South Korea became the 29th member of the OECD last year, and as the first chill drafts of global competition whistle through its hitherto hermetically sealed markets, investor relations has become a buzz-phrase, a sort of modernizing mantra for its corporate financiers.
However, Korean IR needs a lot of practice to make it anywhere near perfect. Local practitioners, like Chun Soo Hahm, who has just set up Seoul IR Consulting Inc, describes Korean IR as embryonic. Ill-conceived might better describe some aspects.
For example, four major financial newspapers have investor relations clubs – the Diamond Club, Business Club Bluechip Members Club, Stars Club, and 21st Century Leaders Club – that companies pay hefty fees to join. This means that their stock prices are highlighted in the respective sponsoring papers. More significantly, says Hahm, ‘most companies don’t want to reveal bad news, and a newspaper is more likely to ignore bad news – if the company has joined its IR club.’ Conversely, companies in the clubs expect – and generally get – good coverage for their more positive press releases. The extensive daily financial press has a big influence on investors so the idea is pragmatically sound, even if not quite what Niri would have ordered.
Dr Insup Lee, managing director of the Seoul Investment Trust (Sitco), points out that ‘the media people have tremendous power because they know the wrongdoings of companies and consequently they have a certain leverage to get companies to join their clubs.’
Keeping Up Appearances
At the core of the problems with Korea’s strongly regulated, cartelized and dirigiste economy are the chaebols – the conglomerates that make Japan’s zaibatsu seem positively transparent. For example, there are no consolidated accounts for the interlinked holdings which tie the disparate range of industrial and financial companies into the chaebol bundles. That has enabled the controlling minorities to run them as private fiefdoms while preserving the appearances of public companies.
Until recently the factors that drove chaebols were not those of western companies. ‘They measure their success in terms of sales or market shares, not earnings,’ says Seong Gweon, a critical financial analyst with the Joong Ang Il-bo newspaper, who points out that at the regular national chaebol meetings, traditional protocol seats chaebol heads in order of turnover, not profitability.
While the chaebols took the credit for the country’s rapid growth from runt ailing kitten to roaring Asian tiger, no-one complained too much. Now their old habits seem more of a drag on the economy, and recent hiccups have eroded the image of commercial infallibility. The strains showed with the collapse of the overextended Hanbo chaebol last year and the country is only just recovering from the resultant stockmarket nosedive.
Still, the modernizing impulses wobble precariously on the brink, held back by old habits dying hard. The heavily regulated economy is being freed of many restrictions, which, for example, are designed to make M&A activity more transparent, but the government says it will allow only ‘friendly’ takeover bids by foreign investors – hardly consistent with OECD membership.
Earlier this year, tremors were sent through the cozy cartels by a hostile takeover bid for Hanwha Merchant Bank – part of the Hanwha chaebol, which thought its 25 percent stake tantamount to absolute ownership. The Hanwha case suggests that, despite the rhetoric, the new corporate reality frightens the chaebol establishment.
Open Capital
But fear alone is unlikely to be enough of a catalyst to push back the clock. OECD membership and the need for cheaper foreign capital to finance the chaebols’ globalization, is forcing an opening up of Seoul’s capital markets. After all, few foreign shareholders would exchange their solid returns for the dubious benefits of a higher seat at the chaebol table.
Some of the more far-sighted chaebols realize that their future depends on becoming global players which will require the injection of foreign capital. And that means playing by global rules. Some have already worked hard at improving their investor relations and have seen a surge in their foreign shareholder bases as communication improves. In fact, some of them will soon be pushing up against the government limits on foreign ownership – raised to 23 percent this year.
‘What gave impetus to all these changes is entry to the OECD,’ says Sitco’s Insup Lee. A former World Bank employee, he suggests that its efforts to open up the Korean economy a decade ago were too premature. ‘It just wasn’t strong enough then, but the economy can take it now,’ he argues, and indeed it has to if it’s going to become a fully-developed market.
Like many of the new corporate generation, Lee has educational and work experience overseas. Sitco’s brokerage had a turnover of $33.6 bn last year and its stated ambition is to be one of the five largest investment banks in the world by 2005. He considers that the current affection for IR is ‘probably for overseas investors first. But two or three years down the road I believe that domestic investors will also pay a lot of attention to companies’ actual structure and operations.’
The problem he sees is a transition from the old ‘Korean economy, in which a lot of companies were controlled by very rich people with maybe 15 or 20 percent who could control the company for their own benefit.’ A major change is that the government has announced that the 30 largest corporations will need to provide consolidated financial statements. ‘So far they haven’t really cared about small and potential investors, but now they have to think about how to treat those investors, domestically and overseas. This is making companies sit up and pay attention to investor relations.’
Even now, as an IR ‘consumer’, Lee reports that companies, especially smaller ones, invite portfolio managers like himself and analysts over for visits. ‘Sometimes the president or executives of the companies attend. Last week one motor company invited our analysts to their HQ, explained the current status of the company, and tried to convince them that they didn’t have a big unsold inventory.’
Members Club
With some 800 members, the Korean Listed Companies Association is the main organizational framework for promoting IR in the country. A lot of those listed companies all have the same name indicating their chaebol connection, yet the association claims ‘corporate disclosure’ and ‘IR’ as its main aims.
However, as the words of its very own translated brochure point out: ‘It is quite recent of 1993 to generalize the IR because the most of the CEOs in Korea are in lack of that conception yet.’
The KLCA maintains records of annual reports in CD-Rom and microfiches, publishes manuals about investor relations, holds regular seminars, offers advice on roadshows and the formulation of investor relations policy. Last year the association joined the International Investor Relations Federation and Sun Keun Choi, special advisor to its president, expresses great hopes that it will manage to host the IIRF conference some time soon.
Choi lists the objectives of IR as ‘providing an appropriate level of information to the investment community, promoting the company, ensuring the stock price reflects the value of the company, and reducing the cost of capital.’ The latter is certainly a major objective of Korean companies but the ‘appropriateness’ of the level of information is likely to be adjudged cautiously by Korean executives for some time to come.
The infancy of IR combined with the interest in it, provides a potential niche for some agencies, such as Technimetrics. Insup Lee says Technimetrics ‘made personal contacts with major Japanese companies and helped them improve their company’s image or prestige overseas. That’s going to work out here as well, because Korean companies are not very good at it. They may be good at copying other companies’ products, but they are not very good at actually promoting themselves, especially to the investors.’
Coming Home
Part of the current IR push seems to be coming from a whole generation of professionals who have came back to Korea with American MBAs and different expectations of what business is about. As they rise in the corporate hierarchies, companies may take a less Confucian approach.
Chun Soo Hahm, of Seoul IR Consultants, is a typical example. A Washington University graduate and a St Louis Cardinals fan, he claims his company is the country’s first specialized IR agency. ‘At present, most Korean companies think IR equals corporate PR,’ he says. ‘They only think of providing presentations for financial reports and future estimated earnings, since from a cost benefit point of view there is no immediate payback in sending IR material out to investors.’
He intends to offer a combined stockwatch, ear-to-the-ground, and IR presentation package, capitalizing on the scarcity of specialist IR departments. In contrast to the policy of the newspapers’ IR clubs, he argues that ‘a continuous stream of news is good for companies, rather than hiding bad news.’ Such notions may be widely accepted in markets like the US, but for Korea they are really radical tactics.
Attempts to bring Korean IR up to international standards were complicated at the outset – sort of through a Japanese glass darkly. The introduction of investor relations to Korea is credited to Mitsuo Shimomura, president of the Daiichi Investment Counselling Co from Japan, at a seminar held by Daewoo securities back in 1991.
It seems to have been a memorable occasion, in its own little way. Since then the Korean business community has sworn its devotion to IR but has often mistaken form for substance. There remains a strong belief that the frequent invocation of the great benefits of IR can act as a substitute for actual reform. On the other hand, the incorporeal Korean version of IR seems to be getting fleshed out as reality intrudes into the peninsula.
Out in Front
LG Electronics has gone out of its way to woo overseas investors and reaped rewards accordingly. Chan Ho Lee, managing director of what appears to be Korea’s only dedicated corporate IR department says that at the beginning of the year foreign investors accounted for some16.2 percent of the stock. The majority of these are Japanese with the remainder split roughly equally between Europe and the US.
Lee reports: ‘I have six people working with me on the investor relations team, all of them deal with investors.’ They formed the department at the end of 1994. ‘One of our goals is to become a world player. We have to expand our overseas operations, so we realized we needed foreign capital’.
Others put LGE at the forefront of Korean IR, but Lee is modest in his reaction: ‘We can’t rate ourselves that highly. To be frank with you, we are still learning and still have to improve the quality of our communications.’ The IR department deals mostly with institutions, but has a hotline for investors ‘so they can call us up anytime they want.’
Assistant IR manager Carol Kim guesses that ‘most individual investors are long-term investors. Those who aren’t, call the company and are often more active and aggressive – more like gamblers. But the general public usually listens to the advice from the papers.’ She also suspects that ‘foreigners tend to be more concerned about overall, long-term strategy and the direction that the company may be going, whereas the domestic institutions may be more concerned with actual results and the short to mid-term.’
Generally, says Kim, the overseas investors ‘do their homework before coming to see the company. ‘We’re similar to GE,’ she ventures rather hopefully, ‘since we also have diverse business areas through our shareholdings in other substantial subsidiary companies within the group. And we’re one of the major Korean companies in industry.’
‘Sometimes we hold international presentations – usually for three days. One day of straight presentations, at the major company of the group, and a tour of the various plants so investors and analysts can discuss matters with specialists.’ The company compiles a domestic report four times a year of all the IR materials which is distributed to the security companies and the analysts and investors.
‘We encourage investors, especially those that we have a close relationship with, to provide feedback or suggestions that they have,’ adds Kim. ‘Their feedback is well received and utilized.’ No promises – but still a big step forward for Korea.
However, the company is not yet ready to look for a listing on the NYSE, Lee says. ‘We need a couple more years to do that. We’re now producing and consolidating the annual statement, but the US requires quarterly statements, so to comply with the requirement we have to have more people in our subsidiaries.’ He envisages a four or five year preparation program, ‘then we’ll be able to produce the quarterly statement and can get a New York listing.’
