K-pop label SM to increase number of outside directors

South Korea’s SM Entertainment Co. will increase the number of outside directors and ban its chief executive from chairing the board as part of an effort to improve governance, according to industry sources on Sunday.

The K-pop pioneer will choose four external directors for its seven-member board, with three other seats reserved for internal members. Currently, SM’s board is comprised of one outside director and three internal members.

The move comes after institutional investors led by activist fund Align Partners Capital Management stepped up pressure for the entertainment giant's governance reform, threatening a proxy battle at the March general shareholders' meeting. 

To enhance the transparency of the selection process, SM will set up a committee to choose candidates for outside directors. They are subject to approval at the shareholder meeting.

Based on South Korea’s commercial law, SM is not necessarily obliged to increase the number of outside directors. The rule applies only to companies with assets of over 2 trillion won ($1.6 billion).

As of end-September of last year, SM’s assets stood at 1.4 trillion won.

Last year, the label behind K-pop idol groups such as Super Junior and Aespa hired a new outside auditor, taking a first step to bring a much-anticipated shift in the company’s governance.

The independent auditor was chosen by Align Partners.

To ensure responsible management, SM will separate the CEO and board chair roles. Accordingly, its board will be headed by an external director.

In South Korea, it is only Samsung Electronics Co. and SK Inc. that prohibit CEOs from chairing their boards.

TRANSPARENCY OF CONTRACTS

SM will also overhaul its business practices. It will launch an internal committee to oversee its business contracts with outside companies, long criticized for their opaqueness.    

Alliance Partners welcomed the move for governance reform but called for additional measures to be prepared by Jan. 30 to allow institutional investors to have a say over management.

Founder and Chief Producer Lee Soo-man holds an 18.78% stake in SM as the largest shareholder as of end-September, 2022. KB Asset is the third-largest shareholder with a 5.12% stake.

Align owns a 1.1% stake in SM Entertainment as of August 2022, when it sent a shareholder letter to the entertainment agency's board of directors to push for board independence and governance reform.

Write to Dong-Hun Lee at leedh@hankyung.com
Yeonhee Kim edited this article.