What our voting record in South Korea says about gaps in corporate governance

In our previous blog we explained how Korea’s Corporate Value-up Program aims to dispel the Korean discount by improving corporate governance in the country.

Below we summarise the key themes that have emerged through our voting during recent AGM seasons, and the policies underpinning our voting actions. Together, these summarise our expectations on the areas where we believe corporate governance reform is needed in South Korea.

We consider voting to be an essential stewardship tool in expressing our stewardship principles and driving changes as an investor. Reviewing LGIM’s voting records¹ on proposals put to a vote during the past three AGM seasons in South Korea, the following patterns were apparent:

• Governance matters constitute the vast majority of proposals. Management proposals remain dominant, with shareholder proposals counting for less than 2% (48 in total) of all proposals
• The majority of proposals have been: 1) approval of financial statements and allocation of income; 2) remuneration of directors; and 3) director elections. At the same time, those three types of proposals have also been the top proposals that we have been voting against in Korea, which is aligned with our voting global Q1 2024 voting summary²

Our Global Corporate Governance and Responsible Investment Policy³ is applied in Korea. The common vote rationales⁴ included in our vote disclosures include the following:

• Vote against applied on the approval of financial statements as companies did not provide the accounts in time ahead of the meetings
• Vote against applied in director elections:
  • Joint Chair/CEO: we expect the roles of Board Chair and CEO to be separate and not to be recombined once separated. These two roles are substantially different, and a division of responsibilities ensures there is a proper balance of authority and responsibility on the board
  • Diversity: we expect a company to have a diverse board, including at least one woman
  • Independence: the board must be sufficiently independent to protect shareholders' interests
  • The local context: we voted against management in a number of instances, due to nominated directors’ record of serious failure of fiduciary duty, raising concern about their abilities to act in the best of interest of shareholders
• Vote against remuneration-related proposals, predominantly, as the proposed remuneration limit is considered high relative to that of the market norm; and/or the company is proposing an increase without providing any reasonable justification

Despite being a minority shareholder, we recognise the importance of Korean companies providing better access to international institutional investors, improving director nomination, and strengthening board composition and independence.

With the draft guideline of the Korean Corporate Value-up Program released in early May⁷, we do not believe this alone will be the magic wand in solving the long-standing Korean discount without companies also playing their part in addressing corporate governance issues in South Korea.

It will take collective efforts from multiple parties to steadily and continuously to push the agenda of boosting shareholder returns. Progress on a number of fundamental corporate governance issues is likely to be a long journey.  

The KOSPI index has been on a bumpy ride since the Corporate Value-up Program was first announced. Corporate governance reform is never a straight line, and the pattern of investors buying into expectation and selling into news could continue.

A delicate balancing act

Corporates clearly face constraints in pushing forward governance reforms as they maintain the delicate balance between the interests of Chaebol families and government’s stance. Nonetheless, there is some low-hanging fruit, even if corporates are only willing to do the minimum.

Over a long term, as many other Asian markets start to address governance reforms and shareholder returns, South Korea could derive significant re-rating potential if the Corporate Value-up Program proves to be the figurehead of a sea change in the country’s approach to corporate governance, rather than a one-off event.

 

Sources

1. LGIM ISS voting data, https://vds.issgovernance.com/vds/#/MjU2NQ==/

2. LGIM Q1 2024 Quarterly engagement report https://www.lgim.com/landg-assets/lgim/cro_q1_esg_engagement_report-final.pdf

3. https://www.lgim.com/landg-assets/lgim/_document-library/capabilities/lgim-global-corporate-governance-and-responsible-investment-principles.pdf

4. https://vds.issgovernance.com/vds/#/MjU2NQ==/

5. For example, we voted against three directors’ nominations of a financial institute as their record of serious failure of fiduciary duty raises concern on their abilities to act in the best of interest of shareholders. Another example is that we voted against the nomination of a director candidate as the candidate has been serving as the internal auditor of this company since 2022. At the same time, this company was indicted by the prosecutor’s office for the violation of the Capital Markets Acts in the same period of time. While the candidate might not have been directly involved in the transactions, the nature of the charge of this company and the top executives indicates negligence in the candidate’s capacity as an internal auditor and a serious failure of risk oversight at the company.

6. https://insights.issgovernance.com/posts/2024-korea-proxy-season-preview/

7. https://www.fsc.go.kr/eng/pr010101/82213