Companies targeted by activist funds see value decline over the long run: Federation of

Is rise of shareholder activism boon or burden?

By Lee Yeon-woo

Companies targeted by successful activist campaigns tend to experience a short-term boost in corporate value, but in the long run, their value falls below pre-campaign levels, the Federation of Korean Industries (FKI) said Monday.

In its report, the FKI analyzed the impact of activist campaigns on corporate value, focusing on 970 U.S.-listed companies with market capitalization and assets exceeding $1 billion since 2000. Of these, 549 companies experienced successful campaigns, while 421 saw the campaigns fail.

The analysis showed that activist campaigns tend to be most effective with companies that have undervalued corporate assets. When indexed at 100, companies with successful campaigns saw their value increase from 83.9 percent to 85.3 percent within three years, reflecting a 1.4 percentage point improvement and a partial correction regarding undervaluation.

However, four years after the campaigns succeeded, their value dropped by 2.4 percentage points to 82.9 percent. This means that corporate value declined by 1 percentage point from pre-campaign levels in the long term.

The FKI said that an excessive focus on shareholder value can harm corporate fundamentals, leading to reductions in employment and capital expenditures.

Lee Sang-ho, vice president of the FKI’s Economic and Industrial Research, urged caution in legislative efforts aimed at fostering a favorable environment for activist funds. Such efforts, he said, should “allow companies to concentrate on their core businesses without expending astronomical resources on defending management control.”

This research from one of Korea’s largest business lobby groups comes as activist funds intensify shareholder activism targeting Korean corporations.

The most recent example came from Align Partners on Oct. 15. Currently holding a 1 percent stake in Doosan Bobcat, the domestic fund called on the company to abandon plans for a stock swap with Doosan Robotics and instead allocate the cash earmarked for the swap to shareholder returns.

Doosan Group had initially planned to restructure its operations by moving Doosan Bobcat, currently under Doosan Enerbility, to fall under Doosan Robotics. However, the plan is facing opposition from regulators and minority shareholders.

SK Square and Samsung C&T are also facing pressure from U.K.-based activist hedge fund Palliser Capital. After acquiring over 1 percent of SK Square and 0.62 percent of Samsung C&T’s shares, Palliser Capital began pushing for measures to boost corporate value, including expanding share buyback programs and restructuring board membership.

As these activist funds escalate their demands ahead of next year’s shareholder meetings, industry officials argue that such funds are exerting undue influence over management despite holding only a modest stake of around 1 percent.

However, shareholder activism in Korea is still in its early stages, unlike the U.S. where such actions are especially active. The approval rate for shareholder proposals driven by activist investors remains low. It recorded 20.2 percent at annual general meetings in 2023, according to a report from the Korea Capital Market Institute (KCMI).

This could also help resolve the lack of transparency in corporate governance, which has been consistently identified as a factor contributing to the undervaluation of the Korean stock market.

“Compared to countries in the Anglosphere, Korea’s capital market has shown relatively limited consideration for diverse shareholder groups, with lower levels of interest in exercising shareholder rights,” said Hwang Sei-woon, senior research fellow at the KCMI.

The sharp rise of local investors after the COVID-19 pandemic is creating a favorable environment for advancing corporate governance reforms.

“Activist funds offer both advantages and disadvantages, making it crucial to determine how they are employed. If leveraged to enhance corporate governance and improve managerial efficiency, they can boost corporate sustainability and help mitigate the undervaluation challenges in Korea’s stock market,” Hwang said.