Repeated Opposition to KB Employee Stock Ownership Plan Recommended Directors... Will the Introduction of Labor Union Recommended Directors in the Financial Sector Fail?

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[Asia Economy Reporter Park Sun-mi] Ahead of the KB Financial Group's extraordinary general meeting of shareholders scheduled for the 20th, proxy advisory firms are continuously recommending shareholders to vote against the appointment of outside directors nominated by the employee stock ownership association, making it unlikely that the labor union-nominated outside director system will be introduced this year as well.

According to the financial investment industry on the 10th, Korea Corporate Governance Service (KCGS), the largest proxy advisory firm in Korea, urged shareholders to vote against Agenda Item 3 (appointment of outside director Yoon Soon-jin) and Agenda Item 4 (appointment of outside director Ryu Young-jae) at the KB Financial Group's extraordinary general meeting on the 20th, in a report distributed the day before. Professor Yoon Soon-jin of Seoul National University Graduate School of Environmental Studies and Ryu Young-jae, CEO of Sustainvest, were nominated by KB Financial Group's employee stock ownership association as outside director candidates to strengthen KB's Environmental, Social, and Governance (ESG) management.

KCGS explained the reason for its opposition by stating that KB Financial already leads the domestic ESG sector with excellent governance and social responsibility, so the appointment of outside directors recommended by the employee stock ownership association is unlikely to enhance shareholder value. Earlier, ISS, the world's largest proxy advisory firm, also advised that appointing outside directors without proper procedures is undesirable and issued a 'vote against' recommendation for the two candidates nominated by the employee stock ownership association. Glass Lewis, the world's second-largest proxy advisory firm, has also officially expressed opposition, siding with the KB Financial board.

As proxy advisory firms that analyze corporate shareholder meeting agendas and provide voting guidelines continue to oppose the employee stock ownership association's outside director nominations at KB Financial, it is expected that the association will find it difficult to secure sufficient votes for the appointment at the extraordinary general meeting on the 20th.

This is because foreign ownership of KB Financial's shares exceeds 65%, giving proxy advisory firms significant influence. ISS also opposed KB Financial's labor union-nominated outside directors in 2017 and 2018, and both times the candidates were rejected. Moreover, KCGS, which issued the current 'vote against' recommendation, influences many domestic institutional investors, including the National Pension Service, KB Financial's largest shareholder.

The KB Financial employee stock ownership association is working to secure legitimacy for its outside director nominations by increasing its shareholding. The association announced the day before that it completed intraday purchases amounting to 67.6 billion KRW from funds it independently raised between the 16th of last month and the 6th of this month, raising its shareholding from 1.34% to 1.73%. It explained that it has become the fifth-largest shareholder after the National Pension Service (9.97%) and JP Morgan Chase (6.40%), and excluding KB Financial Group's treasury shares (5.06%), it is effectively the fourth-largest shareholder.

Ryu Je-gang, the association chairman, stated, “Considering that major shareholders such as the National Pension Service, a pension trustee, and JP Morgan, which holds Depositary Receipts (DR) as a custodian, are financial and economic investors, the employee stock ownership association is the practical largest shareholder capable of directly expressing opinions. Therefore, granting the association the right to nominate outside directors is more desirable.”

Since the chairman of the KB Financial employee stock ownership association concurrently serves as the labor union leader and the association's shareholding is increasing, there are concerns that labor-management conflicts at KB Financial may intensify depending on the voting outcome at the extraordinary general meeting on the 20th. The KB Financial labor union strongly opposed Chairman Yoon Jong-kyu's third term earlier, so the repeated failure of outside director nominations could ignite further labor-management disputes.

Furthermore, if the employee stock ownership association's nomination system at KB Financial fails, the introduction of the labor director system?which was a campaign pledge of President Moon Jae-in to directly appoint workers as board directors to participate in corporate decision-making?and the labor union-nominated director system, which is an extension of that pledge, will inevitably face difficulties being introduced in the financial sector within this year.

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