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On a recent trip to South Korea, Investment director, Alexandra Morris, and portfolio managers Knut Harald Nilsson and Søren Milo Christensen met with Professor Youjae Yi, head of Hyundai's independent corporate governance ​committee​, and Zayong Koo, head of global PR/IR in the company. They had a good dialogue around improvements in the company's corporate governance. Photo: SKAGEN.

SKAGEN recently sent a delegation to South Korea, where our funds have a total of USD 1.16 billion invested. A generational change seems to be taking place in many of the country's largest companies, and it is important to keep abreast of the developments. The family-run conglomerates, known as chaebols, seem to be slowly moving in the right direction.

The chaebol reform is high on the agenda in the run-up to the presidential election in South Korea due to be held in May. A leading presidential candidate, Moon Jae-in, has called for a shakeup in the governance of the chaebols. One goal is to implement legislation to give minority shareholders more power to elect board members to represent their interests and check the power of chaebol chiefs.

SKAGEN's equity funds are minority shareholders in Samsung, Hyundai Motors and LG, amongst others, and could potentially benefit from such a change in legislation. Knut Harald Nilsson, portfolio manager of emerging markets fund SKAGEN Kon-Tiki, discusses the implications of the potential business reforms in South Korea and what this might mean for shareholder activism.

How much do you invest in South Korea at the moment, and how does the current chaebol structure influence your decisions?

We have been shareholders in Korean companies for the past 20 years and currently hold USD 1.16bn. Understanding the chaebols is key to navigating the Korean investment universe. The chaebols have been instrumental in developing the companies and we tend to like to invest where there is strong private ownership as this creates an alignment of interest with minority shareholders. Nevertheless, a change to a clearer structure would be good for the Korean market as it would help attract more international investors that may see the current structure as convoluted and difficult.

How realistic would it be for the government to implement the proposed changes, especially given previous governments have failed to do so?

There is currently a wind of change that is blowing in Korea when it comes to openness, transparency and corporate governance in general. We believe there will be progress, if not on all, then on some of the proposals. Again, a change to a clearer structure would be good for the Korean market, as it would help attract more international investors that may see the current structure as overly complex.

Would measures like having investors recommend one or two board members be enough to prevent chaebol members from abusing their power?

Investors recommending one or two board members would be a step in the right direction. I do not foresee that this will happen overnight, but it would be a first step in a gradual and more long-term process. With continued pressure from the younger generation in Korea, international investors and corporate governance awareness, we believe there will be substantial improvements for minority shareholders.

What do you think the chaebol will look like in three years' time?

We should definitely expect a better integration of corporate governance issues and fair treatment of minority shareholders. The chaebols will continue to be strong, but will to a much larger degree work for the benefit of all shareholders, not just themselves.

SKAGEN's investment philosophy

Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager's skill, the fund's risk profile and management fees. The return may become negative as a result of negative price developments.