Korea Capital Market Institute

Generally, only a small percentage of institutional investors in Korea raise objections in general shareholders’ meetings. Although they are supposed to raise objections to agenda that may shrink the value of shares or go against the interest of customer assets, most institutional investors in practice remain passive in exercising their voting rights. Thus, it is rare to see problematic agenda actually face objections in general shareholders’ meetings of listed corporations. 

Institutional investors are required to engage in management of their investment target companies when they carry out their fiduciary duty. However, certain limitations exist in their engagement activity. Behind those limitations are fundamental factors, for example, the lack of awareness about the duty, conflicts of interest in the ownership or business relations with investment target companies, cost burdens for exercising voting rights, etc. 

The important issue in such passivism among institutional investors is whether fiduciary responsibilities such as the duty of loyalty and the prudent man rule are properly enforced. In order to see whether institutional investors’ passivism as fiduciaries is actually in violation of relevant laws and regulations, I explore the legal framework of the US, the UK, and Japan from the comparative law perspective. 

As a result, I confirm that Korea has a systematic, complete legal framework. Related to this, I review relevant issues requiring further discussions from the legal and regulatory perspectives: 1) voting rights exercised by institutional investors themselves; 2) voting rights exercised by asset owners instead of institutional investors, 3) reduced burdens of proof for asset owners, 4) application of a class action regime, and 5) rights to request a change of fund manager. 

The fact that Korea’s shareholder rights are exercised inactively despite its legal framework on institutional investors’ fiduciary duty as advanced as that of developed countries manifests that the problem lies not in the legal and regulatory framework. Hence, discussions on this issue, more specifically, on active voting rights should focus on enforcement, instead of further legislative improvements on the existing framework.

Seeking a realistic alternative to improve the enforcement of fiduciary duty, I explore two regimes; shareholder activism of the US and the stewardship code more recently adopted by the UK and Japan. This is because those countries are evaluated as effectively enforcing and implementing the fiduciary duty imposed by the legal framework via the two regimes. 

The review on the two regimes uncovers an interesting implication for Korea. The existence of institutional investors 

who fully recognize their fiduciary duty as well as the need to exercise shareholder rights is not the precondition to the stewardship code adopted by Japan and the UK. Rather, the regime sits on institutional investors with low awareness about their fiduciary duty and encourages them to carry out the duty based on market discipline, e.g., disclosure. In that sense, this is more suitable for Korea’s current conditions.

Such a regime, also referred to as best practices, is without any legally binding force, but utilizes disclosure as market discipline to induce institutional investors to carry out their fiduciary duty in good faith. This creates incentives for institutional investors to fully abide by the duty for maximizing investment returns and corporate value without any additional legal burden. 

Based on the findings, the stewardship code better suits Korea’s current conditions in order to encourage the fiduciary duty to be better enforced. This study explores the concrete shape of the stewardship code recommended for Korea. To map out the fundamental direction, I identify and analyze the adequacy of detailed criteria: 1) principle-based system and “comply or explain” approach; 2) disclosure-based system; 3) core principles; 4) collective action among institutional investors; 5) distinction between asset owners and managers; and 6) who enacts and manages the enforcement of the code. 

Furthermore, institutional investors’ engagement in their investment targets may give rise to a conflict with the existing

 legal framework. Regarding this, this study reviews four legal and policy issues: 1) relations between engagement and insider transactions; 2) relations between engagement and filing of changes in ownership of block shares; 3) relations between collective action, filing of changes in ownership of block shares, and a tender offer; 4) supplementary measures for large pension funds’ exercise of shareholder rights.