Billionaire Investor Names Picks for KT&G Directors KT&G Searches for Allies in Standoff with Offshore Fund Offshore Fund in Hostile Takeover Offer for KT&G Offshore Fund Candidate Likely to Join KT&G Board Court Deals Blow to Icahn's KT&G Takeover Bid Offshore Fund Levers Nominee on KT&G Board Rare Sighting of ‘Faceless Investor’ in Seoul KT&G to Pay Out W2.8 Trillion to Shareholders Icahn Walks Away From KT&G W150 Billion Richer

The outcome was expected, but what set alarm bells ringing is that candidates recommended by Icahn and his partners got altogether 48 percent of the vote, as against KT&G’s 52 percent. In a joint stock company, whoever holds more than 50 percent of shares, even by a single share, exercises the management right. Thus if Icahn and his lot persuade just a few more shareholders, they will be able to wrest control of the company via shareholder meetings.

Icahn and partners have only a 6.6 percent stake in KG&T, but they managed to rally sufficient votes to represent a real threat to the company, chiefly because 61 percent of shares are owned by foreign investors. It is therefore more than a hollow bid for sympathy when major local corporations with a large stake held by foreigners say they are worried about hostile takeover attempts by offshore hedge funds.

Samsung Electronics, which has the biggest market capitalization, is 53.5 percent foreign-owned. For POSCO, the figure is 68.4 percent, for LG Philips LCD 53.7 percent, for Hyundai Motor and SK Telecom 49 percent each, for Kookmin Bank 85 percent and for Hana Financial Group 81.2 percent. If the Icahns of this world set their sights on them and rally overseas shareholders in support, things could be even worse than at KT&G.

But it would be missing an important lesson if we point the finger at foreign capital alone. The fundamental reason why such companies are vulnerable lies not in the venality of foreign speculators but in the businesses themselves. Sovereign Asset Management was able to launch its attack on SK Corp in 2004 because of less than transparent corporate governance and a history of window dressing in the company. KT&G’s troubles arose because Icahn’s claim that management is to blame for poor shareholder value appealed to foreign shareholders. Lose the trust of your shareholders and you could lose control of the business.

Thus the best way to defend control of Korean companies is to improve their management with a view to providing better shareholder value. That is the elementary lesson to other big Korean companies from the KT&G affair.