SM Entertainment’s corporate governance battle
SM Entertainment is one of the most successful entertainment companies in South Korea, managing several world-renowned K-pop groups, and a rare event unfolds around SM Entertainment, which happens every ten years or so. This time, the battle for management control is between internet conglomerate Kakao and another K-pop company, HYBE, which owns the hugely popular BTS. At issue is the controlling stake held by SM founder Lee Soo Man, which is being challenged by a consortium of SM management, Kakao and activist fund Align Partners.
For decades, many global investors have cited South Korea’s corporate governance as one of the reasons for the “Korea discount,” a term used to describe stock valuations that have been chronically undervalued compared to regional peers. After many false hopes in the past, global investors are understandably skeptical of the hopes of South Korea’s corporate governance movement. But there are signs that this time may be different.
Activist investors have been gaining prominence globally over the past decade, as investors seek to unlock the undervalued value of many companies whose management has underperformed for a variety of reasons. In South Korea, complex legal hurdles, lack of transparency, and inability to actively participate in company management often hinder foreign investors’ efforts to undertake corporate governance reforms. Unlike other advanced economies, the term minority shareholders is a misnomer in South Korea, as they often hold a larger stake than the founding family, but are seen as an afterthought.
This is due to complex legal structures that make it difficult to bring class action lawsuits against companies or their management. Another reason is that the internal cross-holding of the chaebol group makes it difficult for external shareholders to speak out. The high-profile case surrounding SM Entertainment could be a game-changer as it gains attention not only from foreign investors but also from the wider local investment community and the public.
So far, the HYBE-Lee alliance seems to have the upper hand, as HYBE is already SM Entertainment’s largest shareholder, with Lee owning 15% as recently announced. HYBE now holds the largest stake in SM, followed by the National Pension Service, the main owner of the country’s local stock market. In addition to the 15% stake, HYBE has made a public tender offer for a 25% stake. If HYBE succeeds in acquiring the target stake through a tender offer, it could acquire more than 40% of SM’s equity.
SM’s current management entered into a strategic partnership with Kakao earlier this year when it signed an agreement to acquire 9% of SM. The deal will make Kakao SM’s second-largest shareholder, after SM founder Lee. Before HYBE stepped in, SM management had shown a willingness to improve corporate governance, as proposed by Align Partners, which also holds a small stake in the entertainment company. Significantly, many existing shareholders support the activist fund’s campaign to improve SM’s traditional corporate governance, which is said to have benefited founder Lee Jae-yong. SM’s share price reacted sharply to the event, rising even more than the tender offer, reflecting investors’ high expectations.
This latest string of events reminds us of the effectiveness of activism if it is launched through a constructive platform. In the past, founders were considered owners of the company, no matter how many shares they held. The decision of a company to list and receive public funds carries significant responsibilities to shareholders, who are entitled to shareholder rights based on voting shares and due process prescribed by law.
Historically, the Korean public has shown great respect for entrepreneurs who have devoted their lives to launching and growing businesses that remain one of the country’s main engines of economic growth. However, some credit should also go to investors who have entrusted their hard-earned savings to the company’s future growth. The fight over SM Entertainment should be a lesson in the need to hold companies accountable to shareholders.
While many countries continue to balance wealth between the working and middle classes, balancing the rights of corporate management and minority shareholders should also be a priority for an economy the size of South Korea. The Korean government recently announced plans to apply for developed country status from its current developing country status. Some of the conditions for the upgrade were to liberalize its currency market and allow easier access to the stock market for foreign investors. Corporate governance is another important step towards achieving the global standards desired by the entire country.
Peter S. Kim (firstname.lastname@example.org) is the Managing Director of KB Financial Group.