Samsung Electronics Co. and heir apparent Jay Y. Lee are facing rising pressure from investors for broad change at South Korea’s most valuable company.
Samsung executives and Elliott Management Corp. have been talking with investors in the U.S. and Korea to sound out opinions on the activist investor’s proposals to overhaul the Suwon, South Korea-based technology giant, people familiar with the matter said. Shareholders are voicing dissatisfaction with the status quo after Samsung’s smartphone battery crisis that will cost at least $6 billion and has seen its offices raided twice as part of a widening political scandal in Korea.
Elliott, led by billionaire Paul Elliott Singer, has proposed that Samsung Electronics improve its corporate governance by adding three independent board members, list shares on a U.S. exchange, pay shareholders a special dividend of 30 trillion Korean won ($26 billion) and separate into an operating company and a holding company. Investors are beginning to express support for Elliott’s ideas not just in private meetings but also in public.
“We agree with Elliott’s proposals,” said Daniel O’Keefe, managing director of Artisan Partners and co-founder of the Artisan Global Value Team. “We think Samsung in its current structure faces certain existential threats. Its governance, board and management structure is not well suited to the rapidly changing and highly competitive technology industry. Its board of directors has no truly independent members with experience in global operations, technology and capital allocation.”
Samsung, which has said it plans to respond to Elliott’s proposals by the end of this month, declined to comment for this story.
Artisan holds more than 1 million Samsung Electronics shares and has owned stock in the company for more than a decade, according to data compiled by Bloomberg. The Milwaukee-based company said Samsung’s recent missteps, including the fire-prone Note 7 smartphone that was pulled from the market in October, demonstrate that the company needs change to compete with Apple Inc., Google parent Alphabet Inc. and other rivals.
“Samsung has struggled over the past few years in its mobile business, most recently with the Note 7 fiasco, and we believe there is a link between poor governance and this poor performance,” O’Keefe said. “Secondly, Samsung suffers from a significant valuation discount relative to its peers. We think this is a function of the poor governance we just mentioned, as well as poor capital allocation and a lack of global liquidity in its shares which currently only trade in Korea. In the technology industry, a robust valuation is a competitive advantage.”
Artisan isn’t the only shareholder that is coming out publicly in support of Elliott.
“We certainly think that there is a lot of merit in what Elliott is saying,” said David Smith, head of corporate governance at Aberdeen Asset Management Asia. “What’s important to us is that these are win-win solutions.”
Aberdeen thinks that Samsung can afford to return more profit to investors through dividends.
“Certainly Samsung’s cash flow is very strong and balance sheet is very, very healthy,” Smith said. “Could they afford to pay out more? Sure. I would say in the absence of that, they should make a pretty good case of what they are investing in and why.”
He emphasized that Aberdeen has been a long-term investor in Samsung, well over 15 years.
“We have had a continuous dialog with the group over that entire period, which would include some of these issues,” Smith said.