[Interview] Uniting shareholders to make companies listen > 지배구조

When a shareholder raises a concern with a company, the response is often predictable: “You’re the only one complaining. Every other shareholder is happy.” 

It is a scene familiar in Korea today — and one Britain’s institutional investors knew well enough to address when they established the Investor Forum in 2014.

The Investor Forum is a nonprofit body whose roughly 50 members include pension funds, insurers and asset managers. Together, its members represent around 25% of the market capitalization of the FTSE. A company that might brush off an individual shareholder cannot as easily avoid a call from an organization representing a quarter of the market. 

The forum’s staff numbers just nine people. Yet for 12 years, the body has quietly but effectively made its influence felt in the boardrooms of UK-listed companies.

The Hankyoreh met Victoria Sant, the managing director at the Investor Forum, at the forum’s London office last month for a 90-minute conversation about how the organization works. 

The timing is particularly apt. Korea is now undertaking its first major revision of the Stewardship Code since it was introduced in 2016, including a new provision recognizing “collaborative engagement” among institutional investors. The UK’s experience offers a useful lesson in what it takes to make such a provision work in practice. 

The following are the four main takeaways from our interview with Sant. 

Joining forces is a last resort

Collective engagement is often seen as shareholders banding together from the outset to pressure a company. The forum’s experience was quite different.

Member firms conduct one-on-one engagement with the companies they invest in as a matter of course, and most issues are resolved at that stage. It is only when a company shuts the door — telling an investor, in effect, that they are the only one complaining — that the member brings the issue to the forum.

The forum then does two things: it checks whether other shareholders share the same concerns, and it assesses whether a critical mass of shareholders can be assembled, in terms of ownership, that the company cannot easily ignore. One or two small shareholders holding 1%-2% between them is a very different proposition from five members holding 20% together. 

Sant described the forum as “a kind of insurance policy” that members hope never to have to use. In practice, only a small fraction of engagements ever reach the forum — but the knowledge that an escalation route exists strengthens the one-on-one conversations that precede it. The UK Stewardship Code itself sets out, as one of its principles, that there should be a route to escalate when one-on-one engagement does not resolve a concern.

Build safeguards before building influence

What the forum has spent 12 years building is not influence but safeguards. When shareholders act together, there are three legal landmines to avoid: obtaining inside information, market abuse, and — in takeover situations — being deemed to be “acting in concert.”

The forum’s answer is a hub-and-spoke structure. Like spokes on a wheel, each member communicates individually with the forum at the center; members do not communicate directly with one another. If one member holds inside information, it does not leak to the others. Every meeting opens with a clear compliance statement that the forum does not seek and will not accept inside information from companies. Even in takeover situations, the forum does not know whether members’ combined holdings are large enough to block a deal — only that shareholders have concerns.

All of these rules are set out in the Collective Engagement Framework, which the forum has operated since 2016. It functions as an operating manual covering everything from the initiation of engagement, codes of conduct and record-keeping through to termination. A panel of three law firms provides ongoing legal advice pro bono, and the framework is formally reviewed every three years. 

When it was first drafted, the forum consulted the Financial Conduct Authority, the Takeover Panel and the Financial Reporting Council to obtain confirmation that the approach was permissible, which is why large global investors feel confident participating within its rules.

The forum does not issue directives, making board more open to suggestions

The forum is often compared with activist funds, but its approach is almost the opposite. An activist might push for a specific person to join the board; the forum simply raises concerns about the board’s composition and leaves the company to decide how to respond. There are no media campaigns or open letters. Much of the work happens quietly, behind the scenes.

That discretion is itself a source of leverage. 

A case in point was a takeover approach last year for a UK-listed property company. Shareholders did not want to see the company taken private by a private equity buyer. The forum wrote to the board that shareholders wanted to continue supporting the company on public markets, and the board should not accept the first offer without exploring other options. 

The letter gave the board the confidence to reject the offer and pursue alternatives. Ultimately, the company merged with another listed company rather than being sold to private equity, at a higher premium than the private equity bidder had offered. Shareholders were able to retain their holdings and participate in the company’s longer-term value creation.

“Because we don’t try to take the credit for ourselves, board chairs are actually more willing to open up and listen to us,” Sant said. In fact, companies facing an activist investor have even turned to the forum to hear what other shareholders share their concerns. 

Permissions over punishments

Korea’s reform proposal also introduces a collective engagement provision, but a legal obstacle remains. Under the Financial Investment Services and Capital Markets Act, the large shareholding reporting rule (the so-called “5% rule”) means that the moment institutions jointly discuss how they intend to vote, they risk being treated as “joint holders,” and it remains unclear what counts as “involvement in management.” 

That uncertainty can make institutional investors reluctant to act together, as even a joint request to appoint a single non-executive director could be seen as an attempt to influence management.

The UK’s answer was simple: the Takeover Panel issued a practice note confirming that this kind of activity was permitted. 

Sant said it was more helpful to explain what investors can do, rather than focusing only on what they cannot do, describing this as establishing a “safe harbor” within which investors can freely discuss matters — provided they are not seeking control or setting the price at which they would back a particular transaction. 

Korea’s Financial Services Commission issued a related interpretive ruling in March this year, but observers say further work on the enforcement decree and legal interpretation is still needed.

Hankyoreh: What is the biggest legal risk when shareholders act together?

Sant: Obtaining inside information, market abuse, and the risk of being deemed to be acting in concert in a takeover situation. That’s why we operate a hub-and-spoke structure — members communicate with us individually, not directly with each other. Every meeting starts with a reading of a clear compliance statement. And we only ever tell a company what the problem is; we don’t dictate the solution. We might say there’s a concern about the capital allocation, but we would never say, “You must raise your dividend by x%.” We’re facilitators, not advisers.

Hankyoreh: Is it the Collective Engagement Framework that sets out these rules?

Sant: Yes. It’s an operating manual that makes clear to members what they can and cannot do. Every time we begin an engagement, we test it against four questions: Is this an issue where an outcome can be achieved? Is there a constructive solution? Is there critical mass of shareholder support behind it? And do we have the resources to carry it out? If a member sells out of a position during an engagement and we lose critical mass, we stop because we can no longer say we represent shareholders.

Hankyoreh: How did the framework come into being?

Sant: Lawyers drafted it, but we consulted the FCA, the Takeover Panel, the government and the FRC throughout, and received confirmation that our approach was acceptable. We have a legal panel of three firms — Davis Polk, Skaddens and Gibson Dunn — who advise us pro bono on an ongoing basis, and we formally review the framework every three years. That’s why large global investors feel confident that they’re protected operating within our rules.

Hankyoreh: There are concerns in Korea that the “presumption of concerted action” under the Capital Markets Act would be an obstacle to a similar structure.

Sant: Doesn’t your rule apply only where the purpose is to seek control or involvement in management? It’s the same in the UK — the concert party rules only bite where investors are trying to install their own people on the board or seize control. Agreeing that “the board composition needs to be reviewed” is fine. What isn’t fine is trying to install a specific individual, or pre-agreeing how everyone will vote on a particular resolution. That’s the clear safe harbor principle. Korea just needs to make clear what is permitted. In the UK, the Takeover Panel issued a practice note that formally allowed investors to operate this way.

Hankyoreh: The National Pension Service is by far Korea’s largest institutional investor by assets. If it joins a collective engagement, how can the process ensure that its size does not give it disproportionate influence, and that other participants retain their independence and an equal voice? 

Sant: It’s similar in the UK, where large passive funds like BlackRock and Vanguard are major shareholders in many companies. Companies sometimes assume that talking to BlackRock and Vanguard means they’ve heard from shareholders generally. But it’s the marginal shareholders — those actively buying and selling — who really move the share price. The value of collective engagement is that these active investors can combine their voices to balance the outsized influence of the large passive funds. From a board’s perspective, too, it’s far more constructive to talk to several shareholders who understand the business in depth than to one large shareholder who holds a big stake but who may not have informed views about all the operational details.

Hankyoreh: How do you measure the success of an engagement?

Sant: Honestly, it’s difficult. Everyone wants to find the causal story — “We proposed this, the company changed, and the share price rose”— but it’s rarely that simple. What we do is set a very clear objective at the outset. Sometimes the objective is simply that the company understands the shareholder perspective — if a letter and a meeting achieve that, it’s a success even if the company doesn’t change its behavior immediately. Other engagements are about getting insight ahead of a vote at the annual general meeting. Others are about longer-term change in capital allocation, which can take a long time. If shareholders decide the company now understands the issue and are willing to hold the stock and watch, that’s a meaningful outcome too, even if real change takes years. We’ve had only one company, in our entire history, that simply didn’t respond at all to an engagement letter.

Hankyoreh: How does what you do differ from an activist investor running a public campaign?

Sant: The biggest difference is that we operate privately. We don’t go to the press, and we rarely issue open letters. The conversation between the board and shareholders happens quietly. And unlike activists, we don’t instruct; we convey the concern, and it’s the company’s job to find the solution. Because we don’t try to take the credit ourselves, board chairs are often more comfortable opening up to us. We’ve even had companies approach us first, saying an activist has appeared and they want to know what other shareholders think.

Hankyoreh: What should a market like Korea prioritize when designing a collaborative engagement framework?

Sant: First, agreement from regulators and a clear safe harbor — you need clarity on what is and isn’t permitted. Second, a strong domestic investor base. International investors coming in and telling the local market what to do doesn’t work; research suggests collective engagement succeeds where local knowledge is combined with international perspective. Third, an inclusive system — asset owners, active and index institutional managers and smaller shareholders should all be able to take part. It shouldn’t become a club for one type of investor.

By Lee Bong-hyun, research fellow at the Hankyoreh Economy & Society Research Institute ESG Center

Please direct questions or comments to [english@hani.co.kr]