KT&G, Foreign Investors Hold '44%'... Key Point in Shareholders' Meeting Vote Battle

As KT&G prepares for its regular shareholders' meeting on the 28th, where a vote will be held on the nomination of Bang Kyung-man as the next CEO along with the appointment of outside directors, attention is focusing on the voting intentions of foreign investors. The company has accepted shareholder proposals and introduced a cumulative voting system for the first time this year, making foreign investors, who hold nearly 45% of the shares, a key factor in determining the outcome. The company is emphasizing its top-tier shareholder return policies and strengthened governance with enhanced expertise to capture the support of foreign investors.

Bang Kyung-man KT&G Next President Candidate
Photo by KT&G

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According to industry sources on the 21st, KT&G's board of directors has recommended Bang Kyung-man, head of the General Division (Senior Vice President), as CEO, and Lim Min-gyu (CEO of LMK Consulting) as an outside director for the upcoming shareholders' meeting. IBK Industrial Bank of Korea, the largest single shareholder with a 7.11% stake, has nominated Son Dong-hwan (professor at Sungkyunkwan University Law School) as an outside director. Under the cumulative voting system, which combines inside and outside directors and allows shareholders to cast two votes per share proportional to the number of directors to be appointed, shareholders can exercise their voting rights accordingly.

IBK Industrial Bank has openly expressed opposition to candidate Bang and hinted at giving all its votes to candidate Son. Activist fund Flashlight Capital Partners (FCP), holding less than 1% of shares, has also decided to support IBK's candidate, and global proxy advisory firm ISS has effectively recommended against appointing Bang as CEO. However, other domestic and international proxy advisory firms such as the Korea ESG Institute, Korea ESG Standards Institute, and Glass Lewis have recommended supporting Bang’s appointment, setting the stage for a tight contest.

For KT&G, securing the votes of foreign investors has become crucial to appoint both candidates recommended by the board. KT&G has seen a steady increase in foreign shareholding, rising from 35.1% at the end of 2021 to 44.3% as of the 18th. Experts attribute this trend to KT&G’s strong shareholder return policies and a governance structure centered on outside directors with management expertise.

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According to a report by the Korea Exchange titled "Dividend Payout Ratio as a Policy for Shareholder Profit Return," foreign investors prioritize shareholder interests when selecting companies to invest in. KT&G recorded a total shareholder return rate of 99% last year, including cash dividends and share buybacks, and the average over the past three years (2021?2023) exceeded 95%. The total amount returned to shareholders during this period reached 2.75 trillion KRW. The dividend for 2023, to be voted on at this shareholders' meeting, has been set at 5,200 KRW per share, an increase of 200 KRW from the previous year.

According to a study by the Korean Financial Management Association on "Foreign Investors' Preference for Dividends," the size of dividends is an important factor influencing foreign investors' decisions. Accordingly, the company expects the dividend increase to be positively received by foreign investors.

In fact, during CEO Baek Bok-in’s second term renewal in 2018, IBK Industrial Bank opposed the reappointment by changing its shareholding purpose from "simple investment" to "management participation," but foreign investors sided with CEO Baek, enabling his reappointment. Notably, Franklin Mutual played a "white knight" role at the shareholders' meeting after becoming KT&G’s largest shareholder in 2006.

The governance system centered on outside directors with professional management backgrounds is also seen as a consideration for foreign investors. Among KT&G’s eight board members, six (75%) are outside directors, and among them, four (67%) are current or former CEOs of major companies. This composition is comparable to major global companies like Apple and Philip Morris, where CEO-origin outside directors make up over 80% and 60%, respectively.

Notably, Lim Min-gyu, chairman of KT&G’s board, has demonstrated expertise in organizational management, risk management, and sustainable management as CEO of OCI Materials and SK Materials, leading large listed companies. He was also recommended as an outside director candidate due to his understanding of supply chains and overseas markets, having served as head of the petrochemical division and Paris branch manager of Samsung C&T Corporation’s trading division. A capital market industry insider commented, "There has been ongoing criticism that outside directors of domestic listed companies are mainly professors and legal professionals, lacking expertise. Appointing professional managers as outside directors, as recommended by KT&G’s board, is a suitable choice for enhancing long-term shareholder value."

It is also noteworthy that KT&G’s foreign shareholding increased by about 2 percentage points from 42.7% after Bang Kyung-man was selected as the next CEO candidate on the 22nd of last month. Since becoming an inside director three years ago, Bang has contributed to nearly a 20% increase in operating profit growth across the company’s three core businesses (global cigarettes, electronic cigarettes, and health functional foods) and has led proactive shareholder return policies. Global investment bank Morgan Stanley stated, "Bang has actively engaged in investor relations activities, reflecting investor feedback in shareholder return policies, so his selection as CEO candidate is expected to be positively evaluated," and predicted further strengthening of shareholder return policies going forward.

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