[2024 Alternative Investment Forum] Won Jonghyun, National Pension Service Specialist, "Improving Corporate Governance is the Essence of Value-Up"

It is undesirable to modify the existing pension management system for value-up
Short-term stock price boosting focused on shareholder return rate goes against the essence
Focus should be on improving corporate governance, etc.

"Rather than changing the current operational system or decision-making organization for a temporary 'value-up,' we will focus on fundamentally enhancing corporate value while adhering to responsible investment and the principles of fiduciary duty."

Won Jong-hyun, a member of the National Pension Service Investment Policy Committee, is giving a presentation on the topic "National Pension Service Fiduciary Responsibility Activities and Value Up" at the 2nd Asia Economy Alternative Investment Forum held on the 12th at the Conrad Hotel in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

Won Jong-hyun, full-time expert committee member of the National Pension Service (NPS) Fund Management Headquarters and former chairman of the Fiduciary Responsibility Committee, stated at the '2nd Asia Economic Alternative Investment Forum' held on the 12th at the Conrad Hotel in Yeouido, Seoul, that value-up should be an essential improvement of corporate value through corporate governance enhancement. He also mentioned that it is undesirable to change the existing operational decision-making structure or management methods of the NPS for short-term value-up.

As of the end of 2023, the NPS holds 1,281 domestic stocks listed on the KOSPI and KOSDAQ markets. Among them, 268 stocks have a shareholding ratio of 5% or more, and 43 stocks have 10% or more. The average shareholding ratio per stock in domestic equities reaches 5.8%. It is no exaggeration to say that the major stocks are held roughly in proportion to their market capitalization. In terms of amount, this amounts to approximately KRW 148 trillion.

The scale of assets under management by the NPS has increased every year, surpassing KRW 1,000 trillion. However, the valuation of stock holdings has not changed significantly for over 10 years. This is the result of partly reducing the proportion of domestic stock investments and low returns. Commissioner Won explained, "Since 2010, the U.S. S&P has increased 4 to 5 times, Japan's Nikkei index has tripled, and Germany's DAX index has doubled, but the cumulative return of the KOSPI index is less than 50%," adding, "The sluggish Korean stock returns are acting as a dilemma for domestic stock investments."

He stated, "Large pension funds like the NPS cannot discover undervalued stocks or select stocks with price appreciation catalysts for timing investments," and emphasized, "For the NPS to achieve excess returns, the only way is to enhance corporate value." He continued, "About 80% of last year's investment returns came from valuation gains of held assets," and said, "The focus of asset management inevitably has to be on how to increase the value of held assets."

He also pointed out problems with the direction of value-up efforts currently promoted by the government and financial authorities. Commissioner Won said, "Value-up has two aspects: how to raise corporate value and how to increase the value of undervalued stocks, but true value-up should be the former," and criticized, "However, recent government-led value-up efforts are focusing on the latter, centered on shareholder return rates."

He remarked, "It is undesirable to change the governance of the NPS for value-up," and proposed, "It would be a faster and more efficient way to systematize the existing voting guidelines more realistically and disclose voting records to secure the objectivity and independence of shareholder rights exercise."

Regarding fund management performance evaluation, he advised, "Before discussing the independence of fund management, it is more realistic to prioritize the independence of the evaluation itself," and added, "If government interference is a concern, the number of government members on the Fund Management Committee should be reduced to reflect the subscribers' opinions, and the 'National Pension Act' should explicitly state the duty of care to maximize subscriber benefits."

He further urged, "A system of outside directors should be established who respect shareholders, engage in dialogue with them, listen to their opinions to gather ways to help the company, and independently point out and monitor factors that hinder management's attitude and corporate value enhancement."