Corporate Cultural Governance

It is a well known fact that Korean companies are valued at approximately 20% less than their Asian counterparts. In terms of corporate governance, South Korea was ranked 29th by Governance Metrics International among 39 countries in 2010. Consequently, poor corporate governance has been identified as one of the significant contributing factors to the discounted values of Korean companies aka the ‘Korean Discount’.

From a cultural point of view, how does one go about implementing western styled corporate governance practices in a country where there is a lack of the fiduciary concept, a dislike of confrontation and relatively youthful capital markets?

Can western styled corporate governance practices be adapted to allow for cultural diversity and still achieve the same outcomes?

Allianz Global investors in South Korea set up a governance fund in 2006 with a mandate from the state-run National Pension Fund. It now boasts one of the highest returns among equity funds in Korea, outperforming the country’s benchmark Kospi stock index by more than 10 percentage points a year. The fund invests in mostly small and medium-sized companies with a market capitalisation of below Won3tn ($2.59bn), where it can gain the clout to influence the management by taking a 5-15 per cent stake. It usually holds the stake for two to three years and tries to raise shareholder value by inducing lasting corporate governance changes.

Wonil Lee, head of Allianz Global Investors in South Korea, is a strong believer that better corporate governance can drive up business performance and investor returns. Instead of a confrontational approach, he engages with companies in a way that is more in tune with Korean culture and practices, which he believes is more effective.“I try to educate the owners and improve their practices through relational engagement,” he says. “Our capital markets and the institutional environment are not advanced enough to embrace aggressive engagement yet.”

“The biggest problem of our listed companies is that owners think the companies belong to them. So they often make management decisions for themselves, not for the general shareholders. This clearly undercuts western philosophy which calls for the board to make decisions in favour of, and protect the rights and interests of all stakeholders. My job is to guard against such practice,” says Mr Lee. Most Korean companies are still family controlled, with owners wielding undue influence over management, often with small equity stakes. About 90 per cent of Korea’s listed companies are owned by their founding families, compared with about 20 per cent in the US.

Mr Lee learned the importance of relational engagement from western activist funds’ failed crack at Japan. The Children’s Investment Fund, stirred controversy in Japan in a shareholder campaign for change at the utility J-Power four years ago, but eventually had to sell its 9.9 per cent stake back to the company at a Y12.5bn ($158m) loss. Steel Partners also sold its 7.8 per cent stake in Sapporo Holdings 2010 after failing to implement changes at the struggling brewer.“Shareholder activism should be done by local managers who understand local culture. Otherwise, it is not easy to win,” he says.

However, such a soft approach does not often work in the face of resistance by entrenched management. In the worst cases, Mr Lee resorts to shareholder proposal and proxy voting to force change at companies. Most Korean institutional investors remain passive in exercising their voting rights, ignoring their fiduciary duty to protect the interests of their investors and casting dissenting votes only in exceptional cases. Mr Lee says he will not give up his fight because corporate Korea needs better governance to strengthen competitiveness.

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