Hyundai’s governance journey

Corporate governance has taken center stage in South Korea in recent years as the country’s unique chaebol model has come under new scrutiny. And one company that has started down the path of increased transparency and communication is Seoul-headquartered Hyundai Motor Company. 

Like some other Korean companies that have faced pressure from investors, Hyundai was first prodded into action by a large foreign shareholder. But while some firms have been reluctant to make changes, Hyundai has taken proactive steps, including launching one of the first governance roadshows by a Korean company and an English-language governance charter. 

Hyundai’s governance journey is still at its beginning, though. ‘There’s no perfect route to governance, and there are many more things that need to be improved in the future,’ says Zayong Koo, vice president and head of investor relations at Hyundai Motor. 

The event that first stirred up shareholders was a land purchase in Seoul’s posh Gangnam District in September 2014. Along with affiliates Kia Motors Corp and Hyundai Mobis Co, Hyundai paid $10.2 bn for the land, which was around three times the appraised value. Analysts and the media judged the deal to be Korea’s latest case of poor governance and lack of transparency at a family-controlled chaebol. In particular, governance experts questioned the board’s decision-making process. 

Investors in Korean companies were unsettled even before Hyundai’s land deal; weak revenue growth and a lack of capital return were receiving negative attention. But even though Hyundai announced new buybacks and dramatically increased its dividend in the following months, its stock price stayed below what it had been before the land purchase. 

It is not often that shareholders in Korean companies openly confront management but Hyundai’s annual general meeting in March 2015 featured a rare example of dissent when Netherlands-based APG Asset Management proposed that a new corporate governance committee be set up. APG had the support of 20 other top investors, including JPMorgan Asset Management and Legal & General.

Taking action

In the past, such a proposal at a Korean chaebol may have been met with silence – or outright resistance – but Hyundai took action. At the auto maker’s annual general meeting, the management promised that it would study ways to improve shareholder value and work to implement the proposal. Within weeks Hyundai announced a corporate governance and communication committee made up of four independent directors. 

One of those, Seoul National University Professor Youjae Yi, was put in charge of protecting shareholder rights and tasked with communicating the views of shareholders back to the board. 

Planning got under way for a trip in July 2015 that was one of the first ever governance roadshows by a Korean company. Hyundai’s head of IR and other IR team members joined Professor Yi for a series of group meetings with top shareholders in Singapore, Hong Kong and London, all focused on corporate governance. This kind of governance engagement is well established in the UK and is spreading in the US but is just beginning in Asia. In each city, Hyundai invited major shareholders like BlackRock and Capital Group to the meetings. Some of the individuals at the meetings were portfolio managers, others were governance team members dedicated to proxy voting. 

At the top of the agenda was an introduction to the new committee and the enhanced role of outside directors. A large portion of each meeting was devoted to listening to shareholders. ‘As it was our first time, we tried to gather as much information as possible about how our investors viewed our new committee, and whether there were any suggestions or questions for our management and board of directors,’ Koo says. 

Naturally, investors were vocal about the unpopular land deal from several months before, and asked numerous questions about the board’s role in the decision. They also delivered a clear desire that Hyundai should return more capital to shareholders. Professor Yi and the IR team reported the feedback to management and the board – and by the end of 2015 Hyundai had ramped up its dividend payout ratio from 11 percent to 17 percent, which included the introduction of its first interim dividend. 

The make-up of the board of directors and transparency around executive compensation also came up for a lot of discussion. For example, Hyundai’s board, as is the case at many Korean companies, is made up entirely of Koreans, even though it’s a global company. Hyundai’s overseas shareholders suggested the board should include directors who are women, non-Koreans and former chief executives from other car manufacturers. 

Chartered waters

A further response to investors’ wishes was developed over the following months and unveiled at Hyundai’s annual meeting in March 2016: a new corporate governance charter, posted online in English and Korean. It was written as a guidebook to the role of Hyundai’s board of directors and the board’s activities, including measures taken toward transparency and director independence.

In July 2016, Professor Yi and the IR team embarked on their second governance roadshow, adding the US to their itinerary, which now comprised Hong Kong, Singapore, London and Boston. Again, there was a lot of pressure around Hyundai’s shareholder returns, which still lagged global peers’. Board composition was again discussed, as was the way executive compensation is set.

The investor relations team was conscious that once the roadshow was completed, its job was still only half-done. ‘IR is not just about external relationships. It’s about internal relationships, too,’ Koo says. Having listened to investors, the governance outreach team reported back to top management, the board of directors and other departments. ‘As a result, they now know more about investors’ needs and how they think about our company,’ Koo says.

Above all, they needed to understand foreign investors’ perceptions of chaebols, including their view that the big decisions are made by the founding families, not the board, and that directors represent management, not shareholders. ‘In fact, the board of directors should represent all stakeholders,’ reaffirms Koo. ‘We communicated to investors that we’re moving forward and building better governance structures.‘ 

For chaebol companies, governance continues to be a concern for overseas investors. But the intense pressure brought to bear on Samsung by Elliott Management, a US shareholder activist, has been a wake-up call. There is a realization that the large size of companies and wide influence of founding families doesn’t necessarily insulate them from western-style activism. 

In November 2016, Professor Yi and his IR team escort again hit the road, this time to Tokyo for the Asian Corporate Governance Association’s annual conference. As Koo explains, they wanted to get to know the international corporate governance community and the issues it faces, ‘building up knowledge and better ways to communicate.’ 

Having been around the world on an odyssey of shareholder engagement, including meetings with top shareholders and ISS, and having produced a new governance charter, Hyundai’s IR team is energized. ‘It’s just the beginning,’ Koo concludes.

This article appeared in the spring 2017 issue of IR Magazine