Activist Insight: Dalton pushes for changes at Korean corporations

California-based hedge fund Dalton Investments has called on Korean lawmakers to keep corporate governance practices in check, arguing this would boost both investor confidence and the value of the nation’s stock market.

Ten months after issuing a similar letter to the Korean government, Dalton returned with proposals on preventing founding families from exerting undue control at listed companies and advanced requirements regarding share buybacks and enhanced dealmaking.

Korea’s stock market has so far failed to attract sufficient funds to match its strong economy and prospects and this is because investors often stay clear of local companies, which tend to prioritize the interests of their controlling shareholders, Dalton senior analyst James Lim argued. One of the solutions provided by Dalton is to force companies to task a director with monitoring whether minority shareholders’ interests are being respected.

Another cause for the perennial trading discount of Korean shares is the “extremely low” capital firms return to shareholders, Lim added in the letter seen by Bloomberg.

“To promote the listed equity markets and public equity funds, the government and the National Assembly must demonstrate their strong willingness to normalize the Korean stock market and fully explain the rationale so that the market can build up trust in the Korean public stock market,” Dalton said.

Dalton’s arguments echo previous calls from Scion Asset Management’s Michael Burry, who earlier this year blamed certain management behaviors of Korean corporations for the depressed sentiment among international investors toward local stocks. Renowned activist investor Paul Singer, the founder of Elliott Management, also voiced his concerns on corporate accountability several times over the past years.

The Tuesday letter follows a February one in which Dalton decried the local stock market’s underperformance and undervaluation, pointing to the low capital efficiency of Korean companies as the primary culprit.

At the time, Dalton urged large pension funds and lawmakers to demand companies increase shareholder payouts and adjust their capital allocation and planning to maximize long-term “economic value added” for all shareholders, among other proposals. The fund reckoned that the nation’s primary stock index, KOSPI, could rise by 80% it these measures are achieved. Dalton’s letter was supported by KCGI, the activist fund involved in a push for better governance at Korean Air Lines parent, Hanjin Kal.

An in-depth report on activism in South Korea can be read in the April edition of Activist Insight Monthly, which subscribers can read at this link [activistinsight.com].

South Korean lawmakers are working to devise guidelines on activism by the nation’s largest state pension fund. They aim to give the National Pension Service (NPS), which owns 7% of the Korean stock market, more freedom to pursue activist campaigns at companies with shady corporate governance practices. However, the changes may take longer than anticipated as business leaders have recently requested extended talks on the guidelines, worried that NPS would gain too much power over local companies.

This article first appeared in Activist Insight on December 6, 2019.