Views on the integrity of global capital markets
04 June 2015

CorpGov Roundup: Chaebol Governance Challenging, India Stewardship Code in Its Infancy

Should long-term share ownership be rewarded? A European Parliament committee says yes. South Korea’s chaebol governance structure takes one step forward, one step back with regard to minority stakeholders’ interests. India is in the early days of considering a stewardship code. This, and more, is in our May CorpGov Roundup.

European Union

In early May the European Parliament’s legal affairs committee voted by a count of 13 to 11 to change existing rules to incentivize long-term share ownership. Critics of the measure feel that equal rights for all shareholders are sacrosanct and should not be compromised.

Discussion on rewards for long-term shareholders has tended to focus on double-voting rights for those who hold shares for two years — see France’s recently adopted Florange Law — but rewards such as tax incentives, loyalty dividends, or loyalty shares have also been discussed.

For such a law to take effect, a joint agreement is needed between member states and the European Parliament. It is therefore expected that the draft law may still change some before it will take effect.

Canada

Canada has entered the fray over proxy access.

On 21 May the Canadian Coalition for Good Governance (CCGG) published a policy statement endorsing proxy access for Canadian companies. While most of the shareowner proposals in the United States this year have endorsed proxy access for shareowners who hold 3% of shares for three years, the CCGG proposal calls for a 5% share for small corporate issuers. The proposal calls for enhanced engagement between issuers and investors as well as calling for investors to state publicly that they have no intent to seek control of a company when they use proxy access.

India

The International Advisory Board (IAB) of the Securities and Exchange Board of India (SEBI) recently recommended that SEBI coordinate with other authorities to introduce a stewardship code (along the lines of the UK Stewardship Code) based on a “comply or explain” framework. This is early days for such an effort, and there has not been much talk of an Indian stewardship code beyond the recommendation of the IAB. Seven other stewardship codes are now in existence, from the UK code to the most recently adopted Japanese stewardship code.

Japan

It was only a matter of time. Investors are looking to cash in on the “perceived” improvement in Japanese corporate governance. Developments such as the modest improvements in corporate governance standards and Japan’s recent stewardship code have spurred renewed interest in Japanese companies — with the assumption that governance is improving.

The Matthews Japan Fund launched on 30 April citing the improvement in corporate governance in Japan as one of the main drivers behind the fund.

Not so fast, said The Economist magazine in its 16 May issue, using the governance issues at two blue chip Japanese firms, Sharp and Toshiba, to show how far corporate governance needs to improve in order to provide shareowners the comfort they can expect in other developed markets.

South Korea

Type “chaebol” into your favorite search engine and you will get something like this:

A chaebol (Korean: 재벌, from chae “wealth or property” + bol “faction or clan”) is a South Korean form of business conglomerate. They are typically global multinationals owning numerous international enterprises, controlled by a chairman who has power over all the operations (from Wikipedia).

The South Korean chaebol system has long been the scourge of those who push for high corporate governance standards. Critics of the chaebol system hold that the rights of minority shareowners are overrun by these family conglomerates that often pay little heed to governance best practices.

Over the past month we have seen one step forward and one step back by two South Korean companies that help outside investors better understand the challenges of chaebol governance.

On the positive side, the South Korean carmaker Hyundai recently agreed to set up a special board committee to protect the interests of minority shareholders. The committee is to include four current outside directors. The planned committee came about because investors raised concerns after the company paid triple of the assessed value for a plot of land last year.

On the negative side, Samsung recently increased controlling shareholder Jay Y. Lee’s stake in the company, raising concerns in the governance community that one of South Korea’s largest chaebols is moving further away from strong minority shareowner rights. A recent deal in which Samsung’s holding company purchased one of Samsung’s subsidiaries will further consolidate the Lee family’s control over the company. The Samsung chaebol is one of the country’s largest and includes one of the most mind-numbing ownership structures you will ever see. Take a look at this diagram of the Samsung ownership structure and then explain it to me. Seriously — use the comments section below. I’m waiting.

United Kingdom

A recent report by the UK-based organization ShareAction states that many of the world’s best-known asset managers side too often with company management on controversial votes at company annual general meetings (AGMs), even when there is a clear economically defensible case for challenging company management on a vote. ShareAction compared the voting records of the 33 largest UK asset managers and global asset managers on a host of controversial votes made at a year’s worth of annual general meetings.


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Image Credit: iStockphoto.com: YinYang

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

2 thoughts on “CorpGov Roundup: Chaebol Governance Challenging, India Stewardship Code in Its Infancy”

  1. An inverse relationship between the tax rate and ownership time would one way to reward long-term ownership.

    Of course, governments would rather expand by politicizing property rights.

    1. Matt Orsagh, CFA, CIPM says:

      Thank you for your comment Alpay,

      There have been discussions about incentivizing long-term holdings through taxation, for example lowering capital gains on securities held for a longer timeframe. However, many governments that have looked to reward long-term holdings have opted for extra voting rights.

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