[Inside Chodong] Shareholder Activism Is Not an Absolute Good

"Activist funds should be seen as a natural part of the development process of capitalism, neither heroes nor villains," said Lee Chang-hwan, CEO of Align Partners Asset Management, a leading figure in shareholder activism funds. Amid the buzz around shareholder activism in this year's domestic stock market, many individual investors regard activist funds as a force for good. This contrasts with the view of short-selling forces as the 'axis of evil.'

From the perspective of an asset management company CEO who must prioritize fund returns, the overly glorifying public opinion about shareholder activism can be burdensome. Demanding changes in the governance structure of listed companies and calling for increased dividends are strategies aimed at boosting fund returns.

Ahead of the KT&G shareholders' meeting on the 28th, Flashlight Capital Partners (FCP) proposed a dividend of 10,000 KRW per share, double the 5,000 KRW per share set by the KT&G board. FCP also demanded the cancellation of treasury shares worth 1.2 trillion KRW. They explained that considering KT&G's reserves and surplus totaling about 7 trillion KRW and cash flow, this is a reasonable amount that does not affect capital structure soundness. They pointed out that one reason KT&G's stock price remains at the level of 15 years ago is its shareholder return policy, which has been only half that of peers over the past 15 years.

The KT&G board stated that they increased the dividend by 200 KRW compared to the previous year, considering mid- to long-term growth investment plans, and promised to steadily expand dividends. They also tried to appease shareholders by noting that the dividend payout ratio has exceeded 50% over the past three years and that they have been steadily repurchasing treasury shares. The KT&G board has planned to invest 3.9 trillion KRW to expand production capacity by 2027.

At this point, it is difficult to judge whose argument between FCP and the KT&G board will better enhance shareholder value. However, one thing is certain: shareholders with voting rights, even if they do not currently hold KT&G shares, are likely to support proposals for higher dividends. This is because they prioritize how much dividend they will receive after the shareholders' meeting rather than how much KT&G will grow in the future.

We should be cautious of a dichotomy that labels shareholder proposals for governance improvement and shareholder value enhancement as 'good,' and those who reject them as 'evil,' dividing sides. Not all shareholder activism campaigns advocating for shareholder value enhancement present a favorable direction for all ordinary shareholders. Among activist funds taking action ahead of regular shareholders' meetings, few prioritize treasury share cancellations over dividend increases. To gain support from shareholders exercising voting rights at the meeting, dividend increase proposals are advantageous. Dividend payment dates are near, while shareholder value enhancement through treasury share cancellations is more distant.

Shareholders who have already sold their shares but retain voting rights may even feel resentful if shareholder value rises due to share cancellations. Shareholders who currently hold shares but lack voting rights are likely to oppose cash outflows from year-end dividends. They prefer returns through quarterly dividends or treasury share cancellations.

In a capitalist market, institutions and individuals inevitably act according to account returns. While everyone is happy when stock prices rise, opinions may differ on shareholder return policies. The spread of shareholder activism campaigns leading to more transparent corporate governance and improving the distribution method that favored majority shareholders for growth gains is desirable. However, it should not be overlooked that institutional investors advocating shareholder activism primarily aim to enhance fund returns. They are not righteous crusaders driven by a strong sense of duty or sacrifice.