[Opinion] Reflecting on the 2020 Annual General Meeting of Shareholders

Amid the unprecedented COVID-19 pandemic that brought the global economy to a halt and caused turmoil in financial markets, this year's regular shareholder meetings have also concluded. Due to the COVID-19 situation, companies faced significant difficulties in meeting the quorum for shareholder meetings. Notably, this year, 315 listed companies failed to appoint auditors or audit committee members, which is largely attributed to the application of the 3% rule under the Commercial Act that restricts the voting rights of major shareholders' special related parties on auditor and audit committee appointments. Since the shadow voting system, where the Korea Securities Depository exercised voting rights on behalf of absent shareholders, was abolished in 2017, all companies have found it challenging to meet the quorum for shareholder meetings.

The business community is calling for the abolition of the 3% rule or the reinstatement of the shadow voting system. However, the implementation of these two systems aims to limit the excessive influence of major shareholders, particularly on the appointment of auditors who are responsible for checking and supervising management, thereby protecting minority shareholders and encouraging active participation in shareholder meetings. Considering this purpose, it seems preferable to maintain the current system while promoting electronic voting systems to ensure that shareholder meetings effectively function as the highest decision-making body of companies.

This year's shareholder meetings were the first since the National Pension Fund Management Committee transitioned to a full-time expert committee system. As the largest institutional investor in Korea, the National Pension Service (NPS) became the first or second largest shareholder in about 200 major companies and held more than 5% stakes in 300 companies. At this year's meetings, the NPS opposed or abstained on 80 agenda items across 46 companies. Although the NPS is the most active institutional investor in exercising voting rights domestically, it has not been able to decisively influence the outcomes of shareholder meetings. Last year, the NPS exercised voting rights on 4,139 cases and opposed 682 of them, but only 24 proposals were actually rejected.

The limited influence despite the NPS's high shareholding is due to the ownership structure of domestic companies. According to the Fair Trade Commission, internal shareholdings in Korean companies exceed 50%, and many companies have controlling shareholders holding more than 40%, which severely restricts the NPS's ability to exercise shareholder rights. The passive exercise of shareholder rights by other domestic institutions and individual investors is also a major reason why non-controlling shareholders have minimal influence at shareholder meetings. Going forward, by adopting the full-time expert committee system to enhance expertise and actively engage in shareholder communication, the NPS is expected to strengthen its exercise of shareholder rights to enhance shareholder value.

Reviewing the 353 agenda analysis reports provided by the Korea Corporate Governance Service (KCGS) to institutional investors for this year's shareholder meetings, a total of 2,460 agenda items were proposed, with 1,323 (53.8%) related to executive appointments, accounting for the majority. The KCGS's opposition recommendation rate was 15%, and 206 companies received opposition recommendations on at least one agenda item. With the enforcement of the amended Commercial Act strengthening the qualifications for outside directors, outside directors of listed companies can no longer serve more than six years at the company and nine years including affiliates, leading to the replacement of many long-serving outside directors whose independence was in question. However, the number of outside directors opposed due to low attendance, damage to corporate value, or inappropriate concurrent positions increased compared to last year, indicating that companies still need to improve their awareness of the role of outside directors.

The agenda item with the highest opposition recommendation rate was auditor appointments, reaching 43.1%. Considering that auditors play a role in ensuring transparent management through oversight and supervision of management and protecting shareholders' interests, this high opposition rate reveals a dark side of Korean corporate governance where companies are still reluctant to appoint qualified auditors.

Next, the opposition recommendation rate for approval of director remuneration limits was high at 31.4%. Opposition was recommended for companies where there was no confirmed correlation between the level of director remuneration paid and management performance, and where the actual payment level was low compared to the proposed remuneration limit.

Regarding dividend proposals, opposition votes were recommended for 35 companies (10.1%) due to under-dividends, an increase compared to the previous year. Director remuneration limits and dividends are issues that institutional investors pay particular attention to in exercising shareholder rights, and shareholder communication is expected to focus on these agenda items going forward. Reflecting on this year's shareholder meetings, which were conducted without major issues amid the COVID-19 pandemic, it is hoped that next year, more shareholders will actively participate so that shareholder meetings can fulfill their substantive functions.

Shin Jin-young, President of Korea Corporate Governance Service and Professor at Yonsei University School of Business