The NPS, strengthen management intervention of companies

National Pension Fund Management Committee decides on 'active shareholder activity guidelines'

Responsible activities such as proposals for national pension shareholders when corporate value is compromised

Concerns about “squeeze management” in business, more than 5% stake in 22 national pensions including Dong-A ST

The nation's largest institutional investor, the National Pension Service declared that it will actively participate in management of investment companies.

 

Starting next year, the possibility of exercising shareholder rights, such as dismissal of directors, will be raised against “bad companies” that violate laws such as embezzlement and resignation.

 

Pharmaceutical bio companies with high stakes in the national pension will also be affected by their participation in national pension management.

 

The National Pension Fund Management Committee held the ninth meeting in 2019 to deliberate and decide on the Guidelines for Active Shareholder Activities.

 

This is a follow-up to the Principles for National Pension Depositary Responsibilities implemented in July last year.

 

The stewardship code is an action guide for the institutional investors, such as pension funds, to faithfully fulfill the responsibilities of trustees, including shareholder activities, for the benefit of the citizens.

 

The active shareholder activity guideline is based on the decision and implementation of the shareholder proposal by the Fund Management Committee within the scope of the Commercial Law and Capital Markets Act.

 

If a pension-invested company undermines corporate value such as embezzlement or labor, and the company does not make efforts to improve it, the national pension may offer a shareholder proposal such as moving away from the company or changing its articles of incorporation.

 

Active pension shareholders' activities are divided into key management issues and unexpected concerns.

 

Key management issues include corporate dividend policy, adequacy of executive remuneration limits, embezzlement and directions, such as damage to corporate value, violation of shareholders' rights, and continuous exercise of voting rights.

 

The National Pension Service will carry out four levels of trustee responsibility activities: private conversation target companies, private key management companies, public key management companies, and shareholder proposals.

 

Unforeseen issues are those that may cause unforeseen damages to corporate values or shareholder rights in relation to the environment, society and governance.

 

Large-scale industrial accidents or severe environmental damage are included.

 

Unexpected concerns go through two stages: selection of companies to be closed talks and shareholder proposals.

 

Neung-hoo Park, The Minister of Health and Welfare said, “The main purpose of the 'Active Shareholder Activities Guidelines' that the National Pension Plan is to create is not to intervene or interfere with corporate management, and it is to improve the profitability of the National Pension System by solving problems through dialogue with companies to increase corporate value and shareholder value”.

 

However, the business community criticizes the national pension as a management intervention.

 

This is because, depending on the will of the National Pension, there is more room to interfere with management such as the removal of directors and the change of articles of incorporation.

 

The Federation of Korean Industries criticized on the day, “If the national pension increases involvement in corporate management and interference with corporate governance, the business activities of companies that have to concentrate on entering new industries and creating jobs will be reduced, and the vitality of our economy will be lost”.

 

As of the end of 2018, national pension investment pharmaceutical bio companies and their shareholdings (Source: The National Pension Service)

Pharmaceutical bio companies with high stakes in the National Pension will also be affected by management intervention.

 

As of the end of last year, there are eight pharmaceutical bio companies with more than 10% of the national pension, including Dong-A Socio Holdings, Dong-A ST, Kolmar Korea, Chong Kun Dang, SK Chemicals, Suheung, Yuhan, and Hanmi Pharmaceutical.

 

A total of 22 pharmaceutical bio companies have more than 5% of the national pension.

 

Dong-A Socio Holdings and Dong-A ST, who have the largest stake in the national pension, have faced opposition from the national pension.

 

In 2013, when Dong-A Pharm attempted to split the company into a holding company system, the National Pension Service, which owns a 9.5% stake, then voted against it.

 

The split of the old Dong-A Pharmaceutical is divided into the holding company 'Dong-A Socio Holdings', 'Dong-A ST' in charge of specialty medicines, and 'Dong-A Pharmaceutical', including the general medicine business division, including Bacchus.

 

Dong-A Pharm is a wholly owned subsidiary of the holding company.

 

At the time, the National Pension Service rejected the agenda item, saying, “Because the Bacchus division, which earns 50% of its operating profit from Dong-A Pharm's cash cows, becomes a privately held company, there is a risk of losing shareholder value, despite opposition from the three major shareholders pensions, Dong-A Pharm managed to split 73.38% of the shares in the extraordinary shareholders' meeting”.

 

However, it is also observed that major pharmaceutical bio companies, such as large pharmaceutical companies, have stable control through the change of holding company structure, so that the active shareholder activity of the National Pension will not be a threat.

 

In March, the National Pension Service voted against some agenda at the regular shareholders' meetings of seven pharmaceutical bio companies, including Dong-A ST, Dong-A Socio Holdings, Hanmi Pharmaceutical, Samsung BioLogics, Celltrion, and Seoheung, but all passed by the original plan.