November 26, 2024

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South Korea’s National Pension Service decided on Nov. 29 to hold off on plans to implement guidelines to influence its portfolio firms’ behavior amid controversy surrounding the guidelines.

After a meeting of the NPS’ Fund Management Committee in Seoul, the world’s third-largest pension fund by assets under management admitted its shareholder activism guidelines might put “excessive pressure” on its portfolio firms in Korea. The matter will be discussed at the next committee meeting.

The guidelines would have immediately given the NPS the right to address poor governance in companies in which it holds shares. In extreme cases, that could have meant calling a vote to oust board members. 

Welfare Minister and National Pension Service Fund Management Committee head Park Neung-hoo (right, front row) speaks during the committee meeting held Nov. 29 in Seoul. Yonhap

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According to the guidelines, the NPS as a shareholder would be entitled to influence its portfolio companies’ rules on dividend payouts, decide executive salaries and take action in cases where board members engaged in misconduct such embezzlement or breach of trust, if the company refused to address the matter through dialogue.

The pension fund could also engage in shareholder activism if any of its portfolio firms were to show a shoddy performance on sustainability -- environmental, social or in terms of corporate governance -- and if the portfolio firm disregarded an open letter from the NPS about the problem.

The NPS’ 14-member special committee on fiduciary responsibility would designate the companies as subject to shareholder activism, changing the NPS’ shareholding purpose from financial investment to management. Shares of those companies in which the NPS holds at least a 10 percent stake would be suspended from trading immediately. The companies’ fate would be in the hands of the Fund Management Committee, the pension fund’s highest governing body, which would decide what actions to take.

While the NPS says the guidelines are designed to ensure long-term yields from its portfolio, Kwak Kwan-hoon, a law professor at Sun Moon University, said the guidelines fail to validate the designations by the special committee for fiduciary duty -- largely composed of professors -- and explain how the NPS’ shareholder engagement would improve the companies’ valuation. Kwak was among those who opposed the guidelines at a public hearing held earlier in November.

Welfare Minister and Head of NPS Fund Management Committee Park Neung-hu in an opening speech Nov. 29 responded to concerns about the possibility of “arbitrary interference” with management.

“The NPS does not intend to focus on wielding influence on the company boards’ management,” Park said. “Shareholder engagement is a very unlikely option, unless the portfolio companies’ value is severely undermined despite a series of discussions (between the NPS and the portfolio companies).”

The NPS has been working on the guidelines since losing a high-profile case of shareholder activism concerning its portfolio firm Hanjin KAL earlier in 2019. The NPS proposed removing directors implicated in financial misconduct, including the late Chairman Cho Yang-ho, only to be outvoted at a shareholder’s meeting in March.

Meanwhile, the NPS’ Fund Management Committee greenlighted a set of principles for responsible investment, under which the NPS will take into account environmental, social and governance factors for its stocks and bonds at home and abroad.

As of end-September, the AUM of the NPS came to 713 trillion won ($603.5 billion), having seen an 8.92 percent rise through the January-September period of this year.

By Son Ji-hyoung (consnow@heraldcorp.com)