Chaebol in the dock as shareholders come to the fore

PUBLISHED : Wednesday, 02 March, 2005, 12:00am
UPDATED : Wednesday, 02 March, 2005, 12:00am

Consider Chey Tae-won the US$2 billion man. According to one study by two brokerage analysts, that is roughly how much the chairman of Korean communications-to-chemicals conglomerate SK Corp is dragging down its stock-market capitalisation by his presence on the board of directors.

If SK Corp's largest shareholder gets its way, however, Mr Chey will not be around much longer to weigh on the share price.

In what could prove an important test case for the evolution of shareholder rights in South Korea - and another nail in the coffin of the nation's giant chaebol (conglomerates) - Dubai-based private capital fund Sovereign Asset Management is hoping to get Mr Chey voted out when he comes up for re-election at next Friday's annual general meeting.

At a series of recent meetings in Hong Kong, Sovereign's chief executive, James Fitter, attempted to rally support from locally based institutional investors.

Mr Fitter's argument is that, as a former convict, Mr Chey is not a suitable person to be running Korea's principal oil refiner. 'Chey personifies everything that's wrong with the chaebol model,' he says.

In 2003, Mr Chey served seven months of a three-year prison sentence after being convicted of responsibility for about US$1 billion of accounting irregularities aimed at covering up losses at subsidiary SK Global.

Despite the conviction, against which he is now appealing, Mr Chey retained his position as SK Corp's chairman. At last year's AGM he defeated a package of measures proposed by Sovereign which would have forbidden criminals from serving on the board.

Although the package received majority support, it failed to garner the 66 per cent needed to change SK Corp's articles of association.

In contrast, this year Sovereign needs only a simple majority to depose Mr Chey at his re-election, and Mr Fitter is lobbying foreign investors hard.

Mr Chey is not taking the challenge lying down. In recent months, SK Corp has enlisted the support of sympathetic Korean investors, including Samsung Electronics, and mounted its own roadshow to talk up the virtues of Mr Chey's management.

Executives highlight how SK Corp has reduced its debt to acceptable levels and boosted its return on equity, while diversifying away from its core oil-refining business into exploration and production and lubricants manufacturing.

Investor relations chief Lee Seung-hoon plays down Mr Chey's responsibility for the accounting scandal and warns that toppling him now will destabilise the company by creating 'a huge vacuum of leadership'.

Mr Lee insists the management has reformed. 'SK Corp's efforts to improve corporate governance have proven successful and now rank among the best in Korea,' he told foreign investors last month.

Nevertheless, even some Korean investors are concerned that with SK Corp's margins benefiting handsomely from heavy Chinese demand for petroleum products, Mr Chey's continued presence as chairman means its stock is trading as much as 25 per cent below its fair value. That discount could swing the vote against Mr Chey.