SM's 'Expansion of Outside Directors' Governance Improvement Plan... Eolline "Submit Security Measures by the 30th"

SM Entertainment

[Asia Economy Reporter Jeong Dong-hoon] Activist fund Align Partners (Align) urged SM Entertainment (SM) to present supplementary measures by the end of this month, stating that the announced corporate governance improvement plan requires substantial complementary actions.

On the 15th, SM Entertainment announced that it would restructure its board of directors, focusing on expanding the proportion of outside directors to a majority. SM explained, "We reviewed the board structures of leading global companies with renowned advisory firms to reorganize into a transparent and highly professional board-centered governance structure," adding, "Through this, we decided to introduce a board structure optimized for SM."

SM will first change the current board composition of three inside directors and one outside director to three inside directors and four outside directors, increasing the proportion of outside directors from 25% to a majority (57.1%). The chairperson of the board will also be assigned to an outside director.

Additionally, to strengthen the independence and expertise of outside directors, SM will introduce an Outside Director Candidate Recommendation Committee. To recommend outside directors scheduled for appointment in March this year, a temporary recommendation committee composed of at least two-thirds external members will be launched. After the shareholders' meeting, a formal recommendation committee with outside directors comprising at least two-thirds will be established.

SM will also introduce more than three specialized committees under the board, including an ESG (Environment, Social, Governance) Committee and an Internal Transactions Committee. A system will be created to allow outside directors to receive assistance from external advisory institutions, with the company covering the related costs.

SM specifically stated, "For all transactions involving producer Lee Soo-man, affiliated companies, and subsidiaries, a newly established Internal Transactions Committee, composed of at least two-thirds outside directors, will conduct thorough and transparent reviews."

In response, Align, which has long advocated for SM's governance reform, stated, "We welcome and positively evaluate the management's agreement on the necessity of corporate governance improvement and board restructuring, which was one of the main demands in the shareholder letter we sent to SM's board on December 14 last year, and the detailed improvement plan officially announced this time."

They added, "SM's recent measures, along with the early termination decision of the Like Planning contract in October last year, mark an important starting point for SM to leap forward as a global company and enhance shareholder value."

However, Align pointed out that SM's recent announcement lacks substantive measures.

Align claimed, "SM's announcement is an incomplete one missing key elements we demanded through the shareholder letter." First, Align proposed that Align Partners and major institutional investors participate in the initial outside director recommendation at this shareholders' meeting, but SM only stated that a temporary recommendation committee composed of at least two-thirds external members would be launched.

Align said, "If the company recommends members to the temporary recommendation committee, it will be practically difficult to appoint outside directors independent from the major shareholder and founder Lee Soo-man, and as is common in many listed companies in Korea, this could result in appointing directors who are nominally outside directors but effectively 'rubber stamps' for the major shareholder."

Align emphasized, "If outside directors independent from the major shareholder are not appointed, the Internal Transactions Committee will be ineffective. Especially for clear existing issues or urgent matters currently underway, corrective actions should be taken promptly even before the Internal Transactions Committee is formed."

Considering the deadline for shareholder proposals for SM's regular shareholders' meeting agenda, Align demanded that SM's board announce supplementary measures addressing the above points by the 30th of this month.

In urging swift and proactive decision-making by SM's board, Align decided on the 15th to file a shareholder derivative lawsuit regarding some of the issues identified through the first inspection of board minutes and accounting books. The relevant contents have been sent to SM's board via email.