Determinants of Shareholder Activism of the National Pension Fund of Korea

• Published date: 01 December 2018
• Author: Young S. Park,Francis In,Kyeong Woo Wee,Jaehyun Lee,Jaeuk Khil
• Date: 01 December 2018
• DOI: http://doi.org/10.1111/ajfs.12238

Determinants of Shareholder Activism of

the National Pension Fund of Korea*

Jaehyun Lee

College of Business Administration, Soongsil University, Republic of Korea

Francis In

IN-SRI Research Lab Pty Ltd, Australia

Jaeuk Khil

Department of Business Administration, Hanyang University, Republic of Korea

Young S. Park

Department of Business Administration, Sogang University, Republic of Korea

Kyeong Woo Wee**

Department of Business Administration, Sookmyung Women’s University, Republic of Korea

Received 14 April 2018; Accepted 29 September 2018

Abstract

This paper identifies the determinants of shareholder activism of the National Pension Fund

of Korea (NPF), and investigates its stock market reaction. In the case of article amendments,

the NPF exercises its voting right actively when the firm has concentrated ownership, and

does not belong to chaebols. The NPF is active when the firm has diffused ownership, and is

not a chaebol affiliate if the agenda up for vote is auditor appointments. The event studies

show that a long position in the NPF “Yes” vote stocks and a short position in the “No” vote

stocks produce positive abnormal returns.

Keywords National Pension Fund of Korea; Shareholder activism; Stock market reaction;

Voting right

JEL Classification: G11, G14, G23

*The authors thank seminar participants at the 16

th

World Business Research Conference

(San Francisco, July 2016). This work was supported by the National Research Foundation of

Korea Grant funded by the Korean Government NRF-2013S1A2A2035472. They are grateful

for financial support provided under the Global Research Network Program. Comments from

the referees and the editor are also gratefully appreciated.

**Corresponding author: Department of Business Administration, Sookmyung Women’s

University, Seoul 04310, Korea. Tel: +82-2-710-9781, Fax: +82-2-710-9527, email: kwwee@

sookmyung.ac.kr.

Asia-Pacific Journal of Financial Studies (2018) 47, 805–823 doi:10.1111/ajfs.12238

©2018 Korean Securities Association 805

1. Introduction

Since its establishment by the National Pension Act in 1988, the National Pension

Scheme of Korea (NPS) has served as the primary social insurance program. It con -

tributes to social welfare and stability by providing pension benefits to the old

and disabled, and to the families of the deceased. Since the NPS is a partially

funded system, one of its major functions is to manage the National Pension Fund

(NPF) well enough to maintain its financial stability. The NPF’s assets under man -

agement amounted to 470 trillion KRW, or US$430 billion, at the end of 2014,

which was about 30% of GDP. The NPF invests 18% of the fund’s assets in domes-

tic equity, representing about 6% of Korea’s total stock market capitalization.

According to the NPS’s own projection, the NPF will grow and reach KRW 2561

trillion by 2045, representing 50% of the country’s GDP, while it will end up being

exhausted by 2060 as all the money will have been distributed to its beneficiaries.

This implies that the NPF’s dominant presence and its strong influence on Korea’s

financial markets will last at least for several decades.

A few issues arise from the NPF’s dominant presence in the Korean financial

markets, and the most controversial one concerns its voting rights. Ever since the

NPF cast its voting right, there have been two conflicting viewpoints. Proponents of

the NPF’s active voting participation consider it one of the fiduciary duties of a

large institutional investor like the NPF, while opponents criticize it as a manifesta-

tion of pension fund socialism. The NPF is by far the largest institutional investor

in the Korean stock market, and is supposed to exercise its voting rights for the

sake of its beneficiaries. Its own voting guidelines are consistent with the OECD’s

principles of corporate governance. The proposals not fully covered in the voting

guidelines are referred to the Advisory Committee for Voting Rights, which is com-

posed of outside experts. However, the NPF is a public fund and there have been

concerns that the Government may influence its exercise of voting rights. Some

even argue that the Government can manipulate private firms’ managerial decisions

through NPF voting. The firms that are primarily concerned by this are the

chaebols, large family-controlled Korean conglomerate companies. Although the

public largely supports the NPF’s exercise of voting rights as an important channel

for the improvement of Korean firms’ corporate governance, most firms do not

want the NPF to be active.

The academic literature has reported conflicting results on the economic effects

of shareholder activism. Pound (1988) argues that proxy contests do not affect the

value of the firm due to three problems that hinder proxy contests from challenging

the incumbent management. The three problems are the inefficiency in the proxy

solicitation, the existence of conflict of interest, and some dissident proxy chal-

lenges. However, large institutional investors are more likely than other types of

investors to exercise their voting rights actively (Brickley et al., 1988) since they are

less prone to the free-rider problem. Among institutional investors, pension funds

are most active. CalPERS’ shareholder activism is well known, and Nesbitt (1994)

J. Lee et al.

806 ©2018 Korean Securities Association