"Stewardship Code" to be Revised Within the Year... "Post-Evaluation and Penalties Needed"

Stewardship Code Development Seminar Held
Plans to Expand Scope and Coverage to Be Prepared Within the Year

Concerns have been raised that for the 'Stewardship Code,' established to encourage active voting rights exercise by institutional investors, to play a substantive role, the implementation activities of participating institutions must be evaluated retrospectively to provide rewards or penalties. There is also an urgent need for revisions such as expanding the asset classes beyond stocks and specifying non-financial information.

Kim So-young, Vice Chairman of the Financial Services Commission, attended the 'Stewardship Code Development Direction Seminar' held at the Bankers' Hall on the morning of the 5th and stated, "Since major countries such as the UK, Japan, Germany, and Singapore are revising their Stewardship Codes to strengthen the role of institutional investors, South Korea should also begin discussing the necessity of expanding the scope of fiduciary responsibility and target assets, as well as incorporating sustainability factors."

The seminar, hosted by the Korea ESG Standards Institute and sponsored by the Financial Services Commission, is regarded as a significant starting point for revising the Korean version of the Stewardship Code. The financial authorities plan to develop a Stewardship Code advancement plan within the year through public hearings and briefings in the second half of the year, starting with this seminar.

According to the Financial Services Commission, since the establishment of the Korean Stewardship Code, titled 'Principles on the Fiduciary Duty of Institutional Investors (December 2016),' the number of institutional investors who have joined by the end of last year has expanded to a total of 239, including the four major pension funds and 133 asset management companies. However, despite this quantitative increase in participation, there are ongoing criticisms that the exercise of voting rights remains at a formal level, rendering the system a 'mere facade.' Vice Chairman Kim also emphasized the need for revision, stating, "It is necessary to consider whether the current Stewardship Code, which maintains the form it had at its establishment in 2016, is suitable for the changed realities of the capital market."

At the seminar, Professor Kwak Jun-hee of Sogang University’s Department of Economics, who gave the first presentation, focused on overseas cases, particularly the UK, which is regarded as having introduced the most robust Stewardship Code. Professor Kwak explained, "In October 2019, the UK fully revised its Stewardship Code to incorporate sustainability factors, expand the asset classes beyond stocks, specify disclosure obligations for institutional investors, and emphasize improvements in internal governance."

He added, "Subsequently, countries such as Japan, Germany, Canada, Taiwan, and Singapore referred to this revision," and argued, "South Korea should also consider revising the code to reflect domestic circumstances by expanding the applicable asset classes from listed stocks to unlisted stocks, bonds, etc., and by specifying non-financial information." He further stated that in addition to mandating the publication of implementation reports at least once a year, measures to enhance effectiveness such as presenting best practices and providing benefits to excellent participating institutions should be implemented simultaneously. Looking at overseas cases, Australia, Japan, Germany, and South Africa have already expanded their applicable asset classes. Australia, Japan, and Germany also mandate the disclosure of shareholder activity results and performance.

The second presenter, Hwang Hyun-young, a research fellow at the Korea Capital Market Institute, positively evaluated the increasing trend of opposing voting rights exercised by domestic institutional investors since the introduction of the Stewardship Code in Korea but emphasized the need to enhance its effectiveness. In particular, he argued that a compliance monitoring system must be established first.

Research Fellow Hwang introduced overseas cases, saying, "The UK requires disclosure of compliance with the Stewardship Code and manages it so that participating institutions can be stripped of their status for insincere disclosures. In Japan, participating institutions and public pension funds regularly evaluate and disclose their compliance with each principle and guideline, notify the Financial Services Agency of the disclosed website address, and the agency publicly announces it." He suggested, "Referring to this, a compliance monitoring plan should be prepared domestically as well," and proposed, "Post-measures such as incentives for excellent institutions and penalties for insufficient participation should also be considered based on the inspection results."

Panel discussion participants also agreed that it is now time for the Korean Stewardship Code to focus on 'qualitative improvement' and voiced the need for system enhancements. Opinions raised at the session included the necessity for participation by other public pension funds beyond the four major pension funds (National Pension Service, Government Employees Pension Service, Private School Teachers’ Pension, and Korea Post), transparent compliance monitoring through an independent committee, and inclusion of matters related to institutional investors’ efforts to enhance corporate value.

Vice Chairman Kim also stated, "When institutional investors periodically check and disclose their compliance with the Stewardship Code, they can build trust that they are striving for long-term returns for general investors," and added, "To facilitate the smooth establishment of compliance monitoring, it may be possible to start with institutions that are prepared, discover best practices, and gradually expand the scope."

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