When Sovereign Asset Management appeared out of nowhere as a 14.99% shareholder in SK Corp, there were many who asked "Who are these guys?"
In Korea, the mystery surrounding Sovereign quickly led some people to assume that Sovereign was about to launch a hostile takeover. Other people assumed it was affiliated in some way with SK's founding family.
More information came to light when Sovereign dispatched its chief operating officer, James Fitter to Korea to meet SK's management and discuss the future. It then put out two press releases. One stated that it was a long term investor and was not affiliated to any of SK's existing shareholders or management. The other announced that it had no intentions of buying any more SK Corp stock.
Like everyone else we wanted to know more and requested an interview with Fitter. He politely declined, saying we should visit the fund's website.
We did and read about Sovereign's mission statement and why it is located in Monaco.
However, what was not on the site was any data on Sovereign's asset size, or its past performance. We emailed Fitter and asked if he could tell us the fund's NAV, what percentage was in cash, and what percentage was now invested in Korea.
Fitter responded quickly and politely, but said he couldn't answer any of the above. We responded, half in jest, that we didn't think it possible that SK could fall into the hands of an organization even less transparent than the company's founding family.
As a private fund we acknowledged it was Sovereign's right to reveal as much as it wished, but pointed out that every fund should seek to be as transparent as market conditions render possible, or else how else can it expect the same courtesy from others - including the companies they invest in.
A couple of days later, Fitter responded by email that Sovereign had added a section on 'Privacy and transparency' to its website. In this section, Sovereign stated:
"Inevitably, people wish to know more about our organization, especially since, as a private investment company, we do not publish results. This raises the question as to how we reconcile our work as a private organization, and the attendant privacy in which we work, with our promotion of transparency and good corporate governance in the companies in which we invest. In response, the discussion of privacy versus transparency is not a complex subject if one understands that we all have an inherent right to privacy, not an obligation to embrace publicity.
"The right to information, is always based upon some form of a relationship between parties. Mere curiosity is not enough. Clearly, where accountability exists, we will also find the right to information. However, the link between accountability and transparency often seems to be forgotten in a world where it is increasingly expected that people should 'bare all' and 'tell all'. The old-fashioned concept of privacy (like fidelity), seems to be dismissed with a wave of the pen under the guise of 'the public's right to know' or to simply satisfy a lustful curiosity. As has been observed, a little knowledge can be a dangerous thing, as many people extrapolate erroneously and subsequently create their own fears.
"Certainly there are legitimate cases of public interest, where privacy is voluntarily surrendered in the interest of 'the greater good'. A good example might be the public statement our organization made on Friday 18 April 2003, clarifying our intent regarding SK Telecom in Korea. We considered this necessary, not for ourselves, but in order to calm the excessive fears that were being stoked by 'a little knowledge' resulting in extreme speculation in the media. The cost to us of this voluntary statement was a reduction of 8% in the value of a major investment in a single day. It must be emphasised that we were under no compulsion to make a public statement, especially one that would obviously result in the sell-off of an investment, but it would have been thoughtless to allow the needless speculation to escalate.
"Normally, transparency is owed where there is accountability. Company managements are accountable to their investors, and owe them transparency in return for the use of their capital. The relationship does not run in reverse.
"It is a pity that we live in an age where many people cavalierly construe the old-fashioned right to privacy as discourteous, secretive or implicitly nasty or evil. In fact, some privacy has a genuine value and serves a beneficial purpose to both ourselves and the public. While there are some CEO's, politicians and celebrities who choose to give up their privacy and live in the public eye for a time, unfortunately, this has created the unhealthy expectation that anyone finding themselves to be the source of public interest or curiosity has a duty to yield their right to privacy. Nevertheless, to pierce the veil of privacy of a person, or an organization, without consent, is a violation of a fundamental kind which no one has the right to do, no matter what self-justification is given. It is simply another form of voyeurism.
"In summary, we believe that organizations, like people, have a prima facie right to privacy. For those who have a general interest in Sovereign and our activities, we consider that it is sufficient to say that Sovereign is a long-term investor, seeking to actively promote the highest standards of corporate governance, transparency and shareholder rights in the markets in which it invests, for the benefit of the company, the community and all shareholders alike. Little more is of real relevance to the 'public interest'."
However, it seems Sovereign modified the view expressed in the last sentence, when yesterday it put out another press release in an effort to explain its views on corporate governance and SK Corp. This document has gone the furthest so far in explaining what Sovereign is and lists some of its previous investments, many of which appear to have been in Russia. Stocks it has bought include Gazprom, Unified Energy Systems and NLMK. In the document it quotes a series of sources who explain Sovereign's approach to investing, including Citigroup's former head of Eastern European investment banking, and Boris Fedorov, the former Russian finance minister and also a board member of Gazprom.
Fedorov says: "More than any other institutional investor, Sovereign's capital, experience and tireless corporate governance initiatives have helped develop the Russian capital markets thereby attracting further international investments."
Sovereign, for example, was the first investor to use the Russian legal system, in their fight against corporate governance abuses at NLMK.
There is still a lot we don't know about Sovereign but at least we do now know more about its track record. Its goal seems to be to introduce better corporate governance at SK Corp so as to get a higher valuation for that stock, but also to set an example for Korea inc, so that others will follow and Korea's country risk premium will fall in turn. Its normal investment horizon is four years, putting it firmly in the private equity camp and Sovereign has been around for 20 years. Its strategy has worked, says Sovereign, in Russia and they intend to replicate it in Korea.
Charles Ryan, executive chairman of leading Russian investment bank, United Financial Group is quoted in the release as saying: "Russia has been one of the world's best performing stock markets over the past few years as investor perceptions of the country has improved. This has been driven in large part by corporate governance reform at companies like Yukos, a leading Russian oil company. Who knows, the SK Corp reform story could lead to the beginning of an investment re-rating for Korea and be a key step in the road to eliminating the well known chaebol discount. Sovereign is one of the most experienced and active organizations working with corporate governance reform in global markets today. Their unique experiences in Russia have given them special insights which will be helpful in Korea."
Sovereign states that its mission is to persuade SK Corp to distance itself from other SK Group affiliates and focus on improving profits and its reputation through corporate governance reforms.
Meanwhile, UBS Warburg has a target price for SK Corp of W18,000, a price which assumes the stock price will almost double.
