Foreign Proxy Advisors Hinder Corporate Governance Reforms

The recent shareholder meeting season has highlighted a critical bottleneck in South Korea's corporate governance reforms: the recommendations of foreign proxy advisory firms. While South Korea has been diligently amending its Commercial Act to enhance corporate oversight and shareholder rights, these foreign advisors, particularly ISS and Glass Lewis, are often found to be recommending against the very reforms we champion. Their influence is substantial, given that foreign investors hold a significant portion of shares in major Korean companies. When these foreign shareholders follow the advisors' recommendations, it can sway crucial decisions on matters like board appointments and articles of incorporation amendments.

“

The recommendations of foreign proxy advisors, who have significant influence over foreign shareholders, are going against the direction of reform.

This past March, we observed several mid-to-large cap companies attempting to circumvent the spirit of the revised Commercial Act through amendments to their articles of incorporation. These included proposals to make director terms more flexible and reduce the number of directors, measures that could consolidate control within the existing management and hinder the appointment of independent directors through cumulative voting. While domestic institutions like the National Pension Service and local ESG advisory firms recommended against these proposals, foreign advisors largely recommended in favor. This divergence is deeply concerning.

“

The quality of advice from foreign proxy advisors is questionable.

The issue appears to stem from a lack of resources and insufficient understanding of the Korean market among these foreign firms. For instance, one major advisory firm reportedly analyzes over 2,000 companies during a two-week period in Korea with only a handful of permanent staff supplemented by temporary hires. Such a model raises serious questions about the quality and depth of their analysis. We believe it is imperative for our financial authorities to scrutinize the quality of advice provided by these foreign entities. Furthermore, systemic improvements are needed, such as staggering shareholder meeting dates and extending notice periods, to allow for more thorough analysis and informed decision-making. The hard-won progress in corporate governance reform is too important to be undermined by oversight or inadequate analysis from external advisors.

“

Is it possible to conduct high-quality analysis with such limited resources?