On December 3, 2021, the Fund Management Committee of the National Pension Service (the “NPS”) finalized the Guidelines for Responsible Investment on Composition and Operation of the Boards of Directors, etc. by the National Pension Service (the “Guidelines”). These Guidelines are intended to increase predictability among the NPS’ target investment companies by setting out general principles that should apply to the relationship between companies and their shareholders, the function, composition and operation of boards of directors, and the role of audit organizations.
Along with the Policies on Stewardship Activities and the Guidelines on Stewardship Activities, these Guidelines comprise the NPS’ framework for responsible investment and the exercise of shareholder rights.
The Guidelines set out 10 key principles with respect to shareholder, board of director and audit organization issues, as summarized below.
1. Shareholders
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Key Principle 1: Shareholders should be provided with timely and sufficient information to exercise their rights and should be able to properly enjoy such rights. In this regard, companies shall make every effort to: (i) avoid schedule conflicts with other listed companies to hold general shareholders’ meetings; (ii) implement written and electronic voting systems; (iii) disclose the results of general shareholders’ meetings in sufficient detail (including the ratio of votes for each agenda item and the details of voting results); and (iv) disclose detailed information of disclosure letters submitted by certain institutional investors as part of the trustees’ responsibilities (as well as the status of handling the same) so that all shareholders have a clear idea of pending company issues.
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Key Principle 2: Shareholders should be granted equitable voting rights (depending on their type and number of shares) and companies should establish a system to provide information to shareholders in a fair manner. In this regard, the interests of minority shareholders should not be undermined even when companies reorganize their capital structures by issuing new shares, restructure or become holding companies through spin-off or merger. Internal transactions must be processed in a fair manner.
2. Boards of Directors
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Key Principle 3: Boards of directors should establish management goals and strategies as appropriate for the benefit of companies and shareholders and effectively monitor management. Boards should establish and operate succession planning for their CEOs (including in the event of emergency situations), effectively develop and run internal control systems (including risk management, compliance, internal accounting and information disclosure systems), and continually improve and supplement those systems. Companies should actively communicate with their shareholders and other key stakeholders about changes in the companies in relation to environment, society, and governance structures which are the factors of responsible investment.
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Key Principle 4: Boards of directors should be organized to ensure efficient decision-making and management oversight, and the criteria for appointing directors should be transparent and reflect a variety of shareholders’ opinions. In this regard, the Guidelines suggest detailed guidelines on the independence of boards’ composition and separation of representative directors and chairmen of board.
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Key Principle 5: Outside directors should be able to independently engage in making critical corporate management decisions and monitor and support management as members of the board.
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Key Principle 6: In order to encourage directors to perform their duties in good faith, their acts must be fairly evaluated, and their remuneration and reappointment must be determined and approved based on the results of such evaluations.
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Key Principle 7: Boards of directors should be operated in as efficient and reasonable a manner as possible to promote rational decision-making in furtherance of the best interests of companies and their shareholders.
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Key Principle 8: Boards of directors should establish internal committees required to efficiently perform specific functions and roles.
3. Audit Organizations
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Key Principle 9: Internal audit organizations, such as audit committees and auditors, should faithfully perform their auditing duties independently from management and controlling shareholders, and the details of their main activities should be publicly disclosed.
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Key Principle 10: To ensure shareholder and other stakeholder trust in company accounting information, external auditors should perform auditing functions independently from audited companies, their management and controlling shareholders.
Given that the NPS is investing in a number of large listed companies in Korea, the Guidelines are expected to have a significant impact on the governance of domestic listed companies and capital markets in general. We encourage Korean listed companies to refer the Guidelines in operating general shareholders’ meetings and board meetings, as well as strengthening corporate internal control through audit committees and auditors.
