[In-Depth Review] Stewardship Code Adoption and Institutional Investors' Shareholder Engagement Activities

Ansanghee, Head of Responsible Investment Center, Daishin Economic Research Institute

Since 2016, governance issues of domestic listed companies have rapidly spread. Since last year, ESG (Environmental, Social, and Governance) issues have been quickly permeating companies and investors. As interest in non-financial factors of companies has concentrated in domestic and international financial markets, there is a tendency to focus on shareholder engagement activities such as exercising voting rights by not only the domestic National Pension Service but also foreign institutional investors. Additionally, it has been about five years since Korea’s Stewardship Code, a principle concerning the fiduciary duty of domestic institutional investors, was established. From its introduction in 2016 to recently, the exercise of voting rights by institutional investors provides insight into their responsible investment practices.

First, the proportion of opposition to shareholder proposals by institutional investors affiliated with corporate groups was high (40.0%), and the rejection rate of agenda items at regular shareholders’ meetings was also high (78.3%). At this year’s regular shareholders’ meetings of listed companies, the average opposition rate to shareholder proposals by 22 institutional investors who exercised voting rights was 29.8%. Among them, institutional investors affiliated with corporate groups (7 companies) exercised opposition voting rights on a total of 24 cases, accounting for 40.0% of all oppositions (60 cases). Therefore, through opposition voting rights on shareholder proposals by this group, 78.3% of agenda items were rejected at the actual regular shareholders’ meetings, exerting absolute influence.

Similar voting behavior was observed in last year’s regular shareholders’ meetings. At that time, institutional investors affiliated with corporate groups (8 companies) accounted for 50.5% of opposition voting rights (45 cases) against shareholder proposals. The rejection rate of agenda items related to shareholder proposals by this group was also high at 75.0%. This is significantly higher compared to the average opposition rate of institutional investors on agenda items over the past four years since 2018 (mid-4%), the opposition rate to shareholder proposals by institutional investors (29.8%), and the opposition voting rate on all agenda items by institutional investors (around 4%). Considering the growing influence of institutional investors affiliated with corporate groups in exercising voting rights on shareholder proposals, efforts to secure expertise in analyzing shareholders’ meeting agendas are urgently needed.

Recently, due to the introduction of the Stewardship Code, domestic institutional investors are required to engage in ‘appropriate shareholder activities’ such as regular monitoring of investee companies. Furthermore, shareholder activities related to ESG investment strategies, which have recently been spreading mainly among foreign institutional investors, are becoming more active than before.

Among major overseas pension funds, the U.S. CalPERS, NYSCRF, and Canada’s CPPIB have selected key issues (five core items) of shareholder engagement aligned with each fund’s investment philosophy. These items cover the entire ESG spectrum, including governance such as boards of directors, environment such as climate change, and social aspects such as human rights. Notably, CalPERS even includes ‘ESG-related corporate disclosures’ as a key issue.

The world’s largest asset manager, BlackRock, reported 55 cases of opposing related executive proposals due to insufficient climate disclosures and 6 cases of opposing management on environmental shareholder proposals from July 2019 to June 2020. If investee companies lack sustainability management report disclosures, BlackRock exercised opposition voting rights on the relevant executive agenda at shareholders’ meetings.

Including the Stewardship Code, the institutional environment allowing institutional investors to exercise voting rights and engage in shareholder activities with fiduciary duty has improved compared to before. In this situation, domestic institutional investors appear to be insufficiently prepared for the sophisticated shareholder activities of foreign institutional investors. It seems necessary for domestic institutional investors to conduct their own research or seek advice from external professional advisory institutions.

This content was produced with the assistance of AI translation services.