[The Two Faces of Shareholder Activism]③Just Because They Have a Lot of Cash, Don't Demand Higher Dividends

Long-term Strengthening of Shareholder Returns Needed, Not Temporary Dividend Increase
Shareholders Who Sold Stocks After Record Date Still Exercise Voting Rights

The spread of shareholder activism can contribute to the development of the domestic capital market, but if excessive, it can also be detrimental. This is because institutional investors or individuals advocating shareholder activism ultimately find it difficult to act without considering investment returns. Among shareholders exercising voting rights at regular general meetings, there are quite a few who do not currently hold shares. They are more likely to exercise voting rights based on dividend size rather than long-term growth plans.

KT&G's Dividend Payout Ratio Exceeds Domestic Listed Companies' Average

Opinions are divided over the activist funds' demand for KT&G to increase dividends. Some argue that demanding a dividend increase from KT&G, which already maintains a dividend payout ratio above the domestic listed companies' average, is excessive. Andaz Asset Management and Flashlight Capital (FCP) demanded dividends of 7,867 KRW and 10,000 KRW per share, respectively. KT&G's board of directors resolved a dividend of 5,000 KRW per share, which will be finalized at the shareholders' meeting.

KT&G's board stated that it implements a return policy of about 1 trillion KRW annually and that it is difficult to accept shareholder proposals demanding more than double the current return scale. They explained that demands for dividends and share buybacks totaling 1.2 trillion KRW each could undermine future growth potential. KT&G plans to invest 3.9 trillion KRW over the next five years to expand production facilities. However, the board plans to announce a strengthened new shareholder return policy in the second half of this year. They also plan to prepare active funding measures such as liquidating held real estate and expanding borrowings to secure resources.

It is uncertain which side shareholders will support at KT&G's shareholders' meeting. There are quite a few shareholders exercising voting rights at the meeting who do not currently hold shares. If they are not current shareholders, their interest is naturally more focused on total dividend amounts than on future growth plans.

If shareholder activism helps curb practices like preferential treatment of related parties that distribute corporate growth fruits mainly to major shareholders, the benefits can be shared with the majority of shareholders. However, the logic that dividends should be increased simply because there is a lot of cash on hand risks damaging growth potential. In a situation where inflation concerns increase the cost of corporate financing, holding a certain level of cash is inevitable. If dividend sizes are decided like a popularity vote at shareholders' meetings, remaining shareholders and employees may suffer.

An industry insider said, "I understand what activist funds are advocating, but it is regrettable that employees working at listed companies are excluded from these discussions." He added, "The company should grow so that both shareholders and employees can share the benefits. Increasing profits through cost reduction and expanding dividends is not always a good thing."

There are also calls to distinguish between management disputes and shareholder meeting proxy battles. To secure the minimum shareholding required for shareholder proposals and gain support from institutional investors and general shareholders, it is more effective to recommend well-known figures as directors or demand dividend increases than to present long-term growth strategies.

The reason many investors viewed shareholder activism demanding management participation negatively until just a few years ago can also be found in past cases. Sovereign Asset Management purchased a large amount of SK Inc. shares and demanded the resignation of SK Group Chairman Chey Tae-won from the board. In April 2003, they announced holding 14.85% of SK shares for management participation purposes. However, they left after realizing a profit of 800 billion KRW just over two years after investing 177 billion KRW.

Corporate raider Carl Icahn threatened KT&G's management rights and earned over 100 billion KRW in investment returns from sale gains and dividends within a year. From September 28, 2005, to January 9 of the following year, he purchased 7.76 million KT&G shares, totaling 335.1 billion KRW. Carl Icahn attempted to take control of management demanding corporate governance improvements but sold most shares within 10 months. KT&G had to bear considerable costs defending its management rights. There was significant criticism of Icahn's investment behavior, which realized short-term gains amid a stock price surge due to M&A issues.

[Image source=Pixabay]

Focus on Pursuit of Shareholder Self-Interest Rather Than Protection of Shareholder Rights?

Cases like Sovereign and Carl Icahn may be exceptional. However, financial investment industry insiders expressed concerns that, given recent stock price trends, another activist fund like Sovereign could emerge. There is an increasing number of cases where stock prices soar just on news of activist funds making shareholder proposals. SM Entertainment's stock price has surged over 100% this year. Even within fund management companies, voices advocating profit-taking could arise given such a rise. However, Align Partners, which led SM's corporate governance improvement, has not yet sold shares. Eun Kyung-wan, a researcher at Shinhan Investment Corp., explained, "It is important to distinguish between vulture funds aiming for short-term gains through management disputes and shareholders with a long-term perspective," adding, "There are also cases of short-term capital gains by overseas activist funds, which raises concerns in some quarters." He further added, "The behavior of overseas activist funds focuses more on pursuing shareholder self-interest than protecting shareholder rights."

This content was produced with the assistance of AI translation services.