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[News Focus] Never-ending debate over low-dividend policies in Korea

With heightened awareness here on increasing governance transparency and boosting investors’ rights, large businesses have been facing mounting pressure on all fronts, including the ways they conduct shareholders meetings, reform the power structure and dole out dividends.

Since 2016, when a firm is spotted on the National Pension Service’s radar for paying “stingy” dividends to investors, they run the risk of being added to a blacklist that is disclosed to the public.

And with the world’s third-largest pension fund keen on carrying out intense shareholder activism through the stewardship code adopted last year, there are amplified forecasts the NPS may further pressure such firms to alter their dividend policies, even without considering specific circumstances.


This year, the NPS has voted against nine local companies on approval of their financial statements due to low dividends, according to a report released by a Liberty Korea Party lawmaker on April 21.

The list included the nation’s No. 1 mobile game developer and publisher Netmarble Games, alongside Namyang Dairy Products, Shinsegae Gwangju, Daeyang Electric and S&TC.

This is being interpreted as a warning sign to firms ahead of the NPS’ selection process of blacklisted firms to disclose to the public.

Of the nine firms, Namyang, S&TC, and Daeyang Electric had been identified for two consecutive years, yet remained steadfast in maintaining their dividends at the same level. Three, including Netmarble, were newcomers on the list.

If they refuse to make changes in their dividend policies, they are likely to be added to the public blacklist, which could negatively affect their reputation and the attraction of new investors.

The process of selecting blacklisted firms happens over the course of three years. The NPS draws up a classified list of “low-dividend” firms and arranges meetings with them during the first year. If they fail to see what they consider improvements to dividend policy, they then add them to an undisclosed watch list throughout the following year, before disclosing the list in the third year.

Last year for the first time the NPS publically announced Namyang and Hyundai Green Food, a food service unit of Hyundai Department Store Group, as on the blacklist.

While Hyundai Green Food more than doubled its dividends from 7 billion won ($6.03 million) in 2017 to 18.3 billion won during this year’s shareholders meeting season, Namyang rejected the NPS’ calls to raise dividend payouts in February in a statement that claimed “raising dividends would result in further indulging the ownership family and close acquaintances, who hold a combined 53.85 percent stake.”

It added that it plans to build up cash reserves by maintaining a low-dividend policy, which it said has helped boost corporate value and contributed to debt-free management. Namyang Dairy has paid 1,000 won per common share and 1,050 won for a preferred share since 2015. It has paid only 854.7 million won annually in dividends over the period.

As it has been only a year since the NPS has adopted the stewardship code, analysts expect firms sticking with low-dividend policies to continue their tug-of-war with the pension fund in the years to come.

“It has become a trend for the NPS to boost its shareholder activism and, compared to other global economies, South Korea’s dividend yield remains relatively low. The low rate is expected to give more grounds to the NPS to push for an investor-centered dividend policy and is likely to pressure companies to change their dividend policies in order to boost shareholder value,” said Choe Gil-su of Kiwoom Securities.

The move has sparked ample debate, with experts torn between improving shareholders’ rights and supporting companies’ strategies.

“Excessive pressure on the firms should be refrained from, as the dividend policy and the firm’s ability to carry out new projects and investments have always had a somewhat ‘opposing relationship,’” Yoo Jung-joo, a researcher at the Korea Economic Research Institute, told The Korea Herald.

“It seems at the moment the NPS and institutional investors’ requests are focused on making short-term plans regarding dividend increase. But the focus could be about boosting new investments and shareholder value for the firms in the long term,” he added.

Some industry watchers, on the other hand, point to the high wages of the owners of the respective firms.

Namyang Dairy Chairman Hong Won-shik bagged an annual salary of nearly 1.6 billion won in 2015, according to reports. In 2017, he reportedly took 1.6 billion won out of the total 2.8 billion won in annual salaries for the firm’s board of directors, which amounted to 58.1 percent of the entire volume.

The figure prompted criticisms that it contradicts Namyang’s excuse made earlier this year on its low-dividend policy.

“A majority of the listed firms in South Korea have undergone rapid economic growth of the 1970s-80s and believe it is practical to keep low dividends and use the capital to make other investments,” said Lee Sang-heon of Hi Investment & Securities.

Experts also reiterated that the responsibility of creating a balanced market is not only in the hands of the NPS and investors, but of the firms as well.

“When the return-on-equity is low, it would boost corporate value to increase dividends at a reasonable rate,” said Ahn Sang-hee, head of the Daishin Governance Research Institute.

By Jung Min-kyung (