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KB Financial Group

Governance and climate change

Home / EOS Case Studies / KB Financial Group

KB Financial Group is a financial services holding company headquartered in South Korea. Its activities range from personal and corporate lending to insurance and asset management. Over the past few years, the company has been diversifying its revenue sources by acquiring a non-life insurance company, enhancing its asset management business and developing its lending to small and medium-sized enterprises. It was one of the first conglomerate financial institutions to commit to the Korean Stewardship Code, which launched in December 2016.

Background
KB Financial Group is the result of a 2001 merger between Kookmin Bank and the Housing and Commercial Bank, both of which were former state-owned lenders that were privatised in 1995 and 1997 respectively. Despite no longer being a state-controlled entity, governance has traditionally been weak. In the 2000s, the board was dominated by academics and politicians. By 2014, the company had experienced loan fraud, money laundering, a large-scale leak of customer personal information and infighting between the group chair and the president of KB Kookmin Bank.

Our engagement
We began engaging with the company in 2010, calling for the separation of the CEO and chair at subsidiary KB Kookmin Bank and the establishment of a regular communication channel between the board and shareholders. We questioned the structure of the board and recommended the appointment of financial professionals with the relevant experience and expertise to challenge management. We also suggested tightening the standards expected of the independent directors and chair in terms of experience.

Furthermore, we encouraged the company to set targets to improve its return on equity (RoE), which, at 4%, was barely above the cost of capital. We also suggested the development of a dividend policy with short, medium and long-term payout objectives, as well as a strategy to achieve these targets.

We reviewed the response submitted by the company to the carbon emissions survey of the CDP initiative and voiced concerns about the notable deterioration in the quality of the disclosure. The company’s CDP rating deteriorated from B to D in five years. We therefore recommended more senior level oversight of the group’s climate change strategy, especially with regard to emissions disclosure, and suggested that environmental performance should be integrated in all businesses and be used as a key performance indicator for all its relevant staff.

Changes at the company
Following a tumultuous period of leadership between 2011 and 2014, the company set up a task force to review its corporate governance arrangements. The task force’s key proposals included far-reaching changes to its board nomination process and a commitment to conduct external board assessments on a regular basis. At the same time the company introduced a new process that allows shareholders to propose candidates for election. As a result, a shareholder-nominated independent director was elected in 2015. As part of the reforms, from 2016 onwards, all directors have been evaluated on an annual basis and the lowest-ranking individual has been replaced every year since. In April 2016, we were the first international investor representative to meet the chair of the board. The company launched an annual shareholder roundtable in 2015 and continued to improve in subsequent years, such as encouraging investors to have direct dialogue with its independent directors.

In 2015, the company set a return on equity (RoE) target of 8% for 2018. It aimed to reach this target through organic and acquisitive growth and implementation of a wide-ranging restructuring plan. For the first time, it provided a payout guidance of 20-25% of earnings. By the first quarter of 2017, one year ahead of target, the company had achieved 8.2% RoE. At the 2017 annual shareholders' roundtable, the company committed to achieving a medium-term RoE of 10% by enhancing group returns through organic growth and improved synergy between businesses. The long-term target of a 30% dividend payout is expected to be reached in a shorter time-frame, possibly within the next three years.

Equally encouraging was that the company attended CDP training sessions and reviewed global and local best practices in the financial services industry. It has provided scope 1 and 2 emissions in its CDP climate change survey for each of its key business units, as well as examples of environmental initiatives that help its business partners become more responsible. The company has been expanding its green finance offerings, such as green auto insurance and investing in renewable energy projects with targets to enhance positive and intentional environmental impact. The company’s CDP rating subsequently rose to A- in 2017, and the CEO is now responsible for the environmental performance of the group. Furthermore, employees are evaluated for their contributions to sustainable management every year. Those who have made a significant contribution are awarded by the CEO and given additional points in their performance assessment.

Next Steps
We continue to engage with the company on a range of issues. In particular, we have been encouraging it to improve its management of human capital through better quality dialogue with the trade unions.

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Christine Chow Dr Christine Chow manages the team of engagement associates at Hermes EOS and is responsible for the financial services, technology and extractive sectors in Asia ex-Japan. She has over 20 years of experience in portfolio management, research and investment consulting. Christine's PhD thesis on shareholder engagement for responsible investment was short-listed for a UN award in Sweden for industry relevance and academic excellence. Christine is a member of the Court of Governors of the London School of Economics and a member of the School’s Investment Sub-Committee.  She was an adjunct associate professor in the Department of Finance at the Hong Kong University of Science and Technology. She was also a member of the greater China committee of the Hong Kong Retirement Funds Association between 2014-2016. Christine has worked at a number of multinational corporations such as Merrill Lynch, Schroders and Hewitt. In the 1990s, she was responsible for establishing strategic partnerships in fund management for the Schroders Group, especially in Mainland China. Christine is a graduate of the London School of Economics and the University of Melbourne. She also completed an executive education course on financial engineering at Stanford University.
Read all articles by Christine Chow
Frédéric Bach Frédéric Bach focuses on engagements with companies based in Japan, where he lived for seven years at the beginning of his career. He has 25-year experience as a trader, analyst, head of research and portfolio manager in equity and fixed income markets and also worked in Switzerland and the UAE. Before joining Hermes EOS, he was a contractor with AODP, an NGO raising awareness of climate change issues and their impact on the valuation of financial assets with investors such as pension funds and insurance companies. Frédéric holds an MSc in telecommunication engineering from ENSTBr in Brest, an MBA from ESSEC, near Paris, and the CFA Institute's Chartered Financial Analyst designation. In addition to his native French and fluency in Japanese, he can also work in German, Italian and Spanish and communicate in Portuguese and Arabic.
Read all articles by Frédéric Bach
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Engagement objectives

Environmental: Carbon emissions disclosure

Social: Human rights reporting

Governance: Board director nomination process, Non-executive director dialogue with investors and regular shareholder dialogue

Strategy, risk and communication: Earning adequate returns, Transparency and communications: Short, mid- and long-term return targets

 

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