The stewardship code the National Pension Service decided to adopt raises concerns that it may be used for the government to control companies.
Health and Welfare Minister Park Neung-hoo announced on Monday the fund management committee -- the highest decision-making body of the NPS -- decided to introduce the code, a set of principles that require it to be active in exercising voting rights as shareholder in companies in which it invests. He said the code allows the service to get involved in the management of companies within certain restrictions.
“In principle, the code bans the NPS from participating in corporate management,” Park said. “But it allows the service to exercise voting rights actively if shareholder value or social value is deemed to be seriously damaged and if the committee votes to do so.”
Participation in corporate management as stipulated by law is an act that can have substantive influence on an array of critical management issues: appointment, suspension and dismissal of board members, revision of the articles of association, merger or divestiture, transfer of business, disposition of assets and dissolution of companies. Shareholders can participate in management by exercising voting rights. Now that the code has been adopted, the NPS will be able to interfere widely in the management of companies.
The government says the code is needed to raise corporate governance and long-term returns on investments.
Corporate governance should be enhanced, but it is questionable if the pension fund should be used for that purpose. Shareholder activism is not a goal of the fund. The NPS as an asset manager should focus on identifying promising companies rather than on interfering in corporate management. It should not give up its day job.
There is no guarantee that management participation by the NPS will make share prices rebound and lift investment returns. Rather, intervention by outsiders who do not know the ropes in business may pull down corporate performance.
Though management participation is a critical matter requiring prudence, the condition for the fund to get involved in management is ambiguous. The code cites seriously damaged shareholder value or social value, but there is no further explanation.
As to how to know how serious is serious, Park said the matter will be inevitably left up to the subjective judgment of the committee members. Social value is barely understandable, either. What does it mean exactly? If it means something ideological, the code can be dangerous. The pension fund is the nest egg of many retired people. It cannot be used as a means to serve certain ideological values. There is concern that the government may try to tame companies it disfavors through the fund.
The government needs review the code or work out complementary steps before its harmful consequences turn up. The first thing to do to minimize the unintended effects will be to secure the independence of the committee.
The committee is chaired by the welfare minister. Four vice ministers and NPS chairman are ex officio members. The other members are appointed by the welfare minister. The panel is prone to make government-biased decisions.
The pension fund amounts to 635 trillion won ($567 billion), 130 trillion of them invested in the domestic stock market. It holds a stake of 5 percent or more in as many as 299 listed firms. Now that the door is open for the largest Korean investor to step in the management of the companies, the impact of the code would be tremendous.
The guideline of management participation is said to be missing from the government’s original version of the code, but the committee adopted it with strings attached to compromise with the members representing labor and civic groups who opposed the government version. They are likely to demand more shareholder activism from the NPS.
The top priority of the fund lies in investment returns and stability. If the NPS gives up its day job and its investment is swayed by activism, either the fund or the companies it invests in may not last long.