Don’t let activist funds hamper growth

The annual shareholders’ assembly season is back. The battle of spear and shield, or the conflict of interests between management and shareholders, will be fiercer than ever at this year’s meetings of stakeholders of corporate names in the main Kospi and secondary Kosdaq markets, who ended their fiscal year of 2023 in December. Activist funds have turned more assertive, emboldened by the government’s so-called Corporate Value-up Program pushing listed companies to work harder to enhance values for shareholders.

Activist funds make sizeable stock investments in order to wield managerial or financial influence to draw improvements in companies for greater returns. Some funds came under fire for dumping their stakes for greater rewards or for demanding increased dividend payouts or aggressive buybacks.

They did help bring about changes in companies that mostly served to benefit major shareholders. The Tokyo Stock Exchange’s earlier set of guidelines pressing listed companies to improve their profitability and shareholders’ value actually lifted share prices through the voices of U.S. activist funds.

Activist funds have also been widening their clout in Korean companies. Last year, a homegrown activist fund joined hands with individual shareholders to correct self-serving management practices of SM Entertainment’s founder Lee Soo-man. According to the Korea Institute of Corporate Governance and Sustainability, shareholders-motioned agendas increased to 195 at 50 companies last year, compared to 168 cases at 34 firms in 2021.

The problem is that activist funds’ actions can turn to “shareholder populism.” Feisty demand for excessive dividends and retirement of treasury shares could be won at the expense of a company’s growth potential. Five foreign hedge funds, including City of London Investment Group, are rounding up investors in a “wolf-pack” strategy to force Samsung C&T to increase cash dividends and cancel treasury holdings at this week’s shareholders’ meeting.

The alliance of activist funds demanded that the de facto holding company of Samsung Group buy back 500 billion won ($375 million) worth of its own shares for cancellation and pay 4,500 won in dividend per common share and 4,550 won per preferred share. The total amount of 1.24 trillion won exceeds the company’s estimated free cash flow for this year. Samsung C&T would have to spend more than they earn this year to indulge shareholders, having little left for investment for future growth.

A company must grow and share the increased pie with shareholders to feed its sustainable growth. A binge over today’s profits may please shareholders for now, but it can translate into a doom for both the company and its stakeholders in the future.