Shareholder activism at the cost of facility investments

South Korea’s large business groups are in emergency mode to brace for proxy fights with activist funds at annual general meetings (AGMs) next month.

Some leading Korean companies have been targets of activist shareholders urging them to resolve the so-called Korea Discount, or undervaluation compared to their intrinsic value.

Activist funds are increasingly raising their voices, jumping on the bandwagon of the company value-up program, a new government initiative aimed at propping up undervalued domestic stocks.

Five homegrown and foreign funds have recently joined hands to wage a proxy battle against Samsung C&T Corp., demanding additional share buybacks and dividend increases.

Seoul-based Tcha Partners Asset Management recently launched a proxy fight jointly with Park Chul-whan, the nephew of Kumho Petrochemical Co.'s former Chairman Park Chan-koo.

The investment firm is demanding Kumho retire the company's entire 18.4% treasury share stake, along with the appointment of an audit commissioner and a change in articles.

Samsung Electronics Co., Hyundai Motor Co. and LG Chem Ltd., among the country’s top 10 large-cap stocks, are facing proxy battles at AGMs as well.  

The Korea Corporate Governance Forum on Feb. 5 urged Samsung Electronics, Hyundai Motor and LG Chem to implement shareholder-friendly measures worth 60 trillion won ($45 billion) in aggregate: 50 trillion won ($37 billion) for Samsung Electronics' shareholders; 8 trillion won for Hyundai Motor's and 2 trillion won for LG Chem's.

The forum is a private organization launched in 2019, led by domestic activist funds and institutional investors.

It argued that such shareholder-friendly measures, if implemented, will boost their share prices by 50-120%.

However, their demands were met with criticism by companies and investment bankers. They said such requests do not take the companies' future growth into account.

The cash and cash equivalents at Samsung Electronics stood at 92 trillion won as of the end of September last year. That looks like enough to meet the governance forum’s demand for returning 50 trillion won to shareholders.

However, the industry of memory chips, Samsung’s bread and butter, is highly vulnerable to economic cycles and requires a heavy amount of fixed expenses.

Further, the world’s No. 1 memory chipmaker must invest 50 trillion won into equipment and facilities every year to consolidate its position in the semiconductor market.

In this regard, returning 50 trillion won to shareholders would seriously undermine Samsung Electronics’ fundamentals and growth potential.

No one would object to the fact that companies should resolve the undervaluation of Korean stocks with shareholder-friendly steps.

However, we must be wary of excessive, one-sided shareholder activism that could threaten a company's existence.

The government’s corporate value-up program also must be designed in a way that doesn't pressure companies to boost their short-term share prices at the cost of long-term growth.

Write to Ik-Hwan Kim at lovepen@hankyung.com
 

Yeonhee Kim edited this article.