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Controlling private companies through NPS

Posted November. 28, 2017 08:44,   

Updated November. 28, 2017 09:20


As the National Pension Service that manages 600 trillion won pension is about to declare to be more assertive in exercising its voting rights as a major shareholder in listed companies, there are increasing concerns over the NPS degenerating into a political tool. In a recent meeting of KB Kookmin Financial Group shareholders, the NPS voted for a motion to name an outside director to participate in management decisions. In January next year, it will introduce a “stewardship code” — the guidelines related to institutional investors proactively exercising their voting rights. Expanding its voting rights without addressing the current decision-making process that becomes wobbly under political pressure is more of a friendly gesture towards the current administration than a decision made for the benefit of pensioners or shareholders.

The NPS exercising its voting rights can contribute to business management transparency and increased corporate values. However, the current governance structure of the NPS is so vulnerable that it can be controlled by politics. It is difficult to prioritize the benefits of pensioners when the minister of health and welfare appoints the chairman of the NPS and the ministry of strategy and finance assesses its management. No one guarantees that investment management is subordinate to the Ministry of Health and Welfare, and investment decisions are free from political pressure. There have been fundamental restrictions that hindered the NPS from actively exercising its voting rights.

Introducing the stewardship code in a hasty manner when it is difficult to guarantee prudent investment decisions can give a right to the government to control management of major businesses. The NPS is a giant institutional investor that holds shares of 275 listed companies and the largest shareholder of the most representative companies such as Samsung Electronics and POSCO. If one or two outside directors advance into the board of directors at private enterprises and small and medium-size institutional investors string along with big investor, businesses will become more conscious of the government. Kim Young-joo, the former national assemblyman of the ruling Minjoo party and incumbent chairman of the NPS, could become a window of this “code politics.”

The outside director system was one of President Moon Jae-in’s campaign promises, which is why the ruling party is trying to enact a law to appoint outside directors in public institutions. The system will be spread starting from Seoul to public institutions, private financial institutions and private enterprises. The NPS controlling the management of private enterprises with its voting power and outside director is, in fact, socialism where the government controls private companies.

Moreover, carrying forward national agenda with the NPS fund accompanies a risk of depleting Korean citizens’ retirement savings. The government is already preparing to utilize the NPS fund to build long-term rental houses, expand nursery facilities and expand nursing-home operations. The law stipulates that the NPS can invest in public services, but only under the precondition that it does not destabilize the fund. The profit rate of the NPS last year was 4.8 percent, which is less than half of the California Public Employees' Retirement System or Canada Pension Plan. The NPS fund will be depleted by 2060. Investment that prioritizes the public interest rather than profits will be met with a backlash of 22 million pensioners.