WSJA(3/14) Editorial: Shaking Up Seoul
(From THE WALL STREET JOURNAL ASIA)
Carl Icahn is upsetting many people in South Korea, but he may be doing something right. Namely, by attempting the country's first foreign-led hostile takeover, Mr. Icahn is forcing Korean executives to think hard about shareholder value. How the bid plays out will speak volumes about the corporate climate in the world's tenth largest economy.
Mr. Icahn's struggle began late last year, when his investor group accumulated a 6.6% stake in publicly-listed KT&G Corp., the country's dominant tobacco and ginseng maker. The New Yorker wanted KT&G's board of directors to sell off non-core assets, spin off its ginseng business and return capital to shareholders. When KT&G's board stayed mum, Mr. Icahn nominated a few independent board directors.
All rather ho hum stuff by Western standards. But in South Korea, this is radical thinking. Most companies' boards of directors, including KT&G's, are populated with "outside," rather than "independent" directors, who are reluctant to countenance big corporate shakeups. And foreigners on the board? Forget it. KT&G doesn't have one. Even Samsung Electronics, a mammoth electronics company that says it accounts for over one-tenth of South Korea's total exports (yes, really), cut the number of foreigners on its board to one from three earlier this month.
In that kind of climate, it's unsurprising that KT&G's board rejected Mr. Icahn's nominees and then -- nose to the sky -- limited the number of seats up for election. Mr. Icahn responded by rallying the support of big shareholders, including Franklin Templeton, and bidding for the company. He also alleges that the Korean regulator set an inappropriately early deadline for electronic shareholder voting, to the detriment of foreign shareholders.
Go away! cried the local media. We acted appropriately! responded the local regulator. Friendly South Korean banks can buy our treasury shares and protect us from the foreign raiders, hinted KT&G yesterday. The back-and-forth salvos may come to a head, of sorts, at a Friday shareholder meeting, when the board seats will be put to a vote -- that is, if Mr. Icahn doesn't obtain a legal injunction against the meeting before then.
Even if KT&G's board thinks it's acting in shareholder's best interests by keeping its businesses together, it could benefit from some public soul searching. After a three-week tour through Europe, the U.S. and Asia, company executives could only muster up 40% approval of their strategy. Not exactly a resounding roar of support. Mr. Icahn, fresh off a bruising bid for Time Warner, isn't likely to back down, either.
More broadly, South Korea sorely needs this kind of rude activism. The chaebol culture, a legacy of the country's industrial-led growth after the second World War, has restricted the creation of a truly entrepreneurial culture. Chief executive officers often aren't selected for their business acumen, but rather, for family ties. The intricate web of chaebol business holdings is often so complex that families often control these gigantic companies with only a small minority of shares -- not exactly helpful when aligning controlling shareholders' interests with those of minority stakeholders. KT&G isn't a chaebol, by any means, but it certainly operates within this broader climate.
If you're not depressed already, wait, there's more. Many South Korean companies, including those that are publicly traded, don't release extensive financial information. (Samsung's annual report, for instance, runs only 72 pages; its Dutch competitor, Philips Electronics, runs to 230.) Korean language earnings releases are much more extensive than the English versions -- a deterrent for foreign investors. And often, earnings reports often aren't released in a timely fashion.
It's amazing that South Korea's economy has grown so fast with this kind of corporate thinking. But this cozy environment won't last forever. As South Korea's economy continues to expand and open up to trade, foreign investors will sniff out more opportunities to squeeze value out of stuffily-run Korean corporations. Posco, the steelmaker, is already preparing ways to protect itself; more will be forced to follow. Mr. Icahn's bid, successful or not, shows the writing on the wall.
(END) Dow Jones Newswires
03-13-06 1631ET
Copyright (c) 2006 Dow Jones & Company, Inc.
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