[The Lost Innovation of Kakao]② Troublemaker in the Capital Market... Stir Over Moral Hazard Issues

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Kakao, despite its identity as an IT company, is often cited as a company frequently embroiled in controversies in the capital market. In addition to the arrest of its founder, Kim Beom-su, co-chairman of the CA Council and chairman of the Management Innovation Committee, on charges of stock price manipulation of SM Entertainment, there have been allegations of split listings and executives’ stock option (share purchase rights) profiteering. As even the company’s core strength in innovation failed to show significant results, its stock price also plummeted. This is why about 60% of Kakao’s shareholders, who are small investors, are crying out in distress.

According to industry sources on the 30th, as of the first quarter of this year, Kakao has a total of nine listed affiliates. Among them are not only SM Entertainment, related to Chairman Kim’s arrest, but also Kakao Pay, Kakao Bank, and Kakao Games, which are under suspicion of split listings.

Kakao began listing its affiliates starting with Kakao Games in September 2020, followed by Kakao Bank in August 2021, and Kakao Pay in November 2021. Although these core affiliates were listed amid a surge in liquidity due to COVID-19, dissatisfaction erupted among investors holding Kakao shares. The argument is that the listing of core affiliates causes a concentration of market attention on those companies’ stock prices, which ultimately leads to a decline in Kakao’s stock price. As a result, Kakao and its listed affiliates are doubly valued in the capital market, causing Kakao’s relative value to fall, and only small shareholders with weak voting rights suffer losses.

Kakao did not stop at affiliate listings; it also attempted an IPO for Lionheart Studio, a subsidiary of Kakao Games, but eventually withdrew amid split listing controversies. The company judged that an IPO was the most suitable method to attract external funds and attempted a dual listing, but this led to negative outcomes. As criticism of split listings continued, Kakao established a principle through the Kakao Compliance and Trust Committee, an independent body supporting compliance and trustworthy management, to refrain from indiscriminate new IPOs to prevent the decline of parent company shareholder value.

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Additionally, Kakao has adopted a performance compensation method through stock option grants and stock price increases upon listing to boost employees’ work motivation. In the IT industry, stock options are often used to attract and retain talent. In March, Kakao decided to grant 200 stock options per person to 3,652 employees at its headquarters.

However, when executives with access to high-level information exercise stock options, it can trigger stock price declines and lead to moral hazard issues, such as the ‘profiteering controversy’ of selling at peak prices. In particular, eight key executives of Kakao Pay faced severe criticism after selling 90 billion won worth of Kakao Pay shares about a month after its listing. This situation was a major reason for regulations restricting sales by affiliate executives for one year after listing, by CEOs for two years, and limiting joint stock sales.

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Besides these issues, it is true that Kakao does not receive favorable evaluations in the capital market for various reasons. Although it is enhancing shareholder value through share buybacks, criticism of ‘stingy dividends’ has also been raised among shareholders. At the regular shareholders’ meeting in February, Kakao decided on a dividend of 61 won per share, which is only 1 won higher than the previous year’s 60 won per share. However, the cash dividend yield based on the year-end stock price of Kakao’s common stock is only 0.1%. This can be interpreted as due to the IT company’s characteristic of heavy investment for the future. Naver, in the same industry group, decided on a cash dividend of 790 won per common share this year, with a dividend yield of 0.4%.

Industry insiders point out that the problems Kakao faces in the capital market stem from a lack of innovation. The lack of visible achievements in future industries such as artificial intelligence (AI) has led the company to focus on financial performance. In this process, small shareholders were not considered, and there was also a lack of legal awareness.

Professor Hwang Yong-sik of the Department of Business Administration at Sejong University explained, “While IPOs and stock options can help grow the company and enter new businesses, the current problems seem to have arisen from an excessively financial perspective.” He added, “Kakao has ceased to be an IT company and has become an investment company.” He continued, “Although the fields are different, looking at fallen companies like Lehman Brothers and Enron, there was greed for financial capital and reckless expansion inside. It is time for Kakao to reflect on its identity and original intentions as an IT and platform company.”

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