[Economy Pulse] Stewardship Code Revision and Shareholder Engagement Funds

The Stewardship Code (guidelines for institutional investors' exercise of voting rights) has been revised for the first time in 10 years since its adoption. The revision is an extension of amendments to the Commercial Act. Alongside the mandatory tender offer system, a ban on dual listings, and measures to prevent stock price suppression, it is a practical tool for strengthening shareholder rights. The changes cover five main areas: expanding the asset classes to which the code applies, incorporating environmental, social and governance (ESG) and sustainability factors, broadening the scope of stewardship activities, reflecting collaborative engagement, and formalizing implementation reviews.

The main focus is the scope of stewardship activities. These now include not only active shareholder activities, such as exercising voting rights and submitting shareholder proposals, but also investment decisions that reflect the outcomes of those activities (Purpose and Significance, Item 5). Investors can now reduce or withdraw investments in a company based on the results of their stewardship activities. They are also required to assess whether the board is faithfully carrying out its duties for shareholders. This makes it possible to verify directors' duty of loyalty to shareholders, introduced through the amendments to the Commercial Act.

Another point to watch is collaborative engagement among institutional investors (Guidance 4-5). In fact, minority shareholders have been the main force behind shareholder engagement in Korea, unlike in global markets, where institutional investors play that role. According to an announcement by the Korea Chamber of Commerce and Industry, "minority shareholders and minority shareholder coalitions" accounted for 91% of shareholder engagement. Of the 426 shareholder proposals submitted over the past 15 years, according to my own tally, 293 were proposed by minority shareholders, an overwhelming majority. Institutional investors submitted just 54. Now, however, their shareholder activities can become more active through collaboration.

At this juncture, the National Pension Service has decided to introduce a system for reviewing the implementation of stewardship responsibilities. It will score the stewardship activities of its external asset managers and link the scores to additional allocations or withdrawals of entrusted funds. Backed by the commitment of the country's largest source of capital, stewardship activities that have been largely perfunctory could become substantive.

This is an opportune moment to consider ways to encourage the growth of funds that make shareholder engagement a core investment strategy. These funds make engagement with portfolio companies their primary business, rather than taking a passive approach to stewardship. Shareholder engagement spans a wide range of activities, including private discussions, letters, voting, shareholder proposals, public campaigns and lawsuits. While activist funds pursue assertive shareholder activities such as submitting shareholder proposals, shareholder engagement funds favor a more moderate, dialogue-centered approach, such as private discussions and letters. They act as long-term partners to companies by maintaining their shareholdings over an extended period.

Shareholder engagement funds could also serve as a policy tool for advancing productive finance, a key financial policy agenda of the current government. They could encourage companies to redirect inefficiently deployed capital toward productive areas, such as facility investment and entry into new businesses. Improving capital productivity could also enhance corporate value. Productive finance could be expanded beyond simply providing new capital to channeling existing funds through more efficient capital allocation. In effect, this would fulfill the capital market's fundamental role of moving capital to more efficient uses.

The challenge is fundraising. Launching a fund is difficult in a climate where skepticism toward shareholder engagement persists. Individual investors may be reluctant because the strategy's performance has yet to be proven, while institutional investors may be deterred by uncertainty about recovering their capital and the prospect of longer investment periods. That is why anchor investments from pension funds are needed. Of course, this could conflict with conservative investment guidelines. However, improving companies' long-term value is also consistent with pension funds' investment objectives, providing sufficient grounds for them to commit a portion of their assets under management. For example, even if the National Pension Service committed just 1% of its assets under management, the ripple effect would be enormous.

Doubts remain about the effectiveness of the Stewardship Code. Even as a soft-law framework, it is to be hoped that genuine shareholder engagement will improve corporate governance and the efficiency of capital allocation, ultimately leading to higher corporate value and investment returns.

Lee Junseo, Professor of Business Administration at Dongguk University

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