Revenge of the shareholders: Korean firms on the spot

Posted in Koreas | 12-Sep-06 | Author: Choe Sang-Hun| Source: International Herald Tribune

Businessmen walk past a cigarette machine of KT&G in Seoul August 28, 2006.

SEOUL For years, Daehan Synthetic Fiber, a textile subsidiary of Taekwang Group of South Korea, was known as the hermit.

On most days, fewer than 1,000 of its 1.3 million Seoul-listed shares were traded on the stock exchange. It did not have a Web site. The parent conglomerate's 44-year-old chairman, Lee Ho Jin, never spoke to the media.

That tranquility was shattered in August when the invaders came - insurgent shareholders, with media in tow, intent on shaming the company into transparency.

Suddenly, Daehan was being asked some uncomfortable questions. Why was a textile company investing so much money in the cable TV and financial services units of the parent firm? Had the details of these connected transactions been fully declared? Was the purpose of these investments to benefit Daehan shareholders - or to advance Lee's family empire?

If the grilling sounds familiar, it should. The investors' group, Korea Corporate Governance Fund, appears to be riding the coattails of other corporate activists like Carl Icahn and the Dubai-based Sovereign Asset Management - foreign investors who barged their way into some of South Korea's largest corporate icons demanding greater accountability to shareholders, but ultimately conducting what many saw as an unfair raids on the companies.

By capitalizing on the momentum generated by Icahn and Sovereign, however, KCGF - advised by Jang Ha Sung, dean of Korea University's business school, and Kim Sun Woong, executive director of the Center for Good Corporate Governance, two of South Korea's best-known corporate activists - hopes to generate new traction for home-grown quests for stronger corporate governance.

So far, they admit to having few followers among domestic investors, although Kim said the fund planned more inside attacks at other opaque listed companies, in a bid to foster the emergence of other activist funds.

"If there are more funds like ours, we can create a theme in the market," said Kim. "We hope that our fund will play a trailblazer's role."

Analysts think the appearance of KCGF means that companies will now have to fend off corporate raiders not only from outside but also from inside South Korea. "Businesses are more likely to be careful and try to improve their management," said Park Duck Bae, an economist at Hyundai Research Institute. "This is positive."

In an Aug. 23 regulatory filing, KCGF said it had been buying Daehan shares since April, using money from unnamed foreign investors. Paying between 65,000 won and 70,000 won a share, KCGF had quietly amassed a 5.15 percent stake - entitling it to run for a board seat, file shareholder lawsuits and requisition inside company information.

Daehan's share price doubled in five days on the news, to 148,000 won, before tapering off. On Monday, the shares were up 5,000 won, or $5.22, or 3.77 percent, to close at 137,500 won.

Jang and Kim unveiled KCGF in April, collecting $120 million from foreign investors who, they say, saw a unique chance to profit from a credible corporate governance campaign. KCGF hired the New York-based Lazard Asset Management to manage the fund, but Kim and Jang help direct its activities in South Korea.

Jang and the civic group he leads, People's Solidarity for Participatory Democracy, have been working for nearly a decade to shine a spotlight on companies with low accountability. They built their reputations in the aftermath of the 1997 Asian financial crisis, which hit South Korea particularly hard, attacking murky accounting, insider dealings and other shady practices that they said allowed the families of big businesses to enrich themselves at the expense of minor shareholders.

But until KCGF's move on Daehan, wielding shareholder power from inside listed companies was a tactic employed exclusively by foreigners.

The Dubai-based Sovereign had waged a strident and ultimately very profitable war on the country's largest oil refiner, SK Corp. In the battle, it sought to oust SK Corp.'s chairman and chief executive, Chey Tae Won, who had been convicted in 2003 in a $1.3 billion accounting fraud.

The effort failed - Chey is still SK's chief executive - but Sovereign sold its SK stake for a gain of 800 billion won, or $835 million.

Icahn met with more success in his quest for greater returns to shareholders: After a long battle, Icahn and the Steel Partners hedge fund leader Warren Lichtenstein forced KT&G, the country's largest cigarette maker, to promise a $2.9 billion return to shareholders over the coming three years.

But he, too, used his entry to cash in, a move that embittered South Koreans against foreign raiders.

Icahn's group now appears poised to sell its stakes, which at current valuations would net it more than 180 billion won.

KCGF, by contrast, has no immediate plans to cash out.

"We are doing long-term investments," said Kim. "As time passes by, people will realize that there are big differences between us and the other funds."

Until the appearance of Sovereign and Icahn, shareholder conduct in South Korea was generally deferential and demure.

Corporate raids and hostile takeovers were alien concepts. Even powerful domestic banks and other institutional investors seldom used their stock ownership to pressure listed companies for change.

That is changing, albeit slowly. Although resistance is stiff, some in South Korea have welcomed shareholder activists as a promising new force for reform.

Han Duck Soo, the former finance minister, likened foreign investors such as Icahn to a "catfish in the pond" - alien predators that force bloated fish to swim faster or be eaten.

Nonetheless, nationalism still hampers the acceptance of shareholder activism in South Korea, even if the protagonists in KCGF happen to be Korean.

Critics are already calling Kim and Jang unwitting pawns of unscrupulous foreign investors.

"We don't see any difference between KCGF and the others like Icahn and Sovereign," said Jong Jong Nam, secretary general at Spec Watch Korea, which keeps close tabs on the activities of foreign funds in the country. "They all talk about enhancing corporate governance, but let's face it: What they want is quick bucks in the name of reform, not genuine reform."

Jang and Kim remain unapologetic about soliciting foreign money, saying outside capital constitutes a force independent of the country's powerful conglomerates and an agent for reform.

The activists say they have had limited success raising capital from domestic investors. Until that changes, they say, foreign money is a perfectly legitimate weapon with which to fight for change.

Some analysts, however, say shareholder activism, foreign or native, has limited ability to effect meaningful reform. Its most serious flaw lies in its focus on raising share values, said Kim Yong Ki, an expert at Samsung Economic Research Institute.

Shareholders are not the only stakeholders in South Korean companies, Kim points out. Should shareholder returns become the supreme goal, national well-being will deteriorate as businesses squeeze their workers and sacrifice research and development to give shareholders larger returns.