Activist Shareholders Drive Corporate Governance Reforms in South Korea

The recent wave of shareholder activism has significantly impacted corporate governance in South Korean companies, marking a shift in power dynamics between small shareholders and traditional family management. As the March regular general shareholders’ meeting season concludes, individuals recommended by small shareholder alliances and activist funds have joined the boards of various listed companies, signaling a growing demand for improved shareholder returns and corporate accountability.

According to the Korea Exchange on April 1, the stock price of KOSDAQ-listed HPO closed at 2,455 won, up 2.29% from the previous trading day. The health functional food specialist, known for “Denmark Probiotics Story,” saw its stock price rebound after seven trading days following the election of an auditor recommended by an activist fund at the shareholders’ meeting on March 31.

The activist fund Stride Partners pointed out that HPO’s governance structure and poor decision-making led to its sluggish stock performance. Since its listing in May 2021, HPO has never surpassed its public offering price of 10,608 won, and its market capitalization has decreased from 442.6 billion won to 103.3 billion won. Stride Partners demanded the withdrawal of HPO’s subsidiary listing plans and recommended attorney Nam Joong-gu as an auditor, which was approved.

Stainless steel processing company T-Flex, also listed on KOSDAQ, saw former Vice President Koo Hee-chan, recommended by a small shareholder alliance, appointed as a standing auditor at its shareholders’ meeting. This was achieved by securing 56.11% of voting shares through the small shareholder platform Heyholder. On the same day, T-Flex’s stock price rose by 1.9% compared to the previous trading day.

The law firm Weon, representing the small shareholder alliance, criticized the excessive family management for diminishing the company’s value. Of the total seven executives, four, and of the four board members, three are related to the CEO. While the accumulated operating profit over the past five years was 45.3 billion won, the compensation for the CEO and other executives was 9.3 billion won, whereas the total shareholder dividend was only 3 billion won. They plan to normalize corporate value through management transparency.

Kolmar Holdings welcomed Lim Seong-yoon, co-CEO of the U.S. activist fund Dalton Investments, as a non-executive director. Although non-executive directors do not participate in management, they attend board meetings to express opinions. Kolmar Holdings decided to listen to diverse shareholder opinions to enhance corporate value.

Additionally, individuals recommended through shareholder proposals were elected as outside directors at DI Dongil (Lee Sang-guk) and UXN (Kim Byung-chul, Lee Han-nam).

The increasing instances of directors and auditors being appointed through shareholder proposals are due to the growing demands for shareholder returns. With the activation of online shareholder action platforms, cases of small shareholders winning in proxy battles have also increased. According to the Korea Chamber of Commerce and Industry, the average shareholding ratio of small shareholders in 200 listed companies is 47.8%, surpassing that of major shareholders and related parties (37.8%). The stock price of Dentium, a KOSPI-listed company, rose by 11.11% from the previous trading day simply on news that the activist fund Align Partners secured a 7.17% stake.

However, there are concerns that the demands of small shareholder alliances or activist funds do not always have a positive impact on companies. As demands for excessive dividends or share buybacks increase, the capacity for long-term investment may decrease. Jeong Dong-hee, a researcher at Samsung Securities, stated, “Dentium’s stock price has fallen to the lower end of its historical valuation due to its passive shareholder return policy, so the intervention of activist funds could be an opportunity for a stock price reversal,” but also warned, “Until a fundamental performance improvement strategy emerges, stock price volatility may increase.”