[Contribution] Do Companies Now Need to Set Up a 'National Pension Response Team'? (January 25, 2022)

Most of Korea's 71 large business groups operate a 'Fair Trade Commission response team.' This is because the Fair Trade Commission's watchful eye is sharp. In business circles, a self-deprecating voice can be heard asking, "Do we now need to set up an in-house 'National Pension response team' too?" This is because the National Pension has decided, starting this year, to actively pursue 'shareholder derivative suits' — lawsuits that pursue corporate executives' liability for damages.

A derivative suit can be filed by a shareholder of a listed company who has held 0.01% of its stock for six months or more, but that is not all. The National Pension is said to be revising its 'Stewardship Responsible Investment Guidelines' to delete the word 'shareholder' from the term 'shareholder derivative suit.' In other words, it intends to go as far as 'multiple derivative suits,' in which a shareholder of a listed parent company who has held 0.5% of the parent's stock for six months or more can hold the executives of a subsidiary liable for damages.

This decision by the National Pension did not come out of nowhere. In 2016, on the occasion of the introduction of the Korean-style Stewardship Code — a kind of voluntary norm — the National Pension took the lead in pledging to diligently uphold this code. It then drew up a roadmap for implementing it, and under this roadmap, around 2020–22 it was to go as far as appointing outside directors through shareholder proposals and filing derivative suits.

That said, the National Pension has not actively informed companies of the existence and content of this roadmap in the meantime. It is understandable that business circles find it sudden and bewildering.

The National Pension's attempt to bring derivative suits against the executives of domestic companies has no validity whatsoever. The reason is that the National Pension has absolutely no independence in its governance structure, and it also lacks independence in fund management.

The reason the National Pension itself is seen as lacking independence is that its top decision-making body, the 'Fund Management Committee,' is chaired by a cabinet minister, has three vice-ministers as members, and is otherwise composed of representatives of interested parties — representatives of workers' organizations such as the Korean Confederation of Trade Unions and the Federation of Korean Trade Unions, representatives of civic groups, representatives of regional (local) subscribers, and representatives of employers. The committee itself has become an arena where these stakeholders clash, leaving it without objectivity, and, above all, without independence from the government.

Among the funds known as the world's five largest pension funds — Japan's GPIF, Canada's CPPIB, the United States' CalPERS, and the Netherlands' ABP, apart from Korea's National Pension — there is not a single one whose government controls the top decision-making body.

Furthermore, the National Pension's fund management is also a problem. Fund management and the exercise of shareholder rights are decided by the Fund Management Headquarters. The Fund Management Headquarters is an internal organization of the National Pension. However, on politically or socially sensitive issues, it sometimes leaves the matter to deliberation by the 'Stewardship Responsibility Committee (Stewardship Committee).'

The Stewardship Committee is made up of three standing members with three-year terms and six outside members, likewise with three-year terms. Looking at the makeup of these nine members, they too consist of representatives of interested parties — representatives of workers' organizations, representatives of civic groups, representatives of regional subscribers, representatives of employers, and the like. This body, too, becomes an arena for clashes among stakeholders, and it is a structure in which fund management and the exercise of voting rights are themselves inevitably swayed by the influence of the government and civic groups.

Under the guidelines to be revised this time, the derivative-suit portion would be left entirely to the Stewardship Committee, so that the Committee decides whether or not to file suit. This means entrusting an important decision to an outside committee — but a lawsuit is something whose outcome cannot be known in advance, and the National Pension could lose. If this committee makes the wrong decision and the National Pension loses, both the company and the National Pension suffer enormous damage.

The question of who bears responsibility remains. In theory, the members of the Stewardship Committee, as the decision-making body, ought to bear responsibility, but the members are merely temporary appointees who receive little more than a small meeting allowance. So no heavy responsibility can be placed on them. In other words, they are people who wield enormous authority and can make important decisions, yet bear no responsibility whatsoever. In this 'republic of committees,' it has become common practice that important agenda items — the kind that could later become problematic and require accountability — are organized into an outside committee with no responsibility and entrusted to it, while the officials actually in charge quietly step back.

If the National Pension, under such an abnormal governance structure, says it will file derivative suits against corporate executives, can the companies that are responsible for 42% of the fund's formation possibly accept that?

Japan's public pension fund, GPIF, has the long official name 'Government Pension Investment Fund, Japan.' GPIF does not directly hold domestic stocks itself, but entrusts fund management to outside asset managers.

Accordingly, the exercise of shareholder rights such as voting rights is likewise not carried out directly by GPIF but is delegated to asset managers. In 2016, a derivative suit naming executives as defendants was filed over Toshiba Corporation's large-scale accounting fraud, but that lawsuit, too, was not conducted directly by GPIF, but by its entrusted asset manager, the 'Japan Trustee Services Bank (日本トラスティ・サービス信託銀行).'

This is not to say that the National Pension must never bring suit against companies. It is to say that a groundbreaking improvement in the National Pension's governance structure must first be a precondition.

To secure a guarantee of the National Pension's independence, the 'National Pension Act' must first be overhauled. And a 'Fund Management Act' must be enacted to specify in law the decision-making structure and process for important matters — such as major decisions in fund management or shareholder proposals and derivative suits — in fund operation.

This is not something that should be left to the decision of the Stewardship Responsibility Committee, a temporary body.

https://m.newspim.com/news/view/20220124000437