SM announces 2023 AGM Agenda and Board Nominees, Express Commitment to Enhancing Corporate Governance and Shareholder Value
2023. 02. 22
– Establishing a Board of Directors with the highest level of independence, diversity, and expertise in the country, without reappointment of current members
– Accepting appropriate agendas from the shareholder’s proposal while seeking to amend the Articles of Incorporation to further enhance the Board’s independence
– Proposing the six-fold increase in the dividend payment compared to the previous year, considering last year’s record high earnings
– The shareholder’s proposal by former Executive Producer Lee and hostile M&A could hinder SM’s growth
(Seoul, February 22, 2023) SM Entertainment has today announced that its Board of Directors has set the agenda for the 2023 Annual General Meeting of Shareholders, which will be held on March 31, 2023. SM also announced its goal to generate KRW 1.2 trillion in revenue and KRW 430 billion in operating profit by 2025, with a target stock price of KRW 360,000, and triple its corporate value over the next three years through the implementation of its “SM 3.0” strategy.
The “SM 3.0” aims to advance SM into a fan- and shareholder-centric global entertainment company and includes the transition plan to a multi-production center/label system, an IP monetization strategy, global expansion strategy, and investment strategy. In doing so, SM aims to establish a fundamentally sustainable business model by moving away from relying on a single outsourced producer. In order to implement SM 3.0, a strategy centered on enhancing shareholder value, SM has recognized that 1) the Board of Directors must be independent from any particular shareholder; 2) the Board of Directors must have relevant expertise; 3) the Articles of Incorporation should be amended for sustainable growth of the Company; 4) a proactive capital deployment and shareholder return policy should be introduced; and 5) and compensation linked to the achievement of the target share price should be introduced. SM’s Board of Directors resolved that all of the above are essential requirements and set them as agenda items for the upcoming AGM.
All of the current Inside Directors of the SM’s Board of Directors, including co-Chief Executive Officer Sung-su Lee, have decided to step down as registered directors without serving consecutive terms, taking full responsibility for the current situation brought by the former Executive Producer Soo-man Lee’s mismanagement of the Company. Further, SM has proposed to increase composition of Outside Directors to 55% and of 36% to be female, to ensure that the new Board of Directors has the highest level of independence, expertise, and diversity globally. In addition, SM proposes to appoint at least two corporate governance experts to pursue the proportionate interests of all shareholders. The Articles of Incorporation (AOI) will also stipulate that the Chairperson of the Board must be the Outside Director to enhance its independence, and that the Outside Director Recommendation Committee must be composed entirely of Outside Directors.
In terms of enhancing shareholder value, SM proposed a cash dividend of KRW 1,200 per share in 2022 in light of its record-breaking performance. This represents a 32% dividend payout ratio based on the consolidated net income, which is the highest in the industry, and a six-fold increase from the previous year. In addition, SM will introduce a shareholder value-linked incentive system for executives to build a corporate management environment centered on enhancing SM shareholder value.
Establishing a Board of Directors with the highest level of independence, diversity, and expertise in Korea
SM has nominated Cheol-hyuk Jang, Chief Financial Officer (CFO) of SM Entertainment, Ji-won Kim, Head of the SM Entertainment Marketing Center, and Jung-min Choi, Head of the SM Entertainment Global Business Center as Inside Directors.
Cheol-hyuk Jang is the current CFO of SM, a certified public accountant, and an expert in accounting, taxation, and M&A, who will contribute significantly to increasing financial efficiency and making the investment decisions to implement the SM 3.0 strategy. Ji-won Kim plans to actively carry out marketing activities to monetize SM’s IP by utilizing the press, media network, and fan club management experience accumulated over 20 years. Jung-min Choi has also worked for SM for more than 20 years and will focus on enhancing SM’s overseas investment opportunities and overseas sales by expanding SM’s overseas networks through the implementation of the global strategy, a key pillar of the SM 3.0 strategy.
As for the Outside Directors, the interim Outside Director Recommendation Committee reviewed more than thirty Outside Director candidates with support from global consulting and search firms and selected six candidates after assessing their suitability and competencies based on the Board Skill Matrix (BSM, Board Skill Matrix (BSM), verifying their disqualifications, and conducting reputation checks. The six chosen nominees following the extensive review are; Kyu-shik Kim, Chairman of the Korean Corporate Governance Forum; Tae-hee Kim, Attorney at Pyeong San Law Firm; Jung-bien Moon, Professor at Korea University Business School; Kyung-hwan Min, Partner at Blocore; Seung-min Lee, Partner at Peter & Kim; and Sung-moon Cho, CEO of Chartmetrics.
Kyu-shik Kim is a governance, law, and investment expert who has worked at multiple asset management companies and is expected to contribute to the establishment of a sustainable and advanced corporate governance at SM. Tae-hee Kim is a lawyer and tax expert, with 15 years of experience at the National Tax Service, who help prevent and respond to tax issues that may arise in the future. Jung-bien Moon is a professor of ESG management and global strategy, who will support the introduction of advanced governance and establishment of global expansion strategies. Kyung-hwan Min is a partner at a blockchain project investment firm Blocore, who will contribute strategically to SM’s expansion into new businesses such as NFT and blockchain. As an international dispute expert, Seung-min Lee will provide the legal expertise needed to expand SM’s IP business globally and Sung-moon Cho will contribute strategically to the expansion SM’s data-driven global music business as the head of a company that provides music big data analysis services.
The proposed nominees for non-executive director are Chang-hwan Lee, CEO of Align Partners, and Yoon-joong Jang, EVP & Global Strategy Officer at Kakao Entertainment. Chang-hwan Lee is the representative of Align Partners, who has led SM’s Like Planning contract termination and governance improvement campaign, as well as an expert in corporate governance and M&A. He is expected to contribute to the board by discovering and accessing various investment or acquisition opportunities that will underpin SM’s growth. Yoon-joong Jang is a nominee of Kakao, a key strategic partner in the SM 3.0 strategy, who can contribute to the creation of synergies between the two companies. Jang is also a global entertainment business expert who is the former CEO of Sony Music Korea and the current GSO of Kakao Entertainment who can support the development and execution of SM’s global expansion strategy.
While SM has nominated Board candidates with the highest level of independence, diversity, and expertise in Korea, comprised of 55% of Outside Directors and 36% of female directors, the director and auditor candidates nominated by former Executive Producer Soo-man Lee are lacking expertise in governance and technology/platform, both of which are key priorities of SM’s business model. Moreover, Soo-man Lee’s nominees – Jin-soo Jung, Byung-moo Park, and Kyu-dam Choi – are believed to be inappropriate to serve as SM’s Directors, as they are alleged to undermined shareholder value at their respective companies through mutual equity investment decisions for the purpose of defending management rights.
Amendment of the Articles of Incorporation for sustainable development at SM
While SM accepts reasonable agendas proposed by a shareholder, it propose to amend the AOI further to enhance the independence of the Board of Directors by appointing the Chairperson of the Board from Outside Directors and the Outside Director Recommendation Committee to be only comprised of Outside Directors.
In addition to introducing an electronic voting system and clarifying the Directors’ duty of loyalty and duty of care, SM accepted the proposal agenda aimed at protecting shareholders’ rights and improving governance, such as establishing an Internal Transactions Committee and Compensation Committee and appointing a compliance officer.
Moreover, by proposing that the Chairperson of the Board to be selected from outside directors, SM secured the independence of the entire Board of Directors, going further than the shareholder’s proposal which left the possibility of appointing a non-executive Director to the Chairperson of the Board. Lastly, SM expanded the authority of the Outside Directors by proposing to exclude Inside Directors from the Board Committees, unlike the shareholder’s proposal which allowed possible inclusion of Inside Directors.
SM opposes the shareholder’s proposal and hostile M&A from former Executive Producer Soo-man Lee and HYBE
SM expressed its firm opposition to the shareholder’s proposal and hostile M&A attempt by former Executive Producer Soo-man Lee and HYBE. In particular, SM pointed out the fact that Soo-man Lee, the individual responsible for the major governance issues at SM and for damaging corporate value, is launching the shareholder proposal to ‘introduce exemplary corporate governance and enhance corporate value shareholder value.’ In the past, Lee undermined SM’s shareholder value by; 1) tunneling profits through Like Planning; 2) funneling SM’s core businesses to SM Brand Marketing and Dream Maker, companies he owns a stake in; 3) operating CTP, an overseas version of Like Planning; 4) making unfair demands to artists to benefit his real estate business; and 5) acting as the de facto CEO.
SM’s criticisms of shareholder’s proposal submitted by Lee and hostile M&A attempt can be summarized in following three key points:
1. Conflicts of interests between SM, HYBE and its shareholders: As both SM and HYBE are direct competitors, operating in the entertainment industry, the appointment of HYBE insiders as SM’s Board of Directors could result in leakage of key information about SM’s business to HYBE. There is also risk that those Directors could vote in favor of a proposal that favors HYBE, not SM. Under the governance structure based on the hostile M&A, HYBE holds only 15-40% of SM shares, creating a structural conflict of interest between the HYBE and SM shareholders, which is very likely to lead to the destruction of shareholder value. Conversely, if HYBE prioritizes SM, this would place the interests of the HYBE shareholders at risk.
Due to the loss of SM’s platform business opportunities, the loss of control in high-margin/growth businesses, and the transfer of profits from Soo-man Lee to HYBE through the share acquisition, the hostile M&A will only result in losses for SM shareholders.
2. HYBE’s double-sided position on amending the Articles of Incorporation: The shareholder’s proposal HYBE made through Soo-man proposes to amend the AOI as follows – “Chairperson of the Board of Directors will be elected annually by resolution of the Board of Directors, amongst directors who are not Inside Directors.” However, the current Chairperson of the Board of Directors at HYBE is actually Si-hyuk Bang, an Inside Director and the largest shareholder of HYBE. In addition, the proposal requests that SM to “maintain a dividend payout ratio of 30% based on consolidated net income,” however, HYBE has never paid any dividends to its shareholders.
3. Korea Fair Trade Commission (KFTC) review risks: As HYBE’s acquisition of shares from the major shareholder and the tender offer are announced at the same time and aon the same date, the two should be considered as the single transaction, which are subjected to preliminary review by the KFTC. However, HYBE avoided the preliminary review by acquiring only 14.8% of Lee’s shares (18%), just below the threshold for KFTC review. In case HYBE continues with the tender offer then a review by KFTC is inevitable, which is a risk to SM future. If the merger is rejected due to antitrust issues, a large amount of SM shares will be dumped into the market, leading to a sharp drop of the stock price. If the KFTC conditionally approves the merger, there is a risk that HYBE will reduce the size of the acquired company, SM, to implement the corrective measures proposed by the KFTC. Even if the approval is granted, the delay in the review process is expected to cause a significant disruption in the implementation of SM’s business strategy.
“Through the realization of SM 3.0, we have been working hard to improve the organization of our Board of Directors, amend the Articles of Incorporation, and establish advanced governance structure to enhance shareholder value, which are essential for us to become a fan- and shareholder-centric global entertainment company,” said Sung-su Lee, co-CEO of SM. “We kindly ask for your attention and support for our nominees who are the right people to realize our SM 3.0 strategy and triple SM’s corporate value over the next three years.”