Korean Conglomerates Shrink Boards Ahead of Cumulative Voting Rule

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A shareholder holds up a voting card at Samsung Electronics’ 57th annual general meeting held at the Suwon Convention Center in Yeongtong-gu, Suwon, Gyeonggi Province, on March 18. Yonhap News

Korean companies are shrinking their boards and adjusting director terms ahead of a revised commercial code taking effect on the 10th that requires listed firms with total assets of 2 trillion won or more to adopt cumulative voting. Because the system raises the odds that candidates nominated by minority shareholders win board seats, companies are moving to limit the influence of outside forces.

Companies subject to the mandate narrowed entry paths to their boards at this year’s annual shareholder meetings, according to business circles on the 6th. Leaders Index, a corporate analysis firm, reviewed the results at 269 listed affiliates of the top 50 conglomerates that could be compared with a year earlier and found the total number of directors fell to 1,733 from 1,780, a decline of 47 seats, or 2.6%. Inside directors dropped 4.3% to 807 from 843, while outside directors fell 1.2% to 926 from 937. Kakao (035720) eliminated 14 board seats, followed by Lotte with 13, Samsung with nine, LS (006260) with seven and Hanwha (000880) with six.

Hanjin KAL (180640), the holding company of Korean Air, recently changed its board size to between three and nine members from between three and 11, guarding against the risk of a control dispute after Hoban Construction narrowed its stake gap with Hanjin Group Chairman Cho Won-tae to 0.42 percentage point.

Fourteen companies also staggered the expiration of director terms to prevent multiple seats from turning over at once. Hanwha Group, for example, extended director terms at major affiliates including Hanwha, Hanwha Aerospace (012450) and Hanwha Ocean (042660) to three years or up to three years, from up to two years previously. Reducing the number of directors elected at one time can blunt the effect of minority shareholders concentrating their votes on a single candidate.

Companies are also expected to work harder at managing shareholder sentiment once cumulative voting becomes mandatory. They are likely to strengthen shareholder communication and returns to draw support for their own nominees, while paying closer attention to the expertise and independence of the directors they put forward.

Some in the business community argue that because the revised law strengthens shareholder rights, defensive tools for management should be introduced on an equal footing. Chief among their demands are dual-class shares, which grant extra voting rights to stock held by founders or executives, and poison pills, which let existing shareholders buy shares below market price when an attempt is made to seize control.