KT&G Faces Challenges in CEO Reelection Process

According to a report by South Korean news outlet Newspost, Baek Furen has served as the CEO of KT&G company for ten years, and the question of whether he will be reappointed is now drawing attention from the industry. At the same time, Baek Furen has not yet expressed his intention to give up on seeking reappointment, hence it is also possible for him to challenge a fourth term.

However, the path to re-election for Bai Furen seems to be far from smooth, due to changes in the company's internal CEO election system, negative government attitudes towards CEO re-election, and attacks from radical investment funds.

According to industry insiders, KT&G Company has started preparations for the selection process of its next CEO since the end of last month. Before the 10th of this month, the company will publicly announce the gathering of candidates for the CEO position.

The selection process for an external president will involve methods such as public recruitment and recommendations from executive search firms in order to identify qualified candidates. Only individuals who have worked in the tobacco or consumer goods industry, or have held positions as CEOs or similar roles, are eligible to apply. The selection committee for internal president candidates may include individuals who have been part of the Bai Furen senior management development program, which has been in operation since 2020, as well as any presidents who meet the prescribed criteria.

The election procedure for the president of KT&G must be carried out in accordance with relevant regulations, which usually takes approximately three months. The process involves going through the "Corporate Governance Committee -> President Candidate Recommendation Committee -> Board of Directors Report and Shareholders' Meeting Approval" sequence. On December 28th of last year, the board of directors and the corporate governance committee of KT&G discussed the proposal for setting targets for the selection of presidential candidates and the criteria for reviewing market candidates.

The corporate governance committee will incorporate the opinions of external expert advisors to determine the selection criteria for the president candidates by the end of January next year, and recommend them to the president candidate recommendation committee. The president candidate recommendation committee will discuss the selection criteria for the president candidates and finalize the candidates by the end of February, reporting to the board of directors.

Next, the board of directors will introduce the agenda of electing the president at the shareholders' meeting, and ultimately determine the next president at the regular shareholders' meeting at the end of March.

Currently, President Park Bok-reun's term is set to end in March of this year. He joined the company in 1993 and assumed the role of President in 2015, having been reelected for the past 9 years. Since President Park Bok-reun took office, KT&G has been devoted to global expansion and has achieved significant external growth. The company's sales in 2016 were 4 trillion Korean won, but exceeded 5 trillion for the first time in 2020 and reached nearly 6 trillion in 2022. With a strong performance growth, President Park Bok-reun successfully secured reelection in 2018 and 2021.

There have been no official announcements regarding whether Bai Furen will run for re-election or not.

However, industry experts predict that since the company will publicly gather candidates by the 10th, and he has yet to express any intention of giving up on re-election, there is a possibility that he will once again challenge for re-election. If Bai Furen is able to successfully be re-elected, he will continue leading KT&G until March 2027, creating a record of serving in leadership positions at KT&G for 12 consecutive years.

Despite receiving strong support internally, Bai Furen's reelection prospects are worrisome in light of this year's internal and external circumstances.

First, in December of last year, the board of directors of KT&G removed the "priority review for reelection" clause. This clause allowed the incumbent president to have priority in reviewing their own qualifications and those of other candidates if they publicly express their desire for reelection. If the incumbent president is deemed qualified during the qualification review, he would be the only candidate to participate in the shareholders' meeting, achieving the so-called "self-reelection." The primary beneficiary of this clause was originally expected to be Baek Bok-in.

The attacks from activist investment funds are also on the rise. The activist fund Flashlight Capital Partners (FCP) has called for management reform at KT&G in 2023, and in December, it once again called for a change in the company's presidential candidate election process.

The FCP, in a recent statement, pointed out that within 11 trading days after his re-election decision, Bai Furen was nominated as the sole candidate, which violates the principle of fairness and transparency. They demanded that the company publicly disclose the qualifications of the candidates. Criticizing the presidential candidate election process, the FCP deemed it a "language game and secretive voting," highlighting that the three entities involved in the process - the Corporate Governance Committee, the Presidential Candidate Recommendation Committee, and the Board of Directors - are essentially composed of external directors appointed by Bai Furen during his tenure, forming essentially the same group.

The government also needs to overcome its critical attitude towards self-reelection. Companies without major shareholders, such as KT and POSCO, are often considered privatized enterprises due to their dispersed shareholding structure. These companies have already removed the clauses prioritizing re-election, as seen in the former KT president and POSCO chairman stepping down due to opposition from the Korean National Pension.

As of the end of the second quarter, the largest shareholder of KT&G was Small and Medium Enterprise Bank, with a 6.93% stake. The second-largest shareholder was the National Pension Service of Korea, holding 6.31% of the shares. Small and Medium Enterprise Bank, in turn, is primarily owned by the Ministry of Planning and Finance, with a 59.5% stake, indicating significant government influence. Notably, Small and Medium Enterprise Bank opposed the reelection of Mr. Baek Bok In 2018.

On the other hand, regarding the controversy surrounding the unfairness of the presidential election process, KT&G Board Chairman Lim Min Kyu stated:

Our principle is to uphold fairness and objectivity throughout the entire process, maximizing the interests of all shareholders and the future value of the company. We will engage with shareholders through a three-stage procedure, ensuring fairness and transparency.