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Samsung Electronics

Board diversity and capital efficiency

Home / EOS Case Studies / Samsung Electronics

Samsung Electronics manufactures a wide range of consumer and industrial electronic equipment and products, such as semiconductors, personal computers, peripherals, monitors, televisions, as well as home appliances, including air conditioners and microwave ovens. The company also produces internet access network systems and telecommunications equipment, including mobile phones.

Background
In 2016, the company’s board consisted of nine directors, four of whom were executive and five independent non-executive directors. All were Korean men, indicating an absence of diversity in gender and international experience, despite the company’s global operations. In addition, three out of five independent directors were university academics, while another was a lawyer and former prosecutor, signalling a lack of relevant industry experience among them.

We were also concerned about the company’s tradition of retaining too high a proportion of cash on its balance sheet, with a low dividend payout.

Our engagement
In a group investor meeting with the combined CEO and chair, together with two independent directors, we raised concerns about the composition and effectiveness of Samsung’s board. We explained that the lack of diversity and relevant skills could limit the board’s ability to oversee the complex and expanding nature of the business, particularly following the diversification into new businesses, including a major acquisition. In our view, the scandal of exploding batteries in its mobile handsets underlined the importance of having the right skill sets on its board. The two independent directors sought to demonstrate their value and expertise. However, in the light of the diversification of the business, they appeared to recognise that more sector experience and a broader international perspective could enhance the board's effectiveness. We also pointed out that capital efficiency and dividend payout policies are a major concern to investors.

In a strategic-update conference call in November 2016, we gained some assurances that the board would consider adding new board directors with international experience to the top executive level. We had another constructive discussion about the role of the existing independent directors and suggested ways in which they could prove that they represent the long-term interests of minority shareholders. We requested more evidence that the independent directors are working to influence the board and hold its executives to account.

Changes at the company
In late 2016, the company revealed the major actions underway to enhance long-term shareholder value through better capital allocation. It described its plan to allocate half of its free cash flow from 2016-17 to shareholder returns, which included cash dividends, share buybacks and the cancellation of all repurchased stock, and followed through on this as promised. We encourage this practice as local regulations do not mandate the cancellation of shares by companies. In late 2017, the company announced its shareholder return programme for 2018-20, including the payout of KRW9.6 trillion ($9 billion) in dividends for every year of the programme.

Ahead of its 2018 AGM, the company announced the appointment of three independent directors, including one woman and two men with relevant industry and international experience. In addition, in a meeting at our offices, we were encouraged to hear about its plans to improve the efficiency and independence of its board further. The company also split the roles of CEO and chair to enhance responsible management by its three CEOs and enable more objective evaluations of management by its board. It made this change based on the feedback of shareholders.

While we firmly welcome the improvement in board diversity, we continue to engage with the company on various other issues about which we have concerns. These include social issues, such as health and safety management and labour standards in its own operations, as well as in its supply chain. We will also continue to seek dialogue with the company’s non-executive directors.

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Sachi Suzuki Sachi Suzuki leads company and public policy engagements and voting activities in Japan and South Korea. She is also responsible for the automotives sector. Prior to joining Hermes EOS, she worked as a senior research analyst at EIRIS, where she was responsible for the assessment of the ESG performance of Japanese companies, as well as research on bribery and corruption. Sachi graduated from Keio University in Japan with a degree in Economics and holds an MSc in Development Studies from the School of Oriental and African Studies, University of London. She holds the CFA UK – Investment Management Certificate.
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