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Korea’s Stewardship Code: How Principles for Responsible Investment are Impacting Shareholder Engagement in Corporate Governance in Korea

2021.04.05

As seen by the global rise of shareholder activism, socially responsible investment (SRI), and environmental, social and governance (ESG) considerations in investment decisions, investors no longer look merely to returns to value their investments; they are increasingly aligning their financial goals with their social values and conscience. Investors are also taking their values-driven investment decisions a step further, by actively seeking to implement their SRI and ESG goals through increased shareholder engagement in the corporate governance of their investment targets. 
 
Shareholder engagement in corporate governance has also gained traction in Korea. A concrete manifestation of this trend can be seen in Korea’s Stewardship Code (the “Stewardship Code”), which was introduced in December 2016 to provide guiding principles on responsible investment to institutional investors willing to adopt them. There are now 150 domestic and foreign institutional investors1) that have adopted the Stewardship Code – most notably, the National Pension Service of Korea (“NPS”), Korea’s largest institutional investor and the 3rd largest pension fund in the world.  
 
The Stewardship Code is a ‘soft’ law – a voluntary code of seven "Principles on Stewardship Responsibility of Institutional Investors" – recommended by the Korea Corporate Governance Service,2) as follows: 
 
Principle 1: Establishment and disclosure of a clear fiduciary responsibility policy. 
Principle 2: Establishment and disclosure of an effective and clear conflicts of interest policy.  
Principle 3: Regular monitoring of portfolio investments (i.e. investee companies).  
Principle 4: Establishment of internal guidelines on stewardship activities.  
Principle 5: Establishment and disclosure of a voting policy and voting records.  
Principle 6: Regular reporting of voting and stewardship activities.  
Principle 7: Build-up of capabilities and expertise.  
 
Participating institutional investors may adopt some or all of the above principles in exercising their voting and other rights as investors; and since the Stewardship Code is voluntary, investors are free not to adopt any principles, as long as they provide justification for their refusal to comply. The Stewardship Code calls on institutional investors to disclose their internal policies for responsible investment, detailing the principles and methods for achievement of their investment goals. Such policies should envisage shareholder engagement through various means, from submission of questionnaires or opinion letters, convening meetings with boards, and participating in shareholders meetings, to issuing press releases and filing class action suits, among others. The Stewardship Code also asks investors to establish procedures to monitor their portfolio investments, considering both financial and non-financial data, including ESG-related data. The Stewardship Code further encourages the preparation of clear voting guidelines with differentiated standards and strategies. Finally, institutional investors are asked to regularly report on their monitoring or engagement activities to ultimately enhance their capabilities and expertise in ESG and responsible investment. 
 
While it is still too early to measure its full impact on corporate governance in Korea, it does appear that the Stewardship Code is changing some outcomes of shareholders meetings in Korean companies. For example, the NPS announced its decision to adopt the Stewardship Code in 2018 to increase transparency in its exercise of voting rights and demonstrate its commitment to responsible investment as an institutional investor. Before the NPS’ adoption of the Stewardship Code, the NPS had a negative voting record of about 10%; however, this has now doubled to about 20%.3) In 2019, the NPS took a historical step in voting against the proposal to extend the board term of the CEO and Chairman of Korean Air. This took place at the general meeting of Korean Air’s shareholders, which was held soon after NPS’ adoption of the Stewardship Code and a series of scandals involving allegations of abuses of power, tax fraud and embezzlement by the Chairman and his family members. It was the first time the Chairman of a Korean chaebol was ousted by its shareholders. 
 
NPS and other institutional investors are continuing to establish and announce plans for more active exercise of their shareholder rights. For example, in 2019, the NPS issued detailed shareholder voting guidelines based on the Stewardship Code for its external investment managers, and is currently reviewing the application of ESG-related risk considerations in its corporate investment decisions, which it has already commenced doing in its bond and securities investments. According to industry experts, the NPS’ responsible investment roadmap should have both direct and indirect impact on other institutions and market participants’ ESG considerations, given the NPS’ size and influence in Korea. 
 
With NPS and other institutional investors becoming more active at shareholders meetings, not only Korean but also foreign investors in Korean companies are paying attention to the developments in shareholder activism and responsible investment in Korea. As the financial, political and social landscape in Korea evolves to shed more positive light on shareholder engagement through increased transparency and sustainability, the Korean market may become more attractive and open to minority shareholders, including foreign investors, regardless of their status or size. 
 
However, given the competing views in Korea on the role of shareholders in corporate governance – particularly the concern over “good” vs. “bad” activism (and the concern that certain institutional investors’ votes could fall prey to the changing political winds in Korea)4)  – it remains to be seen how effective the Stewardship Code will be in fostering the good kind of shareholder engagement and activism. Moreover, it may still be too early to determine whether the Stewardship Code is having a material impact on the investment environment in the country.5) The true test will be time. 
 
In the meantime, with shareholder engagement in corporate governance becoming more common, companies should pay closer attention to managing shareholder relations. Maintaining effective and regular communication and positive relationships with domestic and foreign shareholders is becoming increasingly crucial. Shareholders desire assurance that boards are properly managing risks and other issues that could impair performance. Shareholders can be instrumental in alerting boards to serious issues early enough to prevent the perception of decreased value. Accordingly, communication that takes place early and often between boards and shareholders will keep boards apprised of any management direction that shareholders view as not in their best interests. 
 
 
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1)  See Korea Stewardship Code, korea corporate governance service, http://sc.cgs.or.kr/eng/main/main.jsp (last visited Mar. 31, 2021). In addition to the NPS, participating institutional investors include Korea’s next largest pension funds, the Teacher’s Pension and Government Employees Pension Service, as well as Korean and foreign asset management companies, insurers, proxy advisors, investment advisory firms and private investors. 
2)  The Korea Corporate Governance Service (the “KCGS”) is a non-profit organization established under the Korean Commercial Code. It establishes major codes for capital markets development, performs ESG evaluations, provides agenda analysis services and conducts policy research in furtherance of public interests. The Korea Exchange, Korea Securities Depository, Korea Securities Finance Corp., Korea Financial Investment Association, Korean Institute of Certified Public Accountants, Korea Listed Companies Association and KOSDAQ are among its member organizations. 
3)  Lee Jeong-hŭn, Elements that will shake up general meeting of shareholders in 2020, hankyung (Mar. 10, 2020), https://magazine.hankyung.com/business/article/202003109297b. 
4)  For example, there are competing views on the NPS’ commitment to the Korea Stewardship Code; proponents argue that the adoption of the Stewardship Code principles induces NPS’ external investment managers to act as responsible investors and enhance its portfolio valuations; critics argue that since the NPS is controlled by the government, its shareholder engagement activities may be susceptible to distortion and manipulation by political influence and connections, leading to a reduction in its portfolio valuations. 
5)  For example, according to recent Korean media reports, an interesting feature of 2021's proxy season was that opinions from the NPS had limited influence on most investors. The NPS voted against over 60 agenda items of 45 listed companies, but none of the proposed agenda items ultimately rejected. See Park Jae-hyuk, Online Shareholder Activism Becomes New Normal, THE KOREA TIMES (Mar. 30, 2021), https://www.koreatimes.co.kr/www/biz/2021/03/175_306350.html?gonw.

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