Samsung’s promise to hike dividend payments may signal a new dawn for corporate governance in Asia, says Will Ballard.

Key points

  • Those concerned about investing in Asian equities should take heart from developments in South Korea
  • The shortcomings of the chaebols prominent in Asia are particularly highlighted at times of succession
  • Despite rules aimed at lifting dividend payments, South Korean shares yield about 1.3 per cent versus 4.7 per cent in Taiwan
  • After a tense battle with shareholders over a proposed merger, Samsung has promised to substantially increase its dividend payments in the next three years
  • Improvements in Samsung’s governance may start to assuage concerns over Asian companies’ structures

When progress is slow, it is not always easy to remember that persistence pays. The advance of corporate governance in emerging markets tends to be a gradual – often apparently glacial – process. But those concerned over their exposure to Asian equities should take heart from recent developments in South Korea.

The Seoul stock market is dominated by family-run conglomerates known as ‘chaebols’. These companies represent a unique challenge for international investors as the interests of minority shareholders are not necessarily fully aligned with those of the controlling families. Yet these companies are too big – and too successful – to be ignored. Chaebols, which include household names such as Samsung, Hyundai and LG, account for over 60 per cent of the value of the South Korean market.

Labyrinthine company structures

All too often chaebols consist of a labyrinthine company structure. Efficiency has often been sacrificed in favour of elaborate cross-holding arrangements designed to keep the family firmly in control. There is also a tendency for chaebols to pay less-than-generous dividends.

These shortcomings are particularly highlighted at times of succession, when one generation is handing control over to the next. At these moments, the delicate corporate webs have to be unpicked and carefully re-spun with a new kingpin at the centre. This is a process made all the more complex by the desire to minimise inheritance tax while at the same time maintaining control.

Samsung Electronics is the best known chaebol. The world’s largest manufacturer of mobile and smartphones is chaired by Lee Kun-hee who took on the job in 1987 after the death of his father, the company’s founder. With Lee now 73-years’ old, the tricky business of handing over control to his son and heir apparent, Lee Jae-yong, who happens to be vice chairman, has already started.

In May, it was proposed that one Samsung subsidiary, Cheil Industries, should take over another, Samsung C&T. This raised the hackles of investors concerned at corporate governance within the chaebols, leading to suggestions that the interests of minority shareholders were being trampled on. While both the company’s management and members of the Lee family argued the merger was designed to drive growth, activist investors were unconvinced.

The family won that battle. At a tense shareholder meeting in July, the merger was narrowly voted through. This gave Lee Jae-yong, Cheil’s biggest shareholder, effective control over Samsung C&T’s four per cent stake in Samsung Electronics and was seen as a significant step in the succession programme.

Assuaging corporate governance concerns

The chaebols and their founding fathers played a crucial part in the massive growth the Korean economy enjoyed from the early sixties to the late eighties. As such, they were accepted, warts and all, by the Korean public and politicians alike.

This changed following the Asian financial crisis of 1997-98, which exposed the weaknesses of such an autocratic system. Investigations exposed corruption within the chaebols, including fraudulent accounting and bribery. Others were so indebted that they significantly contributed to a South Korean banking crisis that forced the authorities to turn to the International Monetary Fund for assistance. The chaebols reached something of a nadir in 1999 with the collapse of the Daewoo Group, Korea’s largest bankruptcy to that point.

While the chaebols that survived are undoubtedly fitter for purpose, corporate governance concerns persist. The South Korean government is trying to encourage better governance, adjusting tax arrangements to make paying dividends to shareholders more attractive to the controlling families. This has had limited impact. The dividend yield on domestic equities is about 1.3 per cent, comparing poorly with the 4.7 per cent average of its regional rival Taiwan.

It is pleasing that Samsung promised to substantially increase its dividend payments over the next three years in October. Having been stung by the closeness of the shareholder vote, perhaps the Lee family has finally started to appreciate the importance of taking the interests of fellow shareholders seriously. Were Samsung to set a more positive example on corporate governance for other domestic conglomerates to follow, it may start to assuage the concerns of investors at home and abroad.

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