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[Newsmaker] Why would Chey leave SK Holdings board?

Feb. 21, 2019 - 16:02 By Cho Chung-un
The reported departure of SK Group Chairman Chey Tae-won from the boardroom of the conglomerate’s holding company drew heated interest from the market on Thursday, with many viewing it as an effort to improve transparency in corporate governance. Some aggressive analysts also interpret the move as a prelude to more governance restructuring to raise SK Holdings’ stock value.

According to local reports, Chey plans to leave the boardroom of SK Holdings and will have CEOs of other affiliates to do the same. SK officials declined to comment on Chey’s boardroom departure, saying nothing had been decided yet.

SK Group Chairman Chey Tae-won

The move was immediately interpreted as a gesture that the conglomerate is embracing the Moon Jae-in government’s proposed chaebol reform.

Market reformists have criticized that chaebol boardrooms in South Korea have typically acted as rubber stamp organizations. According to the Financial Supervisory Service, CEOs from 86 percent of 1,087 listed companies in Korea also serve as the heads of the boardrooms.

Strengthening a boardroom’s capacity by keeping management in check or through adopting a stewardship code has been part of the Moon administration’s reform agenda.

On top of holding a majority of shares in SK Holdings for which he is the chairman, Chey has also headed the boardroom for three years.

Chey leaving the boardroom will separate his ownership and control, increasing governance transparency for the 200 trillion-won ($178 billion) empire.

Improvement in governance transparency is part of efforts by SK to better comply with global market standards that stipulate companies have the boardroom as a separate and independent entity to keep management in check.

The 58-year-old tycoon giving up his leadership of the board of directors could help SK Holdings win wider interest from foreign investors, who have remained skeptical of chaebol scions exerting unchecked power. This would in turn enhance the stock value of SK Holdings.

And enhancing the stock value of SK Holdings appears to have deeper implications, particularly in relation to SK hynix.

Chey currently exerts influence over the entire group through his direct ownership of 18.44 percent of SK Holdings, which is supplemented by a total stake of 12.7 percent held by members of his family.

Over the years, Chey has simplified the group’s tangled ownership while defending himself against potential hostile takeover bids. The recent merger between SK Holdings and SK C&C directly gave Chey 23 percent control of the post-merger SK Holdings.

Before the merger, he had 0.02 percent of shares in SK Holdings and 43.3 percent of C&C, while C&C controlled 31 percent of SK Holdings. Late last year he transferred stocks valued at around 1 trillion won to his family as gifts, which resulted in no change in his firm control over SK Holdings.

The moves have turned market attention to the current ownership chain linking SK Holdings, SK Telecom and SK hynix.

SK Holdings owns 25 percent of SK Telecom. The telecom giant has a 20 percent stake in SK hynix.

With SK hynix becoming the group’s largest cash cow, a higher stock value of SK Holdings would help enhance Chey’s control over SK hynix, according to some analysts. Of the 24 trillion won in operating profits generated by some 88 affiliates under SK Group, the chipmaker’s profit accounted for 84.3 percent, or 20.8 trillion won.

“Chey might want more cash flowing directly from hynix as the current structure of SK Holdings controlling the chipmaker through SK Telecom involves multiple layers, and the income is subjected to more tax,” said Park Ju-geun, head of local corporate tracker CEO Score.

Having SK hynix under the direct control of SK Holdings, however, would be costly, Park said, considering the chipmaker’s value as the world's second-largest memory chip firm in terms of market cap, after only Samsung Electronics.

Splitting SK Telecom into two entities and merging one of them with SK hynix is the most likely scenario, as it could make the chipmaker a direct subsidiary of SK Holdings, Park said. And a higher value of SK Holdings would be crucial in the M&A process.

On top of having SK hynix under direct control of Chey, such a scenario could help remove the chipmaker’s limitation in carrying out mergers and acquisitions, he added.

By law, the ownership of a third-tier subsidiary is allowed only when the second-tier subsidiary acquires 100 percent of its shares, meaning that if SK hynix wants to acquire a company, it has to buy all its shares.

Meanwhile, according to reports, Yeom Jae-ho, president of Korea University, is being mentioned as a possible replacement for Chey. Yeom, a close friend to Chey, was a former scholarship student from the education foundation launched by Chey’s father and SK founder Chey Jong-hyun.

By Cho Chung-un (