The Essence of Shareholder
Activism
International Corporate Governance Meeting:
Why Corporate Governance Matters for Vietnam
Hanoi
December 6, 2004
Hasung Jang
jangya@chol.com
Korea University
1
Why Shareholder Activism
Minority shareholders are not protected
– Expropriation of minority shareholders
– No independent director and auditor
– Lack of monitoring function in the company
Agency problem & moral hazard of management
– Shareholder’s value is ignored
– Controlling shareholder or managements are involved in
self-dealing
– Nepotism in the management
Weak enforcement of laws & regulations
– Laws are sleeping in the book
Market monitoring function is weak
– Institutional investors are passive due to conflict of interest
Government can not do everything
2
Why Shareholder Activism
Poor Corporate Governance Practices
– Company assets are siphoned for the family
– Illegal or unfair related party transactions
Cross debt guarantee, hidden debt
Sales and purchases among affiliated companies
Financial subsidies for related parties: Loan
No Transparency & No Accountability
– Disclosures and auditor’s reports are not credible
– Controlling family and management are not accounted for mismanagement
Poor corporate governance creates corruptions
– Improving corporate governance is one of effective way to fight
against corruption in the society
3
Objectives of Shareholder Activism
Independent Watchdog on the Management
Protect Shareholder’s Value
– Stop profit-siphoning management practice
– Stop subsidies to affiliated companies
– Stop illegal intra-group transactions
Ensure Transparency & Accountability
– Independent management from controlling
shareholder
– Outside directors representing minority shareholders
Fights against Corruptions
4
What Shareholder Activism Can Do?
Monitoring and reporting corporate activities
Constructive talks with management before taking
actions
Exercise shareholder rights
– Attending shareholder meetings
– Proposing agenda at the shareholders meetings
– Electing directors
Proposing outside director candidate
Proxy fights
– Taking legal actions
Filing civil lawsuit: Derivative actions, Class-Actions
Filing criminal investigation
Proposing and lobbying for legislation
5
Minority Shareholder’s Right
Korean Case: Security Exchange Act.
Requesting termination of directors & auditors
Seeking injunctive action against illegal acts
Bringing shareholder derivative actions
Compelling inspection of financial records
Convening a special shareholders’ meeting
Making a shareholder proposal
Requesting cumulative voting
Appointing inspector to examine
corporate affairs & records
Terminating a liquidator
April 1997
1% (0.5%)
1% (0.5%)
1% (0.5%)
3% (1.5%)
3% (1.5%)
1% (0.5%)
--
March 2001
0.5% (0.25%)
0.05% (0.025%)
0.01%
0.1% (0.05%)
3% (1/5%)
1% (0.5%)
3%
3% (1.5%)
3% (1.5%)
3% (1.5%)
0.5% (0.25%)
Number in ( ) is for large company
6
Shareholder Activism
Korean Case
PSPD-PEC has engaged in shareholder activism since
January 1997
PSPD
– People’s Solidarity for Participatory Democracy
– Independent civil rights advocacy NGO
– Watchdog on government, legislator, judiciary, business
– Website: http://eng.peoplepower21.org/
PEC
– Participatory Economy Committee under PSPD
– Economic reform activism
– Shareholder activism
– Monitoring large companies
7
PEC Organization
• Staff
• Three full-time staff & 20 volunteer professionals
• Volunteers : lawyers, CPAs, professors
• Funding
• 100% individual donations
• No funds from corporations & government
• Separate funding from PSPD
• Supporting Institute
• Center for Good Corporate Governance
• Website: http://cgcg.or.kr/cgcg/cgcgmain/html_en/index.htm
8
Target Companies
Conglomerate (Chaebol companies)
–
–
–
–
–
–
–
–
Samsung Electronics
SK Telecom, SK Shipping Co.
Hyundai Heavy Industry
Dacom
Daewoo Corporation
LG
Hanwha
Doosan Corporation
Financial Institutions
–
–
–
–
Korea First Bank
Hyundai Investment Trust Co
Hyundai Securities Co.
Daehan Life Insurance
9
Monitoring Corporate Practices
Disclosures
Outside director’s participation & performance
Related party transactions
Issuance of new equity and equity related bonds
Board activities: agenda, attendance, voting
record
Accounting practices
10
Attending Shareholder Meetings
Year-round collection & analysis of information
Pre-negotiation with management on agenda
Advance notice to management on issues & list
of questions
Proxy solicitation on agenda of shareholders’
meeting
Two or three companies per year
– 13 ½ hours at Samsung Electronics AGM
– 10 ½ hours at Korea Exchange Bank AGM
11
Proxy Solicitation
Soliciting proxies from local and foreign investors
– PSPD’s own road show and mail campaign
– Proxy on election of outside directors
Shareholder resolution at AGM
– Amendment of articles of incorporation
Internal compliance procedure on related party transaction
Limits on issuance of equity related securities to related parties
Adopting cumulative voting
– Dismissing directors and management involved in illegal
transaction
12
Election of Outside Directors
Nominating candidates for outside directors
Election of independent outside directors
– Hyundai Heavy Industry
Management accepted 1 outside director
– SK Telecom
Management accepted 3 outside directors
Outside directors have a veto power on related
party transactions
– Samsung Electronics
Not Successful
13
Derivative Lawsuits
Korea First Bank
– $38 million
– Defendants: two former presidents two directors
– Filed in June 1997. Supreme court’s ruling in March 2002
Illegal loans
Taking bribe
– The first derivative lawsuit in Korea
Samsung Electronics
– $90 million
– Defendant: Chairman KH Lee, 10 directors
– Suit filed in Oct. 1998, District court ruled in Dec. 2001
Illegal political contribution
Unfair related party transations
14
Other Legal Actions
Filing lawsuits
– Nullify agenda un-lawfully adopted at shareholder
meetings
– Cancellation of CB & BW issued to controlling family
– Injunction to stop debt guarantee to affiliated company
– Lawsuit against auditing accounting firm for failed
audit
Inspection of financial records
– Hyundai Investment Trust Co
Record of in-house asset transactions
– Samsung Electronics
Obtaining court order to yield minutes of board
15
Other Legal Actions
Filing criminal investigation
–
–
–
–
–
–
Stock price manipulation: Hyundai Securities
Fund embezzlement: Daehan Life Insurance
Off-shore paper company operation
Off-shore off balance sheet debt
Asset stripping using convertible bond, bond with warrant
Falsifying minutes of board
Requesting special audit by FSC
– FSC: Financial Supervisory Commission
– Accounting manipulation
– False or failed disclosure
16
Off Shore Paper Company Operation
Samsung ?
Fund
$300 mil
Samsung
Motor
Bridge
Loan
Stock
Repayment
Pan Pacific
Investments
Put Option
Samsung
Electronics
(Paper Company)
Bond
Samsung
Mech. Elec.
Call Option
Samsung
SDI
Effective
Debt Guarantee
Fund
Bond
Investor
17
Legislation Proposal and Lobbying Actions
Strengthen minority shareholder rights
– Amendment of Commercial Code & Security Exchange Act
– Lowering legal requirements on shareholder rights
Regulation on related party transaction
– Amendment of Fair Trade Act
Governance on financial institutions
– Regulation on bank ownership
– Disclosure and voting of investment trust company
Security Class Action Suit Law
Anti-Corruption Law
18
What Will Expedite Changes?
Government
– More direct regulations on corporate governance
– Enforcement of regulations
– Strengthening minority shareholder’s right
Legal System
– Fair and effective court system
– Fair and independent prosecution
– Security class action suit
19
What Will Expedite Changes?
Corporation
– Voluntary adaptation of global standard
– Active independent outside directors
Market
– Pro-active role of institutional investors
– Active participation at shareholder’s meeting
Civil Society
– Participation in policy making: NGOs
– Minority shareholder activist watch dog
20