In January 2019, the South Korean private equity fund Korea Corporate Governance Improvement (KCGI) took a substantial stake in Hanjin Kal, the parent company of Korea Airlines. It has since raised its stake to become the second-largest shareholder.
The Seoul-based fund, one of the most notable activist shareholders in the country, isn’t interested in taking over Hanjin. KCGI, whose mission as an activist is to improve corporate governance at the companies it invests in, instead suggested that Hanjin improve its credit rating by reducing its debt-to-equity ratio, sell undervalued assets as part of improving its business structure, dispose of unprofitable subsidiaries, and establish corporate governance, remuneration and nominations committees.
While KCGI hasn’t yet achieved all its goals, the fund has been successful in convincing the board to establish the governance and remuneration committees. And the governance committee is to conduct a feasibility study on management issues directly related to shareholder value. And the board has pledged that the remuneration committee will be composed of non-executive directors.
Shareholder influence of this type would never even have been considered in Korea before the 1990s. But in 1997, driven by the return of foreign capital for investment in South Korean companies, the first moves by shareholder activists took place.
All over Asia, shareholder activism puts spotlight on boards
“Today, a growing number of activist shareholders are flexing their muscles to drive positive change at companies, which many expect will end up improving corporate governance of conglomerates and maximizing shareholder value,” writes Seoul-based NH Investment & Securities researcher Kim Dong-yang.
“A series of activist shareholders’ moves will pressure firms not only to raise dividends and oust scandalous management but also to ultimately improve their governance,” he adds.
In fact, shareholder activist campaigns have increased in Asia to 119 in 2018 from about 60 in 2015, and the pace is accelerating, according to the consultancy Activist Insight.
“All over Asia, the spotlight is on boards,” warn research analysts at Brunswick. “A failure to spot the warning signs, or to ensure an appropriate –and prompt – board response to activist concerns, can destroy individual reputations as well as company value.”
In the past, complex ownership structures, such as cross-shareholding, government participation and family control insulated most Asian companies from activist pressure. But now, these very factors are the ones Asian shareholder activists are taking aim at. And they are receiving increasing support as institutional shareholders press Asian companies for greater transparency and accountability, as Brunswick notes.
“Regulators are helping drive change in the region by enacting reform geared towards the adoption of international best practices in investor engagement and corporate governance. A series of recently adopted corporate governance and stewardship codes, as well as listing rule amendments and others, are fueling activism by encouraging investors to be more engaged, and companies to be more responsive and transparent,” comments JP Morgan in a recent report.
And an increased focus on minority shareholders has initiated a shift away from a more traditional stakeholder model in a number of countries, increasing pressure on issuers to maximize value for shareholders above all else, the report continues.
Shift from foreign to domestic activists
In its early years, much of Asian shareholder activism was driven by well-known foreign firms, like Elliot Management or Third Point or Value Act Capital.
A good example of this is the success Value Act has seen in Japan at electronics manufacturer Olympus.
In January, the US-based activist hedge fund forced Olympus to accept three foreign board directors, including one from Value Act itself. It was the culmination of a battle waged behind the scenes for almost two years, and it coincided with an announcement that Hiroyuki Sasa, the long-serving president would step down.
But, today, domestic activists have picked up the mantle. “Despite the media attention given to high-profile international hedge fund activists when they target Asian issuers, most activist activity in Asia is driven by domestic investors,” JP Morgan points out.
With the emergence of specialist funds, activism as an asset class continues to mature in Asia; and while a significant number of campaigns are still being initiated by occasional dissidents – usually existing long term investors, frequently individuals or concerned shareholder groups – activity is expected to be increasingly driven by dedicated funds pursuing activism as a primary strategy. KCGI is a good example of this trend.
Another, in Singapore, for instance, is the Securities Investor Association of Singapore (SIAS), established to develop an educated, engaged and empowered investment community. SIAS aims to advocate for sustainable and stable stakeholder relationships in the investment community; safeguard and protect investor rights; empower investors through education and timely information; and promote fair and transparent corporate governance standards, regulations and practices.
“Domestic institutional investors are taking their cue from their global counterparts, waking up to the idea that they can drive value creation at their portfolio companies by being vocal with their demands for change, further increasing the pressure on Asian issuers. Finally, new regulation encouraging shareholders to engage with their portfolio companies, as well as corporate governance reforms, further propel an activism trend that already has significant momentum,” JP Morgan writes.
Asian shareholders now demand that companies listen and engage, and take constructive steps to improve governance. Dismissive boards and management teams will face increasing pressure and harsh criticism if they refuse to do so. All of which makes the need for a solid technology support for governance critically important.
Diligent Governance Cloud provides support for good governance
To maintain a standard of governance that shareholder activists respect, Diligent’s Governance Cloud provides full-scale support. With a wealth of applications that track and help resolve governance issues, like benchmarking executive pay with Diligent’s Nominations & Governance module.
With so much at stake and so much to oversee, NFPs need the assistance of electronic board management systems to help them manage information and communications better. Governance Cloud boasts programmes that address all director needs, including the board portal, secure messaging, minutes programme, board evaluations, Conflict-of-Interest questionnaires and entity management software programmes. Having a fully integrated Enterprise Governance Management system will aid board directors in developing governance frameworks that work for the benefit of the board, the managers, shareholders and stakeholders.
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