2020 AGM Review(4) Detailed Analysis of AGM Voting Results - Focused on outside shareholders' voting

July 9, 2020 Analyst SJ Yoon ([email protected])

▶ KCGS analyzed the voting results of the agenda items submitted to the 2020 annual general meetings, the support levels of the outside shareholders, etc. ▶ A significant number of companies shared the trend of securing a close-to- majority insider ownership for stable business management. Still, outside and inside shareholders had differing views on a number of agenda items. ▶ A practical institutional tool is necessary such as demanding the board to provide an explanation for the items failing to obtain outside shareholders’ support as is the practice in the advanced capital markets. Companies on their part are advised to make efforts to support shareholders' faithful exercise of rights.

Introduction The KOSPI market disclosure regulation requires that a company owning KRW2 trillion or more file a corporate governance report1), detailing the voting results of its general meeting of shareholders. Under the requirement, 1812) listed companies filed a corporate governance report this year.

Korea Corporate Governance Service (KCGS) reviewed the corporate governance reports submitted this year to identify the support levels of the agenda items voted at the general meetings of shareholders along with the insider ownership percentages. The agency anticipated that controlling shareholders and their family members would be holding a majority of the shares in most cases, which is typical of the Korean

1) As per Article 24-2 of the KOSPI market disclosure regulation, issuers owning KRW2 trillion or more has the mandatory duty of filing a corporate governance report within two months from the date of filing the annual report, effective from 2019. The companies are required to disclose whether they comply with the 10 core principles of corporate governance regarding shareholders, the board of directors, the auditing body, etc. referring to the Code of Best Practices for Corporate Governance published by KCGS. 2) Nine of them filed a corporate governance report voluntarily although their asset size was below the threshold.

1/9 companies. Under the circumstances, we excluded the voting results from the shares held by insiders from our analysis and examined the extent to which the remaining shareholders’ voting impacted the outcome of each agenda item. Based on this analysis, we draw policy implications for the protection of minority shareholders’ interests.

Voting Results As for the 168 listed companies3) who filed a corporate governance report for FY2019, KCGS calculated the support levels and voting outcomes of the resolutions submitted to their 2020 annual general meetings, as well as the percentages of insider ownership4) held by controlling shareholders and the average participation by the outside shareholders.

The companies under the scope of this analysis have issued a total of 109,400,000 shares with voting rights on average, of which votes were cast at the shareholders’ general meetings on around 85,650,000 shares, posting 78.3% of participation approximately. The proposals received 95.25% support with an average opposition of 4.7%. The pass rate stands at 98.7% calculated as the number of proposals that passed out of the total proposals submitted. As for the management proposals, 99.4% of them passed, reaching almost 100%5).

Key Data of AGM Voting Outcomes

2020 AGMs

# of proposals Pass rate # of proposals Pass rate (All) approved (management proposals) 7.3 7.17 98.69% 99.39%

Support (%) Opposition (%) Insider ownership (%) Participation

95.25% 4.68% 42.81% 78.27%

3) Of the 181 issuers who filed a corporate governance report, 13 companies are excluded from the scope of this analysis: , E&C, Korea District Heating Corporation, KT, KT&G, POSCO, POSCO C&C, POSCO International, Korea Gas Corporation, KEPCO, Korea Aerospace Industries, Heavy Industries and Construction, and HMM. They are either a business group without a controlling shareholder who is a natural person or a company whose largest shareholder is a government agency. 4) ‘Insider ownership’ is defined as the sum of the ownership percentages held by the largest shareholder and the related parties (including affiliated companies and executives) as are disclosed on the DART quarterly reports as of March 31, 2019. 5) There was only one management proposal rejected: Hanjin KAL’s proposal to amend the articles of incorporation.

2/9 Of the key business groups, Kolon obtained the highest average support at 99.50%, while LS had the lowest support of 91.25%. As for the average support levels exclusive of the insiders' votes, posted the highest support of 69.93% and the lowest support at a mere 39.06%. In terms of insider ownership, Youngpoong recorded the highest insider ownership percentage of 61.23% and Hansol the lowest at 27.9%.

Voting Results of 2020 AGMs by Business Group

2020 AGMs (#, %)

Avg. support # of Avg. Avg. insider # of Avg. exclusive of affiliated opposition ownership proposals support (%) insider firms (%) (%) ownership*1 (%) Doosan 4 22 93.63 6.22 44.65 58.13 Lotte 6 73 91.88 8.07 56.85 43.44 Samsung 9 65 97.25 2.74 33.47 69.93 2 12 96.54 3.46 28.57 70.10 Amore Pacific 2 10 97.99 2.01 58.15 51.63 Youngpoong 2 18 98.21 1.79 61.23 53.87 Kolon 3 25 99.50 0.50 58.01 54.01 Hite Jinro 2 9 93.29 6.71 57.84 41.09 Hankook Tire 2 7 95.50 4.50 56.44 39.06 Hansol 6 63 91.73 5.03 27.90 69.89 Hanwha 4 35 96.34 3.66 40.97 62.06 Hyundai Department Store Group 3 29 97.21 2.78 38.35 62.52 Hyundai Motor Group 8 56 95.29 4.71 38.65 64.30 Hyundai Heavy 3 16 97.30 2.69 37.24 66.53 Industries Group 5 45 96.13 3.87 47.30 60.45 CJ 4 18 94.54 5.46 42.30 59.05 GS 3 21 96.41 3.59 51.06 56.57 LG 11 56 96.47 3.60 33.99 67.39 LS 2 20 91.25 8.64 40.87 59.68 SK 9 85 96.42 4.68 35.77 65.88 *1 Support percentages net of insider owners (same hereinafter)

Looking at the types of agenda items, elections of non-executive directors, executive officer severance pay regulations, and capital reductions received lower support from outside shareholders (See

). Amendments to AoIs, appointments of non-executive directors and auditors, and directors' remuneration caps attracted higher opposition than the average. For these resolutions, shareholders’ tighter scrutiny is required. Special attention needs to be paid to the proposals that received a lower average support exclusive of insider ownership and a higher average opposition at the same time. Elections of non-executive directors,

3/9 regulations on executive officer severance pay, and capital reductions fall under this category, which failed to win the support of the free float shareholders. This is a corporate governance issue that requires the involvement of the board of directors towards increased communication with shareholders. Moreover, not a single company made public an extra explanation through the corporate governance report for the agenda items that attracted higher opposition.

Avg. Support/Opposition & Avg. Support Exclusive of Insider Ownership By Agenda Item Type 2020 AGMs

Avg. Support Exclusive Avg. Support (%) Avg. Opposition (%) of Insider Ownership (%) Financial Statements 95.69 4.40 53.7 (Dividends) Amendment of AoI 90.68 9.37 51.4 Appointment of Inside 94.49 5.60 51.91 Directors Appointment of Outside 98.03 5.37 54.65 Directors Appointment of 92.38 7.63 48.81 Non-executive Directors Appointment of Audit 94.44 5.32 91.90* Committee Members Appointment of Auditors 74.31 25.69 71.31* Directors’ Remuneration Cap 95.31 9.36 52.74 Auditors’ Remuneration Cap 98.11 1.89 51.14 Stock Option Grants 96.47 3.53 63.41 Executive Officer Severance 94.00 5.93 47.96 Payment Regulation Merger & Division 99.65 1.48 57.62 Reduction of Capital 94.78 5.22 49.45 Total 94.52 5.32 58.93

*1 Controlling shareholders only have a limited influence on the voting outcome of the resolutions to appoint auditors or audit committee members due to the so-called ‘3% Rule’. The rule restricts that controlling shareholders exercise their voting rights on 3% of the shares with voting rights at the maximum.

To examine whether ownership structure impacts the voting outcome, the agency looked at the correlation between the insider ownership percentage and the support levels (See

). The analysis reveals a negative correlation between insider ownership and opposition votes.

The average insider ownership percentage of the analyzed companies stands at 42.63%, close to a majority. SeAH Holdings held the highest insider ownership at 89.98% and NCSOFT the lowest at 12%, which was owned by the largest shareholder. Of the companies under the

4/9 scope of this analysis, those holding a majority of insider ownership shares formed the biggest group. The average insider ownership percentage of this group reaches 61.93%. The companies falling under this group can have their proposals approved as proposed, using the shares held by insiders. Since the portion of the free float shareholders is relatively small then, such issuers may be vulnerable in terms of protecting minority shareholders’ rights.

Also notable is the lower the insider ownership percentage, the higher the average opposition gets. This trend implies the effect of monitoring activities by substantial shareholders such as institutional investors. While the companies show the tendency to secure high insider ownership for stable business management, such a structure serves as a limitation at the same time. Large insider ownership restricts the establishment of sound corporate governance involved by shareholders casting dissident votes. It may also allow a rubber-stamping practice leading to unanimous agreement.

Avg. Support/Opposition By Insider Ownership Band

2020 AGMs

Avg. Avg. Support Group Avg. Insider Avg. Support # of Issuers Opposition Exclusive of Insider Insider Ownership (%) (%) (%) Ownership (%) Ownership (%) 50 ~ 52 96.30 4.06 44.63 61.93

40~50 43 96.13 3.82 59.18 44.14

30~40 35 95.52 7.65 67.04 34.73

20~30 34 92.90 9.86 71.27 25.09

10~20 4 93.11 6.88 79.81 13.72

Total 168 94.52 5.32 58.93 42.63

Outside Shareholder’s Support Rates6)7) To have a clearer view of the gap between the perspectives of inside and outside shareholders, KCGS calculated the support rate of the outside shareholders. The analysis is premised on the assumptions that ① all the related parties attended the respective annual general meetings, and ② all the related parties supported the management proposals. Some of the cases failing to meet these assumptions are excluded from the analysis8).

6) The support rate of the outside shareholders is defined and calculated as [(No. of support shares – related parties’ shares)/(No. of shares voted – related parties’ shares)]*100. 7) The proposals of appointing auditors and audit committee members are excluded from the analysis since they are expected to carry little significance considering the 3% rule. 8) For example, and attracted significantly high opposition on the proposals of electing inside and outside directors. It is deemed that some of the inside shareholders opposed the management proposals.

5/9 Of the 992 proposals under the scope of this analysis, only four management proposals were rejected or approved after amendments, while 49 of them (5%) failed to obtain support from a majority of the outside shareholders. In other words, the 5% would have been rejected if only outside shareholders had voted. Considering that most of the management proposals pass the general meetings, the figure is quite high.

[Figure 1] # of Items By Outside Shareholders’ Support Rate

As Table 5 indicates, the proposal types of 'appointment of inside directors' received the lowest support from the outside shareholders (29.30%), having the biggest gap between inside and outside shareholders. Next, ‘amendment of AoI’, ‘appointment of outside directors’, and ‘directors’ remuneration cap’ received lower support from outside shareholders. These types of proposals also attracted high opposition. As such, the analysis shows a significant gap between inside and outside shareholders’ perspectives on the proposals of electing and compensating directors.

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Proposals Receiving Less Than 50% of Support by Outside Shareholders

2020 AGMs

Avg. Outside Avg. Insider # of Avg. Support Opposition Shareholders’ Ownership Proposals (%) (%) Support (%) (%) Financial Statements 1 75.79 24.21 37.46 41.11 (Dividends) Amendment of AoI 4 55.64 45.22 30.65 35.97 Appointment of Inside 14 80.35 19.65 29.30 48.45 Directors Appointment of 17 73.57 26.43 32.71 43.42 Outside Directors Appointment of Non-executive 2 82.36 17.64 43.97 59.93 Directors Directors’ 7 75.38 24.62 40.71 37.08 Remuneration Cap Auditors’ 1 74.25 25.75 33.47 26.26 Remuneration Cap Executive Officer Severance Payment 3 83.05 16.93 33.43 50.36 Regulation Total 49 75.30 24.77 33.33 43.11

Conclusion and Implications A significant number of companies in Korea share the trend of securing a majority of insider ownership shares to enable stable business management. In this regard, attention needs to be paid to the voting outcome of the general (minority) shareholders exclusive of the inside shareholders. Voting serves as a means to exercise the shareholder's voice. Thus, the percentages of support and opposition votes act as an important yardstick.

By the types of agenda items submitted to the 2020 general meetings of shareholders, a wide gap was witnessed in the items of appointing non-executive directors, amending the executive officer severance payment regulations, and reducing capital, among others. Nonetheless, the agency did not find any company that made public the relevant background or countermeasures for example via the corporate governance report. On compensation-related resolutions including those on directors' remuneration cap, stock option plans, executive officer severance pay regulations, and rules on the privileges granted to former executives and directors, there existed a considerable discrepancy in the perceptions held by the controlling and general shareholders.

An answer to the above-mentioned issues may be found in the widespread application of the comply or explain approach, as is the practice under the UK Corporate Governance Code 9)10). Article 4 of the UK Corporate Governance Code requires a company to explain if a

7/9 board proposal attracts 20% or more opposition from the investors. The explanation must include the background around the voting result, any opinions received from the shareholders, the impact on the board's decisions, etc. The deadline is within six months, and companies may use an annual report as a reporting channel.

Korean companies hardly disclose any background information or feedback voluntarily despite a majority opposition. They are not sufficiently communicating with general or minority shareholders. Effective from 2019, it is mandatory for a firm that owns KRW2 trillion or more to file a corporate governance report. The report needs to be used as a channel to provide a detailed explanation or feedback about the opposed proposals. Then, information asymmetry between controlling and general shareholders may be reduced albeit to a small extent.

Global proxy advisory firm Glass Lewis also takes a similar approach. If a say-on-pay agenda item receives 20% or more opposition from the entire shareholders, the proxy advisor demands that the board of directors provide a reasonable explanation about the remuneration system within the same year.

The listing regulations of Singapore Exchange(SGX)11) have also tightened the rules surrounding long-tenured directors and related-party transactions, in a bid to protect minority shareholders' rights and interests. Regardless of the listing status of a company, if an independent director has served the company's board for nine or more years, his or her continued service must be put to vote for the investors except controlling shareholders. As for the interested person transactions(IPT), shareholder approval is necessary if the size of such transactions amounts to 5% or more12) of the latest audited net tangible assets(NTA)13). While it may be difficult to adopt the same practice in Korea as legally binding one, it seems quite possible to encourage companies to report these elements alongside the voting results for future reference for voting.

The analysis so far points to the increasing need for building into the corporate governance report the measures to protect and enhance the minority shareholders' rights and for companies' faithful implementation. Considering that a stock company is structured under the

9) UK Corporate Governance Code 2018, FRC 10)Many countries around the world have prepared a corporate governance code for companies to adopt. A corporate governance code is aimed at helping the companies build a system to supervise and monitor the management team including the chief executive officer so that they align with the company's policy direction and put the interests of the company before their private interests. A representative such code is that of the UK, which was amended in 2018. 11) SGX Rulebooks, Practice Guidance, Board Roles and Director Duties 12) Around USD124.9m or more as of 2019 closing accounts 13) Net Tangible Assets = Total Assets - Total Liabilities - Intangible Assets

8/9 company act's grand principle of dollar voting, amending the law to restrict the voting rights of the controlling shareholders should be limited to the minimum. Then, more desirable is to update the code of best practices for corporate governance or the corporate governance report form for a more detailed disclosure of the voting results of the general meetings of shareholders. Also desirable is to impose the duty to explain on the board if opposing votes are received more than a certain threshold, modeling after the UK practice. In Korea, most companies have around a majority of insider ownership shares. Without any specific tool or institution, minority shareholders' rights can be hardly protected. Paramount is companies' voluntary will to protect shareholders' rights and interests.

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