1. 1 The Essence of Shareholder Activism International Corporate Governance Meeting: Why Corporate Governance Matters for Vietnam Hanoi December 6, 2004 Hasung Jang jangya@chol.com Korea University

2. 2 Why Shareholder Activism Minority shareholders are not protected –Expropriation of minority shareholders –No independent director and auditor –Lack of monitoring function in the company Agency problem & moral hazard of management –Shareholder’s value is ignored –Controlling shareholder or managements are involved in self-dealing –Nepotism in the management Weak enforcement of laws & regulations –Laws are sleeping in the book Market monitoring function is weak –Institutional investors are passive due to conflict of interest Government can not do everything

3. 3 Why Shareholder Activism Poor Corporate Governance Practices –Company assets are siphoned for the family –Illegal or unfair related party transactions Cross debt guarantee, hidden debt Sales and purchases among affiliated companies Financial subsidies for related parties: Loan No Transparency & No Accountability –Disclosures and auditor’s reports are not credible –Controlling family and management are not accounted for mis- management Poor corporate governance creates corruptions –Improving corporate governance is one of effective way to fight against corruption in the society

4. 4 Objectives of Shareholder Activism Independent Watchdog on the Management Protect Shareholder’s Value –Stop profit-siphoning management practice –Stop subsidies to affiliated companies –Stop illegal intra-group transactions Ensure Transparency & Accountability –Independent management from controlling shareholder –Outside directors representing minority shareholders Fights against Corruptions

5. 5 What Shareholder Activism Can Do? Monitoring and reporting corporate activities Constructive talks with management before taking actions Exercise shareholder rights –Attending shareholder meetings –Proposing agenda at the shareholders meetings –Electing directors Proposing outside director candidate Proxy fights –Taking legal actions Filing civil lawsuit: Derivative actions, Class-Actions Filing criminal investigation Proposing and lobbying for legislation

6. 6 Minority Shareholder’s Right Korean Case: Security Exchange Act. April 1997 March 2001 Requesting termination of directors & auditors 1% (0.5%)0.5% (0.25%) Seeking injunctive action against illegal acts1% (0.5%)0.05% (0.025%) Bringing shareholder derivative actions 1% (0.5%)0.01% Compelling inspection of financial records 3% (1.5%)0.1% (0.05%) Convening a special shareholders’ meeting 3% (1.5%)3% (1/5%) Making a shareholder proposal 1% (0.5%)1% (0.5%) Requesting cumulative voting --3% Appointing inspector to examine corporate affairs & records 3% (1.5%)3% (1.5%) Terminating a liquidator 3% (1.5%)0.5% (0.25%) Number in ( ) is for large company

7. 7 Shareholder Activism Korean Case PSPD-PEC has engaged in shareholder activism since January 1997 PSPD – People’s Solidarity for Participatory Democracy – Independent civil rights advocacy NGO – Watchdog on government, legislator, judiciary, business – Website: http://eng.peoplepower21.org/ PEC – Participatory Economy Committee under PSPD – Economic reform activism – Shareholder activism – Monitoring large companies

8. 8 PEC Organization StaffStaff Three full-time staff & 20 volunteer professionals Three full-time staff & 20 volunteer professionals Volunteers : lawyers, CPAs, professors Volunteers : lawyers, CPAs, professors FundingFunding 100% individual donations 100% individual donations No funds from corporations & government No funds from corporations & government Separate funding from PSPD Separate funding from PSPD Supporting InstituteSupporting Institute Center for Good Corporate Governance Center for Good Corporate Governance Website: http://cgcg.or.kr/cgcg/cgcgmain/html_en/index.htm Website: http://cgcg.or.kr/cgcg/cgcgmain/html_en/index.htm

9. 9 Target Companies Conglomerate (Chaebol companies) –Samsung Electronics –SK Telecom, SK Shipping Co. –Hyundai Heavy Industry –Dacom –Daewoo Corporation –LG –Hanwha –Doosan Corporation Financial Institutions –Korea First Bank –Hyundai Investment Trust Co –Hyundai Securities Co. –Daehan Life Insurance

10. 10 Monitoring Corporate Practices Disclosures Outside director’s participation & performance Related party transactions Issuance of new equity and equity related bonds Board activities: agenda, attendance, voting record Accounting practices

11. 11 Attending Shareholder Meetings Year-round collection & analysis of information Pre-negotiation with management on agenda Advance notice to management on issues & list of questions Proxy solicitation on agenda of shareholders’ meeting Two or three companies per year –13 ½ hours at Samsung Electronics AGM –10 ½ hours at Korea Exchange Bank AGM

12. 12 Proxy Solicitation Soliciting proxies from local and foreign investors –PSPD’s own road show and mail campaign –Proxy on election of outside directors Shareholder resolution at AGM –Amendment of articles of incorporation Internal compliance procedure on related party transaction Limits on issuance of equity related securities to related parties Adopting cumulative voting –Dismissing directors and management involved in illegal transaction

13. 13 Election of Outside Directors Nominating candidates for outside directors Election of independent outside directors –Hyundai Heavy Industry Management accepted 1 outside director –SK Telecom Management accepted 3 outside directors Outside directors have a veto power on related party transactions –Samsung Electronics Not Successful

14. 14 Derivative Lawsuits Korea First Bank –$38 million –Defendants: two former presidents two directors –Filed in June 1997. Supreme court’s ruling in March 2002 Illegal loans Taking bribe –The first derivative lawsuit in Korea Samsung Electronics –$90 million –Defendant: Chairman KH Lee, 10 directors –Suit filed in Oct. 1998, District court ruled in Dec. 2001 Illegal political contribution Unfair related party transations

15. 15 Other Legal Actions Filing lawsuits –Nullify agenda un-lawfully adopted at shareholder meetings –Cancellation of CB & BW issued to controlling family –Injunction to stop debt guarantee to affiliated company –Lawsuit against auditing accounting firm for failed audit Inspection of financial records –Hyundai Investment Trust Co Record of in-house asset transactions –Samsung Electronics Obtaining court order to yield minutes of board

16. 16 Other Legal Actions Filing criminal investigation –Stock price manipulation: Hyundai Securities –Fund embezzlement: Daehan Life Insurance –Off-shore paper company operation –Off-shore off balance sheet debt –Asset stripping using convertible bond, bond with warrant –Falsifying minutes of board Requesting special audit by FSC –FSC: Financial Supervisory Commission –Accounting manipulation –False or failed disclosure

17. 17 Samsung ? Pan Pacific Investments (Paper Company) Bond Investor Samsung Electronics Samsung Mech. Elec. Samsung SDI Samsung Motor Off Shore Paper Company Operation Fund $300 mil Bridge Loan Repayment Stock Put Option Call Option BondFund Effective Debt Guarantee

18. 18 Legislation Proposal and Lobbying Actions Strengthen minority shareholder rights –Amendment of Commercial Code & Security Exchange Act –Lowering legal requirements on shareholder rights Regulation on related party transaction –Amendment of Fair Trade Act Governance on financial institutions –Regulation on bank ownership –Disclosure and voting of investment trust company Security Class Action Suit Law Anti-Corruption Law

19. 19 What Will Expedite Changes? Government –More direct regulations on corporate governance –Enforcement of regulations –Strengthening minority shareholder’s right Legal System –Fair and effective court system –Fair and independent prosecution –Security class action suit

20. 20 What Will Expedite Changes? Corporation –Voluntary adaptation of global standard –Active independent outside directors Market –Pro-active role of institutional investors –Active participation at shareholder’s meeting Civil Society –Participation in policy making: NGOs –Minority shareholder activist watch dog