November 22, 2024

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[THE INVESTOR] Editor’s note: The Korean version of Stewardship Code was unveiled in December last year with aims to encourage more responsible investments by institutional investors here.

In line with the government’s recent push for chaebol reforms and improving corporate governance, public organizations are encouraging the adoption with generous incentives. However, many big investors are still skeptical about adopting the code, citing tricky disclosure requirements and additional costs. 

Now keen attention is being paid to National Pension Service, the nation’s largest institutional investor, which recently started reviewing its own adoption. Analysts say the pension fund’s action could have a ripple effect in the industry.

Here are key issues concerning the code. 


What is the Stewardship Code?

The Stewardship Code is a set of guidelines for more responsible investment practices among professional investors. It was first introduced in the UK in 2010 following the financial crisis. Other countries such as Japan and Germany have also adopted their own versions.


What is its purpose?

The code aims to encourage institutional investors to effectively exercise their voting rights on key business decisions at companies they invest in. It would enhance investor returns and support sustainable growth of capital markets.
In Korea, the code is expected to help resolve the so-called “Korea discount,” a combination of geopolitical risks, low dividend payouts and poor corporate governance that have haunted local stocks to be undervalued for decades.


Is it legally binding?

No. But companies are advised to join the scheme or explain why they do not want to adopt it. 


What is the adoption rate currently?

A total of 36 institutional investors have adopted or plan to adopt the code, while many others, including the NPS, are creating a task force to review its adoption. 

What’s the stance of NPS?

NPS is still searching for a contract researcher for the review. Sources say its review process could be complete within the year before its adoption early next year.
 

Why are institutional investors reluctant to adopt it?

They complain about the rule that mandates them to disclose their stock holdings of 5 percent or more in a listed firm within five days of trading. They say frequent and immediate disclosures would harm their business strategy. 

Some smaller firms also complain about additional costs for monitoring its proper implementation. 


What’s the government’s plan to encourage its adoption?

The Financial Services Commission recently released a set of guidelines to soothe concerns. According to the guidelines, the 5 percent rule applies only for hostile takeovers, and, if the stake purchase is not aimed at influencing management they will be allowed to make a disclosure until the 10th day of the following month. 

State-run Korea Development Bank last month said it will give extra points to those who have adopted or are considering adopting the code. 


The seven principles

1. Institutional investors should establish and disclose a clear policy to fulfill their responsibilities as a trustee who manages and operates other assets for clients and beneficiaries.

2. Institutional investors should have an effective and clear policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.

3. Institutional investors should check the companies they have invested in on a regular basis so as to preserve and enhance the value of assets by raising the mid- to long-term value.

4. While aiming to maintain a consensus with companies, institutional investors should establish internal guidelines on the timing, procedures and methods of escalating activities to fulfill fiduciary responsibilities, if necessary.

5. Institutional investors should set out and disclose a voting rights policy including guidelines, procedures, and detailed standards for exercising faithful voting rights and disclose the details on how and why they execute their voting policy so that their voting activity can be assessed.

6. Institutional investors should report periodically to clients and beneficiaries on voting activity and other activities of stewardship responsibilities.

7. Institutional investors should have the necessary competence and expertise for the active and effective implementation of fiduciary responsibilities.

By Park Ga-young (gypark@heraldcorp.com)