The Pitfalls of Expanding 5% Rule Exceptions

The government has announced that it will expand exceptions to the “5% rule” that institutional investors such as the National Pension Service must follow. This means it intends to launch a full-fledged assault on companies through public pension funds. At a time when the business environment is worsening due to repeated failures in economic policy, it is problematic for the government to seek greater control over and pressure on corporate management rights.

The 5% rule requires investors to disclose relevant information when they hold 5% or more of a listed company’s shares, or when their stake changes by 1% or more. It has served as a regulatory principle that prevents market disorder and enhances market stability.

Why does the government intend to relax the 5% rule, a basic rule of market discipline, and grant exceptional privileges to the National Pension Service? Although it has already exercised influence over corporate management through the National Pension Service, it now seeks to change the public pension fund system so that it can more easily control corporate management at will.

However, using public pension funds such as the National Pension Service, in which the government is involved, for political purposes is itself problematic. The seriousness is even greater because the intention is to intervene in corporate management. The National Pension Service consists of funds that citizens have saved for their retirement. It is wrong for the government, without confirming the will of individuals, to use the National Pension Service at its own convenience as a means of controlling companies.

This raises concerns that the country is heading toward “pension socialism.” Moreover, exercising influence over corporate management through the National Pension Service is a misguided act that turns private companies into something like state-owned enterprises. Strengthening government control over the private sector carries a very high risk of damaging corporate autonomy and undermining business competitiveness.

The government has already introduced the stewardship code and thereby increased its interference in corporate management. But the stewardship code was not created as a system for regulating companies. It is a voluntary code established by shareholders and companies for their mutual benefit. There is a saying, “When a tangerine crosses the Huai River, it becomes a trifoliate orange.” A system created overseas as a voluntary code is being abused in Korea as a regulation that threatens corporate management rights. In the spring of 2019, the National Pension Service shook Korean Air’s management control. It ultimately forced out Chairman and CEO Yangho Cho. Now there is growing concern about Korean Air’s future after losing the executive who had led the company into the ranks of the world’s finest enterprises.

The government keeps trying to change corporate governance structures to suit its political intentions. This is deeply troubling. For the government to determine and impose corporate governance is a policy experiment divorced from reality and nothing more than “social control.” Moreover, using the National Pension Service as a policy tool is a serious departure from the very nature of the pension system. Because the government keeps forcing misguided policy objectives onto companies, businesses resist, and in trying to compel compliance, the government creates a vicious cycle of ever-stronger regulation.

This kind of tightening grip on companies weakens the vitality of the economy. The government always says it will “revive the economy and energize the corporate sector,” but it cannot afford to let its words and actions diverge. Rather than destabilizing companies through regulation and increasing uncertainty in the market, the government should shift its policy direction toward improving the predictability of the business environment.

Sung-no Choi, President, Center for Free Enterprise (CFE)

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Original title: '5% 룰' 예외 확대의 함정

Author: Sung-no Choi

Date: 2019-09-18

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=24&idx=21897