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By Nam Hyun-woo
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| Hyundai Home Shopping CEO Chung Kyo-sun |
According to Institutional Shareholder Services (ISS), the adviser issued a Governance Quality Score report on Hyundai Home Shopping, March 14, which gave the company a score of 8 for governance quality.
A score of 1 indicates the lowest governance risk, while 10 indicates the highest.
This is a relatively bad score compared to other Korean companies covered by ISS. Samsung Electronics received a 2 and several other Samsung units including Samsung Life Insurance and Samsung C&T received 1.
It gave Hyundai Motor 5 and Hyundai Mobis 6, which are deemed relatively good scores, given their fierce battle with global activist funds over their governance structures.
Hyundai Home Shopping's poor rating stems from its shareholder payments and executive compensation.
The ISS gave a 9 for the company's shareholder rights due to the company's weak dividend policy and gave the worst score of 10 for executives' wages because of their continuous increases.
Though the ISS did not recommend investors go against issues proposed by the company's board during a shareholders meeting scheduled for March 28, the scores are expected to provide grounds for multiple activist funds having stakes in the company that are demanding an improved dividend policy and a proper evaluation of senior management's performance.
Earlier this month, U.S. investment management firm Dalton Investments sent a letter to Hyundai Home Shopping directors, demanding the company increase dividends, buy back and cancel shares, pay 40 percent to 70 percent of senior management's annual compensation in restricted shares, and evaluate executives' performance with economic value.
"While the company has created significant value, this value has not been shared with minority shareholders," Dalton Investments Senior Research Analyst James Lim wrote in the letter.
"Further, while long-term shareholders have suffered losses, management has seen its compensation remain stable or increase. Clearly, there is a lack of alignment of interest between that of management and that of all shareholders.
Lim cited the National Pension Service, which has an 11.4 percent stake in the company, as having lost as much as $22 million despite holding shares for the last six years.
"Hyundai Home Shopping's core earning power has increased since its listing. Why, then, after eight years, are shareholders not receiving a better return on their investment? Where did the value go?"
Last year, Hyundai Home Shopping logged 973.45 billion won ($860.3 million) in sales, down 3.8 percent from a year earlier. During the same period, its operating declined by 9.7 percent to 135.45 billion won. However, the investment firm claims the company has been showing a steady operating profit and positive cashflow.
Dalton Investments also threatened to object to the appointment of two independent directors and two audit committee members proposed by the board. The investment firm said its clients and accounts currently own approximately 2.5 percent of Hyundai Home Shopping's outstanding shares.
Value Partners, a Hong Kong-based fund which has been holding shares in Hyundai Home Shopping since 2016, also claimed the company has continued to misallocate capital and failed to serve the best interests of the shareholders, making similar demands as Dalton Investments.
The ISS also acknowledged that Hyundai Home Shopping's payout ratio of 13.3 percent in 2018 is below its 30 percent minimum benchmark to trigger further analysis, but it believes "recommending against all dividend proposals in Korea simply on the basis a low payout ratio may be detrimental to shareholders" because payout ratios at Korean companies generally fall below 30 percent.
"Two dissident shareholders have opposed the distribution of dividends, while raising concerns on the overall board dynamics and oversight function of the audit committee," the ISS said in the report. "However, the dissidents came short of providing concrete evidence to make their case compelling at this point."
