The National Pension Service is a big institutional investor in the domestic stock market. As of February this year, it had about 40.2 trillion won invested in local stocks, accounting for 3.8 percent of the market capitalization of the Korea Exchange’s main board or KOSPI.
But the NPS has thus far limited its role as an institutional investor to proxy voting. It has never attempted to invoke such rights as submitting shareholder proposals, examining accounting books and records or recommending outside directors.
This passive use of shareholder rights, however, is likely to end soon as the government is seeking to make the NPS a more active shareholder. Kwak Seung-jun, chairman of the Presidential Council for Future and Vision, said Tuesday the NPS would start exercising its shareholder rights more actively in September at the earliest.
For this, Kwak said, the government will set up a shareholder rights committee at the NPS by August. It plans to invite 10 or so private sector experts in finance, asset management and corporate governance.
Why is the government hurrying to turn the NPS into an active shareholder? Kwak, a close aide to President Lee Myung-bak, recently said the move is intended to improve the performance of the companies in which the NPS has a stake, which will help make the national pension scheme more sustainable.
Kwak said corporations tend to focus on short-term profits at the expense of long-term benefits. This hurts the interests of the NPS whose investment horizon is 10 to 20 years. To ensure that companies make business plans from a longer-term perspective, he said, it is necessary for the NPS to monitor their management closely.
According to Kwak, a 1 percent increase in the NPS’s overall rate of return on investment would extend the operation of the partially-funded pension program by 10 years, while a 1.5 percent increase would free the NPS from concerns about asset depletion.
But this is not the only reason for pushing the NPS toward shareholder activism. In a speech last month, Kwak revealed what could be seen as the government’s real motives.
The presidential aide said big businesses have become too powerful in Korea. Then he stressed the need to counterbalance their political as well as economic power. In a capitalist society, he said, the most legitimate and effective way to do this is to have public pension funds exercise their shareholder rights.
Kwak’s remarks came against the backdrop of the government’s futile efforts since August last year to promote shared growth between large corporations and small parts suppliers. Despite the government’s increasing pressure, big businesses have taken few substantial measures toward this end.
Hence business organizations interpreted his plan as reflecting the government’s intention to use the NPS as a means of pushing corporations toward President Lee’s vision of shared growth. They also viewed it as part of the ruling camp’s move to tame business groups before the general and presidential elections slated for next year.
But big businesses refrained from vociferously blasting Kwak’s push because it is perfectly legal for the NPS to exercise its shareholder rights.
Making the NPS an active shareholder is a sword with two blades. On the plus side, it can help improve corporate governance of large firms affiliated with chaebol groups. The NPS could provide a counterweight to the emperor-like tycoons who control them.
On the flip-side, it could be a channel for the government to exert influence on private companies. To address this problem, Kwak said the government would ensure that the planned NPS shareholder right committee remains independent.
But as long as the NPS is under the control of the Ministry of Health and Welfare, it would be impossible to wall the committee off from the government’s clout. Therefore, it is necessary to reform the governance structure of the NPS before pushing it toward shareholder activism.