[Inside Chodong] Capital Market "Wolf Pack" Alert

Warren Buffett's Activist Investing in the 1950s
The Rise of Ruthless "Corporate Raiders" in the 1970s and 1980s
"Pack of Wolves" Fund Alliances in the 2010s
Activism Expected to Surge with Korea's Commercial Act Amendment
Pursuit of Short-Term Gains Could Jeopardize Corporate Futures
Activist Funds Should Heed Buffett's "Headline Test"

Warren Buffett (1930~), known as the "Oracle of Omaha," was an active shareholder activist in the 1950s when he first began investing. This was a natural path for him, as he was a prot?g? of Benjamin Graham, the "father of value investing" and the founder of shareholder activism. A representative example is when he became the second-largest shareholder of Dempster Mill, a listed company manufacturing agricultural pumps, and called for changes to the board of directors. As Buffett advocated, Dempster Mill transformed into a profitable company through management changes and asset sales.

In the 1970s and 1980s, shareholder activism in the United States became more aggressive, ushering in the era of "corporate raiders." Using hostile tender offers and leveraged buyout (LBO) strategies, figures such as Carl Icahn?well-known even in Korea?were active in many places. In the 1990s, pension funds such as the California Public Employees’ Retirement System introduced stewardship codes. In the 2000s, hedge fund activism emerged, and in the 2010s, ESG funds became widespread. As a result, the players and strategies of activist funds have become unimaginably diverse.

Around 2010, when countless activist funds emerged, the concept of "Wolf Pack" activism gained attention in the United States. This concept originated from a U.S. court case (Hallwood Realty Partners v. Gotham Partners, 2002), describing how, when one fund begins to attack a target company, various other funds intensively purchase shares and join the attack, resembling a wolf pack hunting together. Although there is no prior collusion, funds that "catch the scent" form loose alliances to focus their attacks on the target company.

Whenever there is a sudden change in regulations, the capital market always experiences "The Hour of the Dog and Wolf." During times when visibility is hazy, such as dawn or dusk, it is difficult to distinguish from afar whether the approaching animal is a dog or a wolf. In Korea, this was the case after the 1997 foreign exchange crisis, when the stock market was opened under the banner of "capital market advancement." At that time, foreign "wolves" such as Tiger Fund (SK Telecom) and Sovereign Fund (SK) arrived first. While this eventually led to improvements in the governance of large corporations, it also caused the alarming experience of seeing national key industries shaken in the short term.

With the amendment to the Commercial Act introducing "directors' fiduciary duty to shareholders," the capital market is once again facing "The Hour of the Dog and Wolf." From the perspective of corporate management, even if the approaching entities are dogs rather than wolves, the mere fact that they come in packs is enough to instill fear. This is especially true for companies already facing numerous uncertainties, such as tariff pressures from the Donald Trump administration in the United States, China’s supply reduction policies, and the wars between Russia and Ukraine and between Israel and the Middle East. The presence of "wolf pack" activist funds only adds to this anxiety. This is why careful and thorough discussions are needed for further amendments to the Commercial Act, such as mandatory cumulative voting and expanding the number of separately elected audit committee members.

Activist funds, even with a "stronger Commercial Act," should not wield their power recklessly. Seeking short-term gains at the expense of corporate innovation capabilities or destroying long-standing corporate cultures must be avoided. Warren Buffett proposed the "headline test": when making an investment decision, ask yourself whether you would be proud to have your actions reported prominently on the front page of a newspaper, in front of your family, neighbors, and friends. If there is even the slightest sense of moral embarrassment or difficulty in explaining your actions, it is best not to pursue such investments.