In Korea, it is highly unlikely to see a board proposal rejected by shareholders, and this is especially true when it comes to electing and re-electing executives of Chaebols, or family-owned conglomerates. It is typical for Chaebol founding members to hold tight control through ownership secured by family members and cross-shareholding structures, often making it impossible for minority shareholders to have any say by means of voting.
Under this structure, shareholders of Korean Air Lines Co., Ltd. (“Korean Air”) made history on March 27, 2019 as they voted down the re-election of then-CEO CHO Yang Ho (“CHO”). It was a close call – a little less than two-thirds of shareholders voted in favor of CHO, just about 2% of votes shy of keeping him on the board. But in the end, the vote marked the first time a Chaebol executive has ever been denied a board seat in the country’s history.
Yet, looking over the scandal-ridden turmoil CHO and his family members managed to get themselves into over the years while running the national’s largest airline, it’s almost surprising that he wasn’t shown the door much earlier.
Korean Air has been repeatedly involved in scandals, most notably starting with the so-called ‘nut-rage’ in 2014 when CHO’s daughter CHO Hyun Ah returned a plane to the gate because she was not happy with the way macadamia nuts were served, causing national outrage and embarrassment and prompting a suspended 10-month sentence. There was also the ‘water-rage’ in 2018 when CHO’s younger daughter CHO Hyun Min threw water at the face of an advertisement executive in a meeting. Then there was LEE Myung Hee, CHO’s wife who was indicted for physical and verbal abuse of drivers, security guards, and housekeepers over many years. Finally, CHO himself has been accused of tax evasion, embezzlement and breach of trust over the last several years.
Perhaps what finally pushed shareholders to act was growing takeup of the Korea Stewardship Code, first introduced in 2016. With many institutional investors adopting the Stewardship Code, Korea has been slowly but steadily moving towards the robust idea of active shareholder initiatives — a drastic change from the laissez-faire approach taken by the nation’s shareholders to date. National Pension Service, the third largest pension fund in the world and Korean Air’s second largest shareholder, voted against CHO at the AGM.
In a market where the national economy depends heavily on large conglomerates, the Chaebol structure has often left shareholder value as a secondary or even tertiary priority. While Korea has a long way to go in terms of establishing a firm voice for shareholder activism and the eventual breakup of Chaebols, the case of Korean Air shows hopeful signs that when shareholders take the initiative to hold management accountable, companies will have no choice but to listen and respond.
Alex is an analyst covering the Korean market.