[Shareholder Capitalism] ④ "Ultimately, Institutions Must Take Action" ... The Reality of the Stewardship Code

Asset managers exercise voting rights at just 2.5% of Japan’s level
Stewardship Code remains inactive despite widespread adoption
Costs, regulations, and conflicts of interest hinder institutional action
Incentive structures needed, linking

Editor's NoteWith the advent of the amended Commercial Act, Korea's capital market is facing a new turning point of 'shareholder capitalism.' The institutional changes resulting from the implementation of the law are expected to have a significant impact on corporate governance and overall capital market practices. In a five-part series, we examine the changes brought by the amended Commercial Act, the responses in preparation for these changes, and the institutional challenges ahead for the full establishment of shareholder capitalism.

① The Era of the Amended Commercial Act Begins... The Key Themes of March Shareholders' Meetings
② "This Is the Last Chance"... Companies Go All Out to Defend Control Amid Amendments
③ 'Anti-Stock Price Suppression Act' Gains Momentum... Experts Say "Inheritance and Gift Tax Reform Is Key"
④ "Ultimately, Institutions Must Move" — The Reality of the Stewardship Code
⑤ The Last Piece of the Puzzle Is the Disclosure System..."'Result Disclosure' That Excludes Shareholders Must Be Overhauled"

For shareholder capitalism to become firmly established in Korea's capital market, above all, institutional investors must take root as 'active shareholders.' Even if an institutional framework is set up to improve corporate governance, its effectiveness cannot be guaranteed unless the key players actually put it into action. The 'Stewardship Code' (guidelines for institutional investors' exercise of voting rights), which has not been as widely adopted as expected since its introduction, stands out as a representative example of this limitation.

Low Effectiveness of the Stewardship Code..."Incentives Needed"

According to Kim Namgeun's office, a member of the Democratic Party of Korea, as of March 19, an analysis of the voting activity of 33 asset management companies that adopted the Stewardship Code between 2017 and 2024 showed an average of 5.4 engagement activities per company per year, which is just 2.5% of the level seen in Japan. The Stewardship Code is a set of principles designed to encourage institutional investors such as pension funds and asset management companies to actively participate in corporate decision-making. Although the number of participating institutions has increased since its introduction, the actual exercise of shareholder rights still falls short of expectations.

The background to this debate over effectiveness is mainly the 'structural limitations'—the costs and time required often outweigh the benefits. In addition, it is pointed out that asset management companies face difficulties in taking active measures due to several barriers: possible deterioration of relationships with investee companies, limitations of passive fund management structures, legal risks such as the 5% rule (large shareholding disclosure requirement) and proxy solicitation of voting rights. Another practical limitation is that a significant number of companies hold their general shareholders' meetings around the same period, making it difficult to secure adequate review time.

Lee Hyoseop, Senior Research Fellow at the Korea Capital Market Institute, noted, "The Stewardship Code has not been effective, and as a result, shareholder engagement has remained low. There is no mandatory evaluation, nor are there incentives or penalties in place." Professor Lee Junseo of Dongguk University also commented, "The problem is not the formality but the execution. There needs to be a feedback structure that checks whether the code is being implemented and reflects this in asset allocation decisions."

With the debate on effectiveness continuing, the key issue now is not just the introduction of the system but 'how to ensure it operates in practice.' As financial authorities initiate efforts to revitalize the Stewardship Code, capital market experts commonly point to the need for a transformation in the 'evaluation and compensation structure' as the core task.

Lee Namwoo, Chairman of the Korea Corporate Governance Forum, stated, "Currently, the system only gives a certain score for joining and additional points for preparing policies, so there is little real differentiation. The weighting should be expanded. If stewardship activities are qualitatively evaluated and reflected in the capital allocation process, sufficient incentives can work even without mandatory inspections." Research Fellow Lee also commented, "Evaluations should be made public, and actual incentives or penalties should be applied in asset allocation. Various approaches can be considered, such as entrusting a certain portion to the National Pension Fund."

Kim Jeongnam, former Managing Director at APG (the Netherlands' largest pension fund asset manager), emphasized that for responsible engagement by institutional investors to work, several institutional measures are needed: ▲ standardized reporting formats and guidelines for activity and performance disclosure ▲ reflection of qualitative stewardship activity evaluation in the selection and assessment of delegated asset managers ▲ clarification of relevant regulations and establishment of standard protocols.

Overseas Cases: "Collaborative Engagement and Division of Roles"

In major overseas markets, 'collaborative shareholder engagement' among institutional investors has already become commonplace. Kim, the former Managing Director, pointed out that the reason such collaborative engagement has not taken root in Korea is because uncertainty over regulatory risks related to collective action, disclosure, and material non-public information is high. He also noted that, except for the National Pension Service, Korean institutional investors have relatively low shareholdings in large companies, which limits the effectiveness of engagement.

He also commented on Japan, which is regarded as having a well-functioning system even without compulsory compliance checks: "The Financial Services Agency (FSA) proposes code revisions and operational direction, the Government Pension Investment Fund (GPIF) actively reflects stewardship performance in its evaluation of asset managers, and the Japan Exchange Group (JPX) requires companies to provide detailed disclosures on capital efficiency and shareholder value. Korea, too, needs clearer policy coordination and division of roles among the Financial Services Commission, National Pension Service, and Korea Exchange, as well as more clearly defined objectives."

Suggestions for improving the Stewardship Code were also mentioned earlier this month at a roundtable hosted by the Democratic Party of Korea's Korea Premium K-Capital Market Special Committee with domestic asset management company representatives. At the meeting, it was proposed that, similar to Japan, the 'Corporate Governance Code'—which provides shareholder-related management guidelines for listed companies—should be institutionalized to promote constructive dialogue between companies and shareholders. Other issues raised included that regulations regarding 'joint ownership' and 'acts influencing management control' under the large shareholding disclosure system are broader and more ambiguous than those in the United States or the United Kingdom. The introduction of a quota system to limit the maximum number of companies holding general shareholders' meetings on a single day was also discussed. Special Committee Chairman Oh Gihyeong stated, "The core systems in Japan's value-up policy process are the Corporate Governance Code and the Stewardship Code. The incentive structure for the Stewardship Code needs to be improved, and supplementary measures should be considered for shareholder engagement activities related to exchange-traded fund (ETF) products."

Alongside these points, experts emphasize that for shareholder capitalism to take root, trust must be established not just through systems but also among market participants. Kim, the former Managing Director, stressed, "The key to sustainable re-rating is whether investor trust in the Korean stock market can be solidified. Improving the effectiveness of Commercial Act and Capital Markets Act amendments to protect shareholder value, consistent and proactive messaging from financial authorities, and institutional support such as the National Pension Service's consistent engagement based on fiduciary duty must all be implemented together."

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