Questioning the Board's Role in Presidential Projects: This is Reform

A recent inquiry from an asset management firm to SK Hynix's board of directors has ignited a debate about corporate governance reform in South Korea. The firm's letter, questioning the process behind a major investment plan, asked, 'Where is the place for general shareholders?' Although the company later retracted the letter, labeling it a 'personal opinion,' the core question about the board's role in significant corporate decisions remains.

The investment plan, announced by SK Group Chairman Chey Tae-won alongside Samsung Electronics Executive Chairman Lee Jae-yong at a presidential event, involves substantial funding for semiconductor and artificial intelligence projects. The asset management firm pointed out that such a large-scale plan, capable of shaping the company's future, was announced without apparent deliberation or approval from the board. This move is seen as problematic, especially given the current government's stated goal of resolving the 'Korea Discount', the phenomenon of South Korean stocks trading at a lower valuation than their global peers.

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Where is the place for general shareholders?

Critics argue that bypassing the board of directors, the company's highest decision-making body, is a relic of past practices and not exemplary corporate governance. The Korean Corporate Governance Forum echoed these concerns, stating that Chairman Chey, who is not an SK Hynix board member, announced the investment plan before board approval, violating OECD principles. The core of good corporate governance lies in an independent and competent board. The amendment to the Commercial Act last year, mandating directors to act in the best interest of all shareholders, was seen as a significant step towards reducing the 'Korea Discount.'

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The structure where an external entity controls the direction of astronomical cash flow before sufficient deliberation and resolution within the board can be a past practice, but it can never be a model example.

While the investment itself is not being opposed, the issue lies in the process. The article emphasizes the importance of following proper procedures, including board review and approval, even for critical projects. Deviating from these established paths, it warns, could lead back to the pre-reform era where controlling shareholders could disregard minority investors. The incident underscores the challenges faced by institutional investors in South Korea. Many financial firms are part of chaebol conglomerates, creating potential conflicts of interest and pressures that can stifle independent oversight. The withdrawal of the letter, potentially influenced by such pressures, highlights the difficulties in fostering a corporate environment where institutional investors can actively engage without being perceived as confrontational.

The article concludes by noting that while a mid-sized asset manager took the courageous step to question the process, larger entities like the National Pension Service remained silent. The success of the current government's corporate governance reform hinges on whether such voices of concern can be sustained and lead to tangible changes in how companies operate and are overseen.

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Chey Tae-won, who does not hold SK Hynix shares and is not a board member, announced the large-scale investment plan before board approval, which violates the OECD Principles of Corporate Governance.