firmly in place has been confirmed through an abundance of historical evidence.
Lessons from the battle over the KT&G management control
For the past two years, KT&G was selected as the Best Corporate Governance Enterprise by the Korea Exchange. The company has also been highly rated by the Fare Trade Commission for its management transparency and fair trade. But this time, KT&G is deemed to be the first, among the companies privatized from the state ownership, to face and struggle against hostile takeover and merge activities of the US corporate raider Carl Icahn and his allied investors.
As of the end of 2005, 27.33% of KT&G shares are owned by locals and 63.09%
by foreigners. Among the foreigner owned shares, 7.52% belongs to Franklin
Mutual Advisers LLC and 6.19% Carl Icahn and his allies, and other foreigners
own the rest 49.38%. The Icahn-led investors offered ¼¼ pay 60,000won
per share and to increase it when the actual purchase takes place in
their takeover bid of KT&G. The KT&G side shot back with a promise
to deliver high dividend and to sell treasury shares in order to attract
the individual shareholders'. Although the Icahn-led group ended up
having only one outside director elected to the company board through
cumulative voting at the shareholders' meeting held as expected on March
17, a beachhead is secured for them for advancing their influence.
The fact reveales during the takeover bid for KT&G's management
control is that any company without a clear dominant owner's group ---
especially when it is a blue chip company --- can be a target of hostile
takeover bids. This means that not only for KT&G but also for Posco,
which has become porous by the prohibition of national capital investments,
there is a high chance to be a target of activism of foreign funds.
The seriousness of the matter is far reaching. By the time the effects
become fully blown out of regulations implemented under the name of
management transparency, ownership distribution and innovation of cooperate
governance, --- such as the Ceiling on Total Amount of Shareholdings
in Other Companies, limits on voting rights of financial subsidies of
larger companies, government's right to trace bank accounts, and Act
on the Structural Improvement of the Financial Industry---in addition
to former state owned companies, Korea's representative privately owned
companies including Samsung Electronics would be also targets of such
bids.
Since a takeover battle over management control of a company triggers a process to achieve better efficiency in the company, the M&A market is worth being vitalized. Thus, activities of foreign capital in taking over domestic companies should not be met with hostility since the same positive effects would be generated in due course. Of course, the fundamental aim of most foreign funds is to come up with short term profits through intervention in management, rather than seeking long term involvement in operation. But foreign capital plays a positive role of helping domestic companies to establish the production structure to satisfy not only the local consumers but also the foreign consumers by transferring foreign market information to the domestic market. The problem lies in Korea's ownership dispersion policy, which is not based on logical and empirical grounds to prove that it is helpful in anyway improving management of national companies but based on the belief that is emotional and nebulous, and implemented by the Fair Competition Commission in order to deter capital concentration. It has been discriminative against national capital in favor of foreign capital, which has cornered domestically owned high quality companies to the preys of overseas funds. It can not help but be deplored as one that is foolish.
As market liberalization has become the world trend, the world is open wider than ever. While the preventive government action against concentrated capital, formed on the basis of economic efficiency in a world where artificially made entrance barriers have been abolished, is one problem, the mindset where the domestic standard has to be muddle headedly used to handle the matter in the already internationalized environment is another that needs to be discarded. Because of this mentality--- that should have been scraped already---Korean companies are spending more time and energy to defend their management rather working on to enhance competitiveness and productivity.
The way to prevent situations such as that KT&G has faced is to scrap or change the various regulations that helped create such situations. Anachronistic concepts --such as the concept of capital concentration-- have to be gotten rid of in order that new paths can be open for both financial and non-financial capital to participate in companies as dominant shareholders. Also, the pyramid style corporate governance that frequently appears in emerging markets deserves to be reviewed for its positive side. Having a dominant share holder of the corporate group at the center controlling subsidiaries with a small number of shares is an efficient way to achieve management stability and to minimize costs and externalities that could be incurred to shareholders in the process of decision making for the whole group of companies.
Although for KT&G it would an ordeal to go through for some period of time defending its management, the current takeover case is offering a chance to learn for the government administrators and some citizen groups and intellectuals who have given the government policy their full support, However, if they still fail to learn from the case and the voice supporting such policies still fills the nation, it would be just a declining time for Korea's fate. Nothing more.
Kim Young-yong (Prof. Dept. of Economics, Chonnam National Univ., yykim@chonnam.ac.kr)
