Pension funds vs. large companies

The National Pension Service in March 2008 voted against the appointment of Hyundai Motor Chairman Chung Mong-koo and Doosan Heavy Industries & Construction Chairman Park Yong-sung as board of directors in the shareholders’ meeting. The two men were deemed "inappropriate" to serve as directors shortly after they were prosecuted for corruption. The objection was the first by Korea’s largest institutional investor to appoint the heads of large companies as directors. Though the pension corporation owned 4.5 percent of Hyundai and 2.9 percent of Doosan at the time, their stand brought on a huge ripple effect.

In the U.S. and the Netherlands, pension funds actively participate in management. California Public Pension Fund even asks for the resignation of poorly performing CEOs. Korea’s National Pension Fund has voiced opposition at shareholders’ meetings since it announced in February 2005 that it would actively exercise its voting right. The fund, however, often gives up the right to vote in sensitive issues such as selecting CEOs. Hyundai and Doosan were extremely exceptional cases.

Kwak Seung-jun, chairman of the Presidential Council on Future and Vision, said, “Exercising the voting right by public pension funds is the best way to keep in check large companies, which have grown into great powers.” The National Pension Service owns more than 5 percent of 139 companies including Samsung Electronics, Posco, Hyundai Motor and Korean Air. If pension funds aggressively exercise their right, they will have a huge impact on large companies. The presidential office feared that the meaning of Kwak`s words might have been exaggerated, saying, “This was Kwak’s personal opinion and was not coordinated with the government or reviewed as policy.” The business sector took a negative view of the matter, calling it “pension fund socialism.”

Yet businesses are also largely responsible for this result. Many heads of large companies have a loud voice compared to the shares they have, which is called "imperial management.” Even privatized companies such as Posco and KT cannot prevent their CEOs from going their own way. If pension funds exercise their voting right in a neutral and healthy manner, such problems can be handled. If the funds benefit pension subscribers, they will like it but if pension funds are not independent, lack expertise, and are swayed by the government, politicians, and anti-business civic groups, more negatives than positives will arise. A decision should be made after comparing the pros and cons and devising supplementary measures that can prevent government influence.

Editorial Writer Kwon Sun-hwal (shkwon@donga.com)