Financial Supervisory Service Pressures 'Real-Name Disclosure' for Insufficient Voting Rights... Applied from Q3

The Financial Supervisory Service (FSS) has stepped up pressure on the domestic asset management industry, which has become a 'rubber stamp,' by using the 'real-name disclosure' card regarding the exercise of voting rights. Based on the third-quarter business reports submitted by asset management companies to the authorities in October and November, cases of shareholder rights violations will be selected. The FSS plans to focus on the voting process of each company and publicly disclose the names of companies that receive failing grades. The asset management industry expressed both expectations that proactive voting will become possible and fears of being labeled as the 'first' offender.

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According to the government and the financial investment industry on the 19th, the FSS will examine whether asset management companies have exercised their voting rights, focusing on cases of shareholder rights violations from the third-quarter business reports. Following the 'Name & Shame' strategy, the names of asset management companies with problematic issues will be disclosed for the first time. Under the current Capital Markets Act, asset managers must submit quarterly business reports to the authorities within 45 days after the end of each quarter. Although the exact method of real-name disclosure has not been finalized, posting on the FSS official website or distributing press releases seems likely.

The FSS's criteria for selecting agenda items for voting rights exercise are cases where the authorities clearly judge that shareholder rights have been violated. An FSS official explained, "It seems unlikely that cases can be selected based on uniform criteria in advance," adding, "The authorities will likely make retrospective judgments on cases where companies clearly infringe on the rights of minority shareholders and others." However, there are concerns that direct judgments by the authorities themselves could be controversial. Some suggest delegating this to a credible external corporate governance specialist institution.

The authorities are also aware of the burden that real-name disclosure places on the asset management industry. An FSS official said, "The guidelines prepared through last year's task force (TF) have been well reflected in the internal policies of asset managers, and if voting rights were exercised according to these guidelines, there should be no problem," adding, "If voting rights were exercised in ways that do not comply, we intend to hear explanations from the asset managers."

The concern that domestic asset management companies exercise voting rights only formally has existed for some time. In fact, when the FSS checked the disclosure of voting rights exercise at shareholder meetings in the first quarter of this year for 274 asset management companies, 265 companies (96.7%) did not provide specific grounds for their reasons for exercising or not exercising voting rights. A representative from asset management company A, who requested anonymity, said, "Previously, no one managed this, and those who raised issues were treated as 'troublemakers.' Since the Stewardship Code was introduced in 2017, the situation has improved somewhat, but because it is a voluntary code, asset managers found it difficult to actively exercise voting rights in response to external complaints."

However, some in the market point out that the timing is peculiar. On the 13th, FSS Governor Lee Bok-hyun said at an executive meeting, "For improving corporate governance and advancing the capital market, it is important for institutional investors to fulfill the Stewardship Code," and instructed, "Devise improvement measures so that the independent exercise of voting rights by funds is not hindered by external factors and that voting rights can be exercised substantively."

The FSS judged that the merger-related securities registration statement submitted by Doosan Robotics falls under the category of "cases that may impair investors' reasonable investment decisions or cause significant misunderstandings to investors" and requested a corrected registration statement. Doosan revised and resubmitted the registration statement on the 6th. However, Governor Lee recently expressed at a meeting with asset management CEOs that if the contents of the merger-related securities registration statement submitted by Doosan are insufficient, the FSS will continue to reject it.

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What the FSS finds particularly objectionable is the merger ratio. Currently, the Doosan Group is promoting a plan to spin off Doosan Bobcat, under Doosan Enerbility, and merge it with Doosan Robotics. They evaluated the corporate values of the deficit company Doosan Robotics and the stable cash cow Doosan Bobcat almost equally at a 1:1 ratio. However, under the current Capital Markets Act, when companies merge, corporate value is evaluated based on the market capitalization of the two companies, so there is no legal violation in Doosan's process of calculating the merger ratio.

Last year, financial authorities reviewed deregulation of merger ratios for affiliated and non-affiliated companies and improved the system to allow free calculation of merger ratios only for non-affiliated companies. For affiliated companies, a consensus was formed that enhancing trust in accounting firms' valuation methods is a priority in the corporate value assessment process, so the current system remains. In fact, there is an interpretation that the FSS, lacking legal grounds to block Doosan Group's restructuring, has pulled out the real-name disclosure card to pressure asset management companies, the investment entities.

The financial investment industry showed mixed reactions to the FSS's strong move of real-name disclosure. Baek Jae-wook, head of Daishin Economic Research Institute, said, "From the company's perspective, they can claim compliance with legal regulations when setting the merger ratio, but from the shareholders' perspective, the question arises whether Doosan made the best decision for shareholders," adding, "I agree with the intention to encourage active exercise of voting rights by asset managers, but from the shareholders' standpoint, exercising voting rights is an area where institutions make their own judgments, so the financial authorities should not pressure them."

Kim Min-guk, CEO of VIP Asset Management, said, "I agree with the authorities' policy intention to properly exercise voting rights," adding, "The asset management industry feels a heavy burden in exercising voting rights, but if cases of shareholder rights violations pointed out by the authorities continue to accumulate, companies will inevitably become aware of this."

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However, there are also opinions that incentive-based system operation should accompany this in the long term. A representative of asset management company B, who requested anonymity, said, "Like Japan's public pension fund (GPIF), there should be a structure that actively evaluates and manages externally delegated assets to increase the implementation rate of the Stewardship Code," adding, "Active participation driven by incentives is more important than regulatory methods."

CEO Kim Min-guk also said, "If an incentive-based structure that encourages exercising voting rights is created, everyone will actively participate even if told not to," adding, "Although it is a Name & Shame strategy, it should not only involve negative 'shaming' but also praise and give extra points to asset managers who properly implement the Stewardship Code."

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