[Corporate Governance Report] SK scores 60 on governance, will it find 'value-up opportunities'?

[KOREA FINANCIAL TIMES, Gwak Horyung] Transparency stems from sound corporate governance. Financial regulators have set out 15 key governance indicators and require companies to disclose whether they are meeting them. You can see at a glance whether a company has policies in place to protect shareholders and whether the CEO is chosen fairly. Here, we look at major publicly traded companies to see which ones are doing well and, if not, why. [Editor's note]

SK Group holding company SK holdings can be considered a 'value-up' stock, but the market doesn't seem to think so based on its current share price. There are a lot of problems, and they are not easy to solve.

According to SK's corporate governance report disclosed on the Financial Supervisory Service's information disclosure system on May 31, the company complied with 9 out of 15 core governance indicators (60% compliance rate).
This is the lowest among major group holding companies or core affiliates acting as holding companies, after Hanwha (47% compliance rate).

Most of the 10 largest groups have higher compliance rates than SK, including POSCO Holdings (100%), Samsung C&T (87%), Hyundai Mobis (80%), LG Group (73%), Lotte Holdings (73%), GS (73%), and HD Hyundai (67%).

The mandatory disclosure of corporate governance reports was first introduced in 2019. It is becoming increasingly important, especially as the government has issued guidelines to use it as a non-financial indicator in connection with the government's 'corporate value-up' program.

The Financial Services Commission and others have recommended that companies achieve a compliance rate of 80% or more in core indicators after three years, and provide reasons for non-compliance and mid- to long-term goals in the report.

The core indicators that SK did not comply with were: convening notice four weeks in advance of the AGM, holding the AGM outside of the centralized day, CEO succession policy, concentrated voting system, executive appointment rules, and internal audit department. Except for the first two, which are related to shareholder benefits, there is a lack of regulations or policies to check large shareholders.

SK's compliance with the 'Chairman of Outside Directors' is also criticized as insufficient. The chairman of the board of directors of SK holdings is Dr. Yum Jae-ho, president of Taejae University. He is a senior of Choi Tae-won, the chairman of Korea University, and the two are known to have a close relationship.

SK has been implementing various shareholder return policies to improve its price-to-earnings ratio (PBR), which is only 0.5 times. It increased its dividend payout ratio (dividend to net income) from 19% in 2019 to 76% last year. It is fulfilling its promise to buy back and burn 1% of its market capitalization in 2022-2025, with an annual amount of 100-200 billion won.

However, it is pointed out that the amount of stock burned is insufficient compared to the size of SK's treasury stock (25%), which is not effective in boosting the stock price. This is compared to Samsung Fire (15.9%), Samsung C&T (12.7%), and Naver (8.4%), which are also criticized for holding too much treasury stock. The amount of shares held by Chairman tae-won Chey (17.7%) and related parties (25.9%) is comparable.

SK increased its share of treasury stock in 2003 and 2004 when it was involved in a management dispute with US hedge fund Sovereign. This is because treasury shares can be used to defend the control of a major shareholder with a low stake. Although treasury stock itself has no voting rights, it can be used to attract friendly forces through share exchanges.
The recent outcome of Choi's divorce case appeal has raised expectations of further shareholder return policies through the use of treasury shares. It is unlikely that the company will actively utilize treasury shares in the event of a change in management.

Gwak Horyung (horr@fntimes.com)