s chief executive officers are subject to over 2,200 regulations with criminal penalties. Companies have been pleading with politicians saying that they are under the most penalties in the world.

If taming companies was what it intended to do in the first place, the ruling power has certainly achieved its goal. However, the economy cannot be vitalized if businesses are fearful of the state. Entrepreneurship is being stifled under excess government regulations and interventions. The economy pays the price as investment and hiring cannot pick up. But no one in the government or ruling party seems to be worried about the country’s future.