Governance Forum: "Hanwha Aerospace Value-Up Plan Is Insufficient"

The Korea Corporate Governance Forum has assessed Hanwha Aerospace's value-up plan as insufficient, citing shortcomings in the composition of the board of directors and shareholder return plans.

On June 10, the Forum issued a statement saying, "Although Hanwha Aerospace's value-up plan claims to practice shareholder-oriented management, it appears to lack understanding of its true meaning. There is a lack of sincerity towards shareholders, and the plan is inadequate in addressing key market concerns such as board composition, capital allocation, and detailed cash flow plans. Therefore, we are assigning a grade of D."

The Forum further stated, "A value-up plan is not simply an opportunity to explain business results such as sales, profits, and investments to shareholders. Good governance means making rational and transparent decisions as the company pursues the long-term interests of all shareholders."

The Forum also noted, "The company disclosed a cost of equity of 15% and a cost of debt of 8%, yet in March of this year, it proceeded with a large-scale rights offering amounting to 3.6 trillion won. Even now, it is difficult to regard this as a rational decision by the board. Although the securities registration statement for the rights offering was revised three times, many in the market and many shareholders still believe that borrowing would have been a better choice."

The Forum also assessed the composition of the board as inadequate. It stated, "It is difficult to understand the appointment of a former Army Logistics Commander as a new outside director, especially since there is already one outside director who is a former military general." The Forum added, "Outside directors must not only be independent, but also be able to monitor management and engage in in-depth discussions about capital costs and capital allocation."

The Forum also pointed out issues with the public tender offer conducted last year. Last year, Hanwha Energy acquired 6 million common shares of Hanwha (an 8.0% stake) through a public tender offer. At the time, the Forum commented that it was unfair for ordinary Hanwha shareholders, who had already suffered from prolonged poor stock performance, to be forced to sell their shares at a price-to-book ratio (PBR) of 0.28 at the request of the controlling shareholder.

The Forum explained, "From a governance perspective, our focus on the Hanwha public tender offer was due to the potential for infringement on the interests of ordinary shareholders and issues of fairness. Naturally, controlling shareholders and management have an advantage due to information asymmetry, and by accessing high-level information such as large-scale order forecasts, they may have anticipated a rise in Hanwha's share price one to two years later."

The Forum concluded, "This is a vivid example that demonstrates the necessity of the Commercial Act revision being promoted by the Lee Jaemyung administration," and emphasized, "At that time, the Hanwha board should have taken measures to protect ordinary shareholders from the perspective of the duty of loyalty of directors."