December 29, 2016 / 7:00 AM / 9 months ago

Korea scandal shows risk of pension giant

People walk past a branch office of the National Pension Service (NPS) in Seoul, South Korea, November 4, 2016. Picture taken on November 4, 2016. REUTERS/Kim Hong-Ji

HONG KONG (Reuters Breakingviews) - South Korea’s national pension giant is being put on a leash after prosecutors detained its chairman in a corruption probe. The case highlights how the country’s biggest investor, with more than $450 billion under management - including sizable stakes in the biggest companies in the country - could be manipulated at the expense of other shareholders. Korea could use a safeguard.

The suspicion is that the pension service, the world’s third-largest, was pressured into voting for a $8 billion merger of two Samsung Group units, Cheil Industries and Samsung C&T, as part of backdoor dealings between the presidential office and the country’s largest conglomerate. A special prosecution team has been looking into whether the order came from then-head of the Ministry of Health and Welfare, which runs the National Pension Service. That minister is now chairman of the institution.

The deal effectively gave Samsung scion Jay Y. Lee stronger control over the group’s crown jewel, the electronics business. But the plan involved valuing the target company, Samsung C&T, substantially lower than the acquirer, although the former was bigger. That didn’t go down well with many Samsung C&T shareholders, including U.S. hedge fund Elliott Associates, which launched a proxy fight against the tie-up. The NPS’ vote gave Samsung a narrow win in a fight it would have probably otherwise lost. Samsung C&T’s stock has dropped more than 30 percent since shareholders approved the merger in July last year.

Investigators are looking into whether Samsung supported a business and foundations backed by a close friend of President Park Geun-hye‘s, Choi Soon-sil, as part of a tacit quid-pro-quo.

Samsung denies the allegations, and the investigation is not complete. But the possibility that the NPS’ market influence could be up for political barter is troubling nevertheless. The fund holds 5 percent-plus stakes in more than 100 companies, including units of Korea’s 10 biggest business groups, an NPS disclosure shows.

Thus greater scrutiny on the NPS is good news. At a forum held by a group of lawmakers this month, one participant called for an overhaul of a committee overseeing how the NPS exercises its voting rights. Pressure is also building on the fund to adopt a “Stewardship Code” to act more responsibly, similar to its Japanese peer. These measures won’t eliminate risk of cronyism, but they’re a start.

On Twitter twitter.com/JYang_in_HK

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