Stewardship Code Revision Falls Short of Expectations

South Korea's Stewardship Code has seen a revision, introducing several welcome changes. These include the mandatory disclosure of internal guidelines for stewardship activities and a commitment to phased strengthening of engagement with companies to enhance corporate value and shareholder returns. The code now also explicitly allows for collaborative engagement and broadens its scope beyond domestic listed stocks. Furthermore, it incorporates environmental and social factors into its oversight and mandates regular reviews and reporting of stewardship activities by participating institutional investors.

Despite these improvements, the revised code is unlikely to fulfill the government's promise of empowering institutional investors. A key concern is the capacity of the Stewardship Code Development Committee, which relies on non-standing private members and a small support staff at the Korea ESG Standards Board. This limited capacity raises questions about the effectiveness of oversight. Moreover, the Standards Board, which provides services to institutional investors, faces a structural conflict of interest as it directly appoints committee members.

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However, it is questionable whether the current revised bill can fulfill the Lee Jae-myung administration's promise to strengthen the role of institutional investors through the substance of the Stewardship Code.

Another significant drawback is the lack of clear regulations for institutions that fail to comply with the code. While feedback and awards may encourage some adherence, there are no provisions to exclude consistently underperforming institutions, unlike in the UK where non-compliance can lead to exclusion from the code. This weakens the incentive for genuine engagement and makes participation a less meaningful signal to the market.

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The Stewardship Code Development Committee is composed entirely of non-standing private members, so the capacity of the Standards Board, which supports the actual work, effectively dictates the core of its operation.

The revision also omits previously announced plans for public disclosure of engagement reports by participating institutions and the committee's review results. This lack of transparency hinders external verification of the committee's work and contradicts national development plans. In contrast, the UK publicly discloses a list of participating institutions and their stewardship activities and performance reports annually.

Furthermore, the revised code continues to allow broad exemptions for non-compliance, enabling institutions to maintain their status even with minimal engagement or voting activity. The inclusion of investment reduction, exclusion, or divestment as part of stewardship responsibilities, without requiring active shareholder engagement, is also problematic. The article concludes that significant revisions are needed, including assigning oversight to a more capable and independent body like the Financial Supervisory Service, implementing stricter compliance measures, and ensuring full transparency through public disclosure.

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Unlike in the UK, where non-compliant institutions can be excluded from the code, there are no clear regulations here.