"Korea's stewardship code faces 'rational apathy' from institutional investors."
Concerns have been raised at a ruling party-hosted National Assembly discussion on the stewardship code, which marks its 9th year of implementation, about it being virtually ineffective. Experts collectively stated that the fundamental limitations preventing major institutional investors like the National Pension Service from actively engaging in corporate management need to be improved. The Democratic Party plans to push for legislation to introduce advisory shareholder proposals during this regular National Assembly session.
The stewardship code (stewardship code, fiduciary responsibility principle) is a guideline that encourages institutional investors such as pension funds and asset management firms to actively participate as shareholders in corporate decision-making to enhance corporate value and long-term revenue and ensure transparency in reporting to the public or clients.
On the 1st, the Democratic Party's KOSPI 5000 Special Committee and lawmaker Kim Nam-keun held a roundtable discussion in the National Assembly titled 'Exploring Ways to Improve and Activate the Stewardship Code.' Experts from the National Pension Service, asset management firms, research institutions, and financial authorities participated to discuss the current status and improvement tasks of the system.
Attendees emphasized that "the stewardship code must establish itself as a practical system." They specifically pointed to tasks such as the introduction of advisory shareholder proposals, strengthening oversight and support by financial authorities, and expanding disclosure and reporting obligations.
◇"Korea's stewardship code and institutional investors' apathy"
Lee Seong-won, vice president of Truston Asset Management, shared experiences from private asset management firms while pointing out the institutional constraints faced by institutional investors.
He noted, "Korea's stewardship code confronts institutional investors' 'rational apathy,' adding that institutional investors are generally bound to various transaction relationships, and those belonging to financial holding companies or large corporations are under intangible pressure from holding companies or affiliates, which limits their ability to engage freely as shareholders."
The stewardship code was introduced in 2016 with the aim of protecting the interests of minority shareholders, but criticism has been consistently raised over its ineffectiveness, as institutional investors rarely vote against corporate decisions, citing concerns over management interference.
Hwang Hyun-young, a research fellow at the Capital Market Institute, introduced examples from Japan and the UK. Japan, after its introduction in 2014, has undergone three revisions to strengthen the obligation of institutional investors to engage in corporate dialogue, while the UK has established an 'investor reporting framework' that fully discloses annual reports of participating institutions. He explained that especially in the 2020 revision, the 'reflection of ESG factors' was explicitly stated as part of the membership requirements, positioning it as a leader in global standards.
Lee Seung-geun, head of the National Pension Fund Management Office, pointed out that although the National Pension Service introduced the stewardship code in 2018 to strengthen shareholder rights, it is difficult to discern the true purpose behind corporations' vague disclosures regarding mergers and capital increases that serve to bolster the control of dominant shareholders.
In response, Kim Nam-keun, who presided over the roundtable, criticized, "There have been instances where the Japan Government Pension Investment Fund (GPIF) changed the governance structures of companies where independent directors make up less than one-third in conjunction with other institutional investors," and asked, "Are there specific companies where the National Pension Service has succeeded in changing governance structures in collaboration with other institutional investors?" He added, "Discussing the results of the past nine years in vague terms makes it impossible to evaluate or propose improvements."
◇Experts say that advisory shareholder proposals and providing incentives are necessary.
Experts suggested that to overcome institutional limitations, a combination of 'carrots and sticks' is needed.
Research fellow Hwang proposed the need to strengthen the reporting and disclosure system and clarify the supervisory authority of financial authorities while emphasizing the necessity of a procedure to exclude poorly performing institutions while rewarding outstanding participating institutions.
The vice president also emphasized, "Incentives should be given to institutions that perform well, and corrective orders should be imposed on inadequate institutions. If they do not make corrections for a certain period, steps should be taken to withdraw from the stewardship code."
Noh Jong-hwa, a lawyer at the Economic Reform Institute, suggested amending laws to lower the threshold for shareholder proposals. He stated, "Institutional investors, such as the National Pension Service, face significant practical limitations due to issues like equity requirements and the scope of shareholder proposals in actively engaging in such activities in Korea. We need to introduce 'advisory shareholder proposals' that are largely unrestricted in scope, similar to the United States," adding that the 'advisory shareholder proposals' were also part of President Lee Jae-myung's election pledge.
◇Democratic Party discusses the introduction of the advisory shareholder proposal system.
The ruling party and government agreed on the limitations of the current stewardship code system and promised legislative improvements.
Director Choi Chi-yeon of the Financial Services Commission stated, "The stewardship code has played a positive role in improving corporate governance," adding that detailed measures such as periodic checks on the implementation of the stewardship code in collaboration with major institutions, including pension funds, need to be established.
Based on the discussions held on that day, the Democratic Party plans to expand the application of the stewardship code and push for related legal amendments, including the introduction of advisory shareholder proposals.
O Gi-hyung, lawmaker from the Democratic Party and chairperson of the KOSPI 5000 Special Committee, stated, "The driving force behind Japan's successful value-up policy was improvements in governance and the stewardship code, and the crux was recognizing shareholders as genuine dialogue partners by the management."
He said, "It is crucial not only to rely on the goodwill of management to improve the system but also for both institutional and individual investors to directly participate, speak up, and create channels for dialogue in an uneven playing field. We will continue to supplement related matters."
He expressed his intention to discuss tasks such as the introduction of the advisory shareholder proposal system, selection of supervisory subjects, and design of incentive structures with the authorities.