[Initial Insight] Behavioralism as a Fund Investment Method

As the regular shareholder meeting season for companies with December fiscal year-ends arrives, activist funds are increasing their presence again this year, following last year. Activist funds strengthen their influence by demanding dividend increases and governance improvements, often clashing with existing boards. Even though activist funds seem to represent the voices of ordinary shareholders, they show flexibility by adjusting their investment strategies depending on fund performance. This is why it is important to carefully scrutinize the claims of activist funds, who are neither heroes nor villains.

The upcoming KT&G regular shareholder meeting on the 28th is one of the biggest battlegrounds to gauge the performance of activist funds this year. Since KT&G’s privatization in 2002, criticism has grown over the “internal succession” as the company appoints presidents from within. Activist fund Flashlight Capital Partners (FCP) is serious about improving KT&G’s governance, even sending a letter to the presidential office. FCP pointed out, “KT&G has only superficially given up on a fourth term, but the cartel continues to maintain its influence.” At an online shareholder briefing on the 14th, FCP sharply criticized the appointment of Bang Kyung-man, KT&G’s Senior Vice President, as the next president, saying, “It makes no sense to recommend him as president despite poor overseas performance.” They argued that if KT&G’s governance issues are resolved, the current market capitalization of approximately 11.9 trillion won could increase up to fourfold within four years.

IBK Industrial Bank, one of KT&G’s major shareholders, also stated that governance improvement is necessary through strengthening the board’s expertise and independence, and opposed the board’s proposal to appoint the CEO and outside directors. ISS, the world’s largest proxy advisory firm, also expressed opposition to the CEO appointment agenda.

Predicting the outcome of the shareholder meeting has become difficult. It is unclear how the National Pension Service, foreign investors, and individual shareholders will vote. Investors holding KT&G shares, rather than secondary battery or semiconductor stocks, are likely to prioritize stable dividends. Earlier, on the 7th of last month, KT&G announced the cancellation of 3.5 million treasury shares along with its earnings report for the previous year. The following day, companies such as Sangsangin Securities, NH Investment & Securities, and Kiwoom Securities each released corporate analysis reports. Titles like “Strong Shareholder Value Enhancement,” “This is Shareholder Return,” and “A Model of Shareholder Value Enhancement” indicate high praise for the current board’s shareholder return policies.

Changing governance alone does not alter corporate value. Corporate value grows when governance is improved, capable management is appointed, and the management grows the company through focused choices. The key to KT&G’s growth lies in its overseas business results. In January last year, KT&G extended its overseas sales contract period with Philip Morris International (PMI) from three years to fifteen years. FCP questioned, “How diligently will PMI, a competitor, promote and sell competitor products?” If KT&G competes without cooperating with PMI, the world’s number one player, significant investment will be inevitable to achieve results in overseas markets.

There is no need to outright reject shareholders’ calls for change. It is detrimental to all if the shareholder meeting devolves into an emotional battle of “I am right and you are wrong.” We hope for a shareholder meeting where concrete development plans are proposed and common ground is found, rather than opposition for the sake of opposition.

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