"Your Excellency the President, Please Take Interest in KT&G's Governance" Activist Fund Appeals via Handwritten Letter... KT&G Calls It a "One-Sided Claim"

KT&G Governance Issues Highlighted Including Internal Succession of Management Rights
"Next CEO Candidate Responsible for 30% Plunge in Operating Profit"
"If Ignored, 'Value-Up' Authenticity Will Be Questioned"

"KT&G is only superficially giving up a fourth term, while the cartel continues to maintain its influence. An external candidate who increased operating profit tenfold was eliminated in the preliminary round, and the person who caused a 30% plunge became the final candidate. In such a situation, no matter how many measures are announced through the 'Corporate Value-Up Program,' the stock price will not move. We ask you to pay attention to KT&G's governance."

This is part of a letter sent by the activist fund Flashlight Capital Partners (FCP) to President Yoon Suk-yeol. According to FCP on the 29th, Lee Sang-hyun, CEO of FCP currently staying in Singapore, sent a 'handwritten letter' to the Yongsan Presidential Office via international mail the day before. Lee said, "I sincerely pressed the pen firmly and sent a letter containing my heart," and "I hope you will definitely read this earnest appeal." The letter was transcribed into text through him.

"The person who caused a 30% plunge in operating profit is the final candidate... Governance is abnormal"

Sanghyun Lee, CEO of FCP [Photo by FCP]

The letter begins with a greeting: "Dear Honorable President, hello. My name is Lee Sang-hyun. I am a citizen of the Republic of Korea and a stock investor, and I greet you like this." It continues, "I appreciate the 'Corporate Value-Up Program.' However, for the program to work well, fundamentally, the company's governance must function, and if it does not work internally, nothing from outside will be effective."

Then, KT&G was cited as an example. "KT&G is a widely held company with many small shareholders," and "As you mentioned, KT and POSCO are being normalized, but KT&G is only superficially giving up a fourth term while the cartel continues to maintain its influence," it said. It added, "Looking at the CEO selection process, an external candidate who increased operating profit tenfold was 'eliminated in the preliminary round,' and instead, the person who caused a 30% plunge was announced as the final candidate. Coincidentally, the board of directors is under police investigation, and the final candidate is also a key witness."

The final candidate pointed out in the letter is Senior Vice President Bang Kyung-man, recently nominated by KT&G as the next CEO. FCP holds the view that since Bang was promoted to inside director and senior vice president in 2021, the company's operating profit has declined, and he lacks qualifications due to failures in the U.S. business. There were also rumors of a 'pre-selection' since the tenure of former CEO Min Kyung-jin, with Bang already being considered a next CEO candidate. Since privatization, all KT&G CEOs, including Bang, have been 'internal candidates.'

The board that selected Senior Vice President Bang as the final candidate is under police investigation for a 'luxury business trip' controversy. The external candidate who increased operating profit tenfold is believed to be Cha Seok-yong, former Vice Chairman of LG Household & Health Care. Cha left records of 17 consecutive years of growth at LG Household & Health Care, with sales increasing ninefold and operating profit 22-fold. He applied for the KT&G CEO position but reportedly was not even included in the first shortlist.

"If KT&G is left as is, the sincerity of the value-up effort will be questioned"

Lee said in the letter, "If outside directors pursue their own private interests rather than the interests of shareholders or the company in this way, no matter what measures are announced externally, the stock price will not move," and "therefore, I hope you will pay attention to (KT&G's) governance." He added, "If governance is ignored and left unattended, the sincerity of the 'cartel reform' and value-up program you have spoken about so far may be questioned."

He also said, "If KT&G's situation is tacitly approved as it is, many people will doubt the value-up program in the future," and "since the 2022 campaign called 'A Company with Owners,' I have met many small shareholders nationwide and received letters. I try to gain strength thinking of those people," he said. The letter ends with an appeal: "Although I am a shareholder with a very small and insignificant stake, we will do our best to make KT&G a model case for large corporations, so I ask the President to continue to give clear messages for the people and pay attention to governance."

Senior Vice President Bang Kyung-man's appointment as CEO will be decided at the shareholders' meeting on March 28. KT&G's largest shareholder is the U.S. asset management firm First Eagle Investment (7.31%), with IBK Industrial Bank as the second-largest shareholder (7.11%) and the National Pension Service as the third-largest shareholder (6.36%). FCP is intensifying its offensive to improve KT&G's governance ahead of the shareholders' meeting. It is proceeding with damage compensation lawsuits against 21 current and former inside and outside directors for causing about 1 trillion KRW in losses to the company through free stock donations and has also submitted a shareholder proposal to nominate CEO Lee Sang-hyun as an outside director candidate. KT&G has contributed to six affiliated foundations and funds over about 20 years, holding approximately 11% of friendly shares, which FCP claims are used to actively exercise voting rights in a coordinated manner for management appointments. FCP recently sent a letter urging the National Pension Service to actively exercise its voting rights.

KT&G: "Management 'cartel' allegations are groundless"

Lee Sang-hyun, CEO of FCP, founded FCP after serving as Korea representative for Singapore Investment Corporation (GIC), McKinsey, Affinity Equity Partners, and Carlyle. FCP holds about 1% of KT&G shares. Regarding the reason for investing in KT&G, he said, "'Good companies' traded at 'cheap prices' due to 'governance' issues, and I believed that improving this would 'normalize' the stock price. KT&G was such a company," adding, "Both the management infringing on shareholder rights and outside directors willingly participating in this behavior are problems that must be corrected."

A KT&G official said, "The entire CEO appointment process was conducted solely by independent outside directors, providing fair opportunities without discrimination between internal and external candidates through a fully open recruitment system, reflecting objective evaluations by an appointment advisory group composed of external experts, thereby enhancing fairness and objectivity in CEO candidate selection," and "The allegations regarding management succession are completely unfounded." Regarding the donation of treasury shares, the official stated, "It was a contribution for the public interest purpose of fulfilling corporate social responsibility." Regarding overseas business trips by the board, "When necessary for business, such as visiting overseas production facilities, the board traveled once a year for about seven days, with an average cost per person of about 6.8 million KRW excluding airfare," the official explained.