[In-Depth Review] The Changing Shareholders' Meeting Environment... Need to Expand Shareholder Communication

Ansanghee, Head of the Daeshin Governance Research Institute

The regular shareholders' meetings of listed companies in 2021 are just over a month away. A significant difference from before is that these meetings may reflect changes in shareholder meeting-related systems and incremental changes in the fiduciary responsibility activities of institutional investors such as the National Pension Service.

First, some amendments to the Commercial Act and its Enforcement Decree related to the practical aspects of shareholders' meetings for listed companies have been passed by the National Assembly and are now being fully implemented. Among the amendments to the Commercial Act applied in January last year, the requirement to attach the business report and audit report when announcing the shareholders' meeting, which had been deferred, will be enforced starting from this year's regular shareholders' meetings. Considering that the submission of business reports (for companies with December fiscal year-end) was concentrated at the end of March, shareholders will now be able to review the business and governance status of listed companies before the meeting and exercise their voting rights accordingly. This can be seen as an opportunity to strengthen the market surveillance function over listed companies.

For financial companies subject to the Financial Company Governance Act, a regulation restricting concurrent positions on other board committees except for the nomination committee or compensation committee has been in effect since the end of last year to enhance the professional expertise of audit committee members. Therefore, financial companies need to expand their pool of suitable outside director candidates at this year's regular shareholders' meetings, and proxy advisory firms and institutional investors are expected to strengthen their verification of new outside director candidates for financial companies.

The amendment to the Commercial Act, part of the so-called 'Three Fair Economy Laws' including the Fair Trade Act and the Act on the Supervision of Financial Groups, which passed the National Assembly in December last year, will be enforced immediately from this year's shareholders' meetings, so careful attention is required.

The amended Commercial Act requires non-financial companies to separately elect at least one audit committee member distinct from other directors. In situations where shareholder proposals for outside director candidates to the audit committee are submitted, and where the '3% rule' limits the voting rights of major shareholders, companies whose shares are not widely dispersed mainly among major institutional investors are expected to face shareholding competition at the shareholders' meetings.

Additionally, with improvements to minority shareholder rights provisions, shareholder proposals are expected to become more active than before. Previously, under special provisions for listed companies, minority shareholder rights such as shareholder proposals were only allowed if both conditions of holding 1% (or 0.5%) of shares and holding them for six months were met simultaneously. Now, meeting either one of these conditions is sufficient to exercise minority shareholder rights.

Since the introduction of the 'Stewardship Code,' the principle governing fiduciary responsibility activities of institutional investors, in December 2016, four years have passed. With changes to systems related to listed companies' shareholders' meetings and governance, and amendments such as the relaxation of disclosure requirements for the 5% large shareholding reporting system and special provisions on the obligation to return short-term trading profits over 10%, the scope of fiduciary responsibility activities of institutional investors is likely to be partially realized through the upcoming regular shareholders' meetings in March.

In particular, since the National Pension Service introduced the 'Principles on Fiduciary Responsibility' in July 2018, it has established a substantial institutional environment for responsible investment, including the preparation of the 'Plan to Activate Responsible Investment' (November 2019) and the enactment of the 'Active Shareholder Engagement Guidelines' (December 2019). In other words, an institutional environment for responsible investment activities has been established not only for the National Pension Service but also for general institutional asset managers entrusted with National Pension funds.

Therefore, institutional investors must have clear internal guidelines and processes for fiduciary responsibility activities. From the corporate perspective, it seems necessary to conduct internal reviews on issues that may harm shareholder value related to governance and to diversify communication channels with shareholders to adequately convey the company's situation.