I. Overview of the Stewardship Code (the "Code")
The Stewardship Code is a set of principles or guidelines on fiduciary responsibilities released on December 19, 2016 by Korea Corporate Governance Service. The purpose of the Code is to encourage institutional investors who manage other people's assets to actively engage in corporate governance in the interest of their beneficiaries.
Institutional investors who are subject to fiduciary responsibilities under the Code are divided into two categories: (i) "Asset Managers," such as asset-management companies, which manage investments in various asset classes for various investors and communicate with portfolio companies; and (ii) "Asset Owners" such as pension funds and insurance companies, which utilize Asset Managers to investigate and make investments by providing specific guidance or general principles, evaluating performance, and more.
The Code applies only to institutional investors—domestic or foreign—that hold shares in Korean listed companies, and voluntarily commit to accept and abide by the principles of the Code. It adopts the "comply or explain" approach, which requires that subject institutional investors either comply with its principles1 or explain why they have not done so.
II. Guidance from the Financial Supervisory Commission
The Korean Financial Supervisory Commission (the "FSC") had prepared and disseminated interpretive guidance on the Code, to help prevent violations of the law by institutional investors in the course of carrying out their stewardship duties. The main subjects the FSC guidance deals with are: (a) how to avoid creating a market disturbance or becoming involved with insider trading, when institutional investors obtain or create non-public information in the course of their shareholder activity; and (b) for purposes of the requirement to file a notice of substantial shareholding (i.e. 5%), what the standard is for determining whether the acquisition of shares is "for the purpose of influencing management," and what the standard is for determining "co-ownership of shares" by multiple institutional investors.
III. Adoption of Stewardship Code and its Effects
1. Current Status
Although more than 30 asset-management companies (including PE firms) have expressed their intent to participate, only three of them have actually committed to participating as of June 15, 2017. If the National Pension Service joins in the future, however, most asset management companies, other pension funds, and insurance companies would be expected to participate as well.
2. Future Prospects
In contrast to previous years, institutional investors are now trying to improve corporate governance structures by means of active shareholder activity and the exercise of voting rights. Additionally, companies are expected to form a more shareholder-friendly environment by means of various policies of rewarding shareholders, among other things. In addition, the proxy-advisor business is expected to grow in the future, given that: (i) for small-sized asset-management companies, it is difficult to independently analyze the agenda of shareholders' meetings of investee companies; and (ii) currently there is no large-scale advisory body for voting rights, such as ISS or GlassLewis, in Korea.
1 The seven principles of the Code are as follows. Institutional investors should:
1. publicly disclose their policy on how they will discharge their stewardship responsibilities;
2. have a robust policy on managing conflicts of interest in relation to stewardship, and this policy should be disclosed;
3. monitor their investee companies on a regular basis, so that the investee companies can raise their medium and long term value and secure/raise the value of the investment assets;
4. establish clear guidelines on when and how they will escalate their activities as a method of securing/enhancing investment value;
5. have a clear policy on voting, and the disclosure of such activity;
6. report periodically on their voting and stewardship activities to investors; and
7. enhance their relevant expertise and competence to effectively/actively carry out stewardship activities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.