On July 30, 2018, the Fund Management Committee (“FMC”) of the National Pension Service of Korea (“NPS”) ratified the Principles on Stewardship of the NPS (the “NPS Stewardship Code”).  

In October 2018, the Special Committee of Stewardship (the “Stewardship Committee”), which will take charge of implementing the NPS Stewardship Code, launched its activities.  The business community and the financial industry are keen to understand how this development will impact the corporate management environment.

Key Aspects:

1. Stewardship code primer

The NPS Stewardship Code is based on the model “stewardship code” regarding fiduciary duties, and was first introduced by the Korea Corporate Governance Service (“KCGS”) in December 2016 under the title, “Principles on Institutional Investors’ Fiduciary Duties.”  

The purpose of the stewardship code is to guide institutional investors with equity holdings in listed companies (e.g., pension funds and asset managers) exercise their voting rights in accordance with the fiduciary duties expected of an asset manager.  Since its introduction, around 70 institutional investors have adopted the stewardship code. 

The stewardship code presents seven principles for institutional investors: 

• Establish and disclose a fiduciary responsibility policy;
• Establish and disclose a conflicts of interest policy;
• Periodically monitor investee companies;
• Establish internal guidelines on stewardship activities;
• Establish and disclose a voting policy and voting records; 
• Periodically report on voting and stewardship activities; and 
• Build up capabilities and expertise. 

Institutional investors may adopt the stewardship code voluntarily, and have discretion to set the scope of its application.  However, once an institutional investor adopts the code, it must provide justification in case of any non-compliance.  

The KCGS is tasked with monitoring and disclosing the state of the adoption and implementation of the stewardship code periodically.

2. NPS’ plan for implementing the stewardship code

The NPS plans to implement the NPS Stewardship Code in steps, first limiting the scope to its application to exercising NPS’ non-managerial rights as a shareholder (e.g., establishment of a dividend policy) in its investees to avoid excessive managerial intervention.  

NPS will expand such scope to shareholder activities that are considered managerial (e.g., appointment/dismissal of executive officers and approval of M&A transactions) when the conditions are ripe.  The NPS had expressed that it would engage in private discussions with select companies to recommend improvement of their dividend policies, and that the Stewardship Committee would determine the scope of advanced disclosure of NPS’ voting plans by the second half of 2018.  The NPS also laid out specific plans for expanding the scope of shareholder activities in 2019 and 2020 as follows: 
 

• By 2019, the NPS will engage in private discussions with its portfolio companies to an expanded set of issues related to shareholder value, such as embezzlement, breach of fiduciary duty, and unlawful subsidy.  The NPS will also establish general principles for the composition and operation of the board of directors of its portfolio entities.

• By 2020, the NPS plans to engage in shareholder activities publicly (e.g., disclose names of problematic companies and issue public letters), and to exercise veto rights against companies whose efforts to streamline their management and corporate procedures (which would have been raised in private discussions) fell short of NPS’ expectation.  

NPS intends to exercise its shareholder’s right on a non-public basis, but will immediately publicize any action it takes if it could materially impact the corporate value of the investee.

Significance:

As more institutional investors adopt the stewardship code, it is expected that they will become increasingly active in exercising their shareholders’ rights.  Further, the amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act will allow discretionary investment managers to exercise their voting right by proxy, and will likely induce the NPS to delegate its voting rights to the managers, possibly beginning in 2019.  

In selecting such managers, the NPS will likely give priority to those who have adopted and implemented the NPS Stewardship Code dutifully.  Such initiative is expected to encourage more institutional investors to show their commitment to the NPS Stewardship Code.

Accordingly, listed companies should prepare proactive measures to respond to more vibrant shareholder activities.  Such preparations include preliminary monitoring of any changes in their shareholding ratios, and monitoring institutional investors on the adoption of the stewardship code and any exercise of voting rights.  

Listed companies should also engage in proactive dialogue with their institutional investors.