No more nut rage: activist fund takes on family-controlled Korean Air

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© Reuters. FILE PHOTO: People take part in a protest against the abuse of power by Korean Air Lines' chairman relatives, in central Seoul© Reuters. FILE PHOTO: People take part in a protest against the abuse of power by Korean Air Lines’ chairman relatives, in central Seoul

By Joyce Lee and Hyunjoo Jin

SEOUL (Reuters) – Days after photos of broken windows and smashed china hit the newsstands revealing a Christmas Day family squabble in the home of Korean Air’s late patriarch, an activist fund received an unsolicited offer to help unseat the current chairman.

Heather Cho, eldest daughter of the founding family’s late patriarch, made the proposal to Korea Corporate Governance Improvement (KCGI), the biggest shareholder of Korean Air’s (KS:) parent Hanjin Kal (KS:) to oust her younger brother, Walter.

“I didn’t meet her initially because I didn’t take it seriously when she said she was ready to give up everything,” Kang Sung-boo, who runs the $380 million fund that is pushing for board and management overhaul at the airline, told Reuters.

“I didn’t trust her until she agreed to take her hands off management.”

Heather Cho’s legal counsel did not comment on Kang’s recount of their discussions.

She is known for the ‘nut rage’ incident in 2014 after forcing a Korean Air plane to return to the gate because she did not like the way she was served nuts.

A win by the 47-year-old activist investor will be a watershed moment in South Korea’s 67-year post-war corporate history which has been led by family-owned chaebol and spawned global industrial powerhouses such as Samsung (KS:) and Hyundai.

It will make Korean Air the first top chaebol group to shake off the grip of its founding family, as many conglomerates transition to the third generation of their founding fathers.

Kang’s fund KCGI and his backers including Heather have mustered roughly 37% of voting rights of Hanjin and seek to replace Walter Cho with mobile industry veteran Kim Shin-bae as a new board member to press restructuring of Korean Air.

Walter Cho, seen backed by his other family members and Delta Air Lines Inc (N:), commands about 40% of the voting rights.

The proxy fight also represents a major distraction to the loss-making airline which warned this month that the coronavirus outbreak could threaten its survival after it scrapped more than 80% of its capacity and put its cabin crew members on leave.


With shareholder activism campaigns by the likes of Elliott having had limited success in South Korea, Kang didn’t initially think of replacing Walter Cho, whose family, including Heather, controls around 33% of Hanjin.

“We were simply hoping to prod Korean Air to cut debt and stop investing in unprofitable businesses,” he said, adding the carrier has a huge upside potential with his proposed restructuring given its solid core earnings power.

The homegrown activist fund took just a 9% stake in Hanjin in 2018, enough to ruffle its feathers.

“They refused twice to meet us, effectively saying we were just one of ten thousand shareholders with whom they can’t meet individually. That really disappointed me.”

Hanjin said many activist funds seemingly advocating shareholder rights ended up profit-taking, and private funds’ threats to management do not help its long-term development.

Things, however, took a dramatic turn following the death of the siblings’ father in April last year which sparked a family feud over how best to manage the group and escalated into a proxy battle between the estranged siblings.

“My campaign will be a catalyst for a more transparent and fair governance system. This is a good signal for foreign investors,” he said, adding poor corporate governance has kept Korean stocks trading at a sharp discount.

Korea’s family groups have been under growing investor scrutiny in the wake of a corruption scandal involving South Korea’s ex-president and Samsung chief in 2017, and as succession looms for the third generation of founding families.

“The third generation is taking over, but their abilities aren’t proven, so the process of finding the most suitable CEO has become more transparent,” said Lee Chang-min, a Hanyang University management professor, calling the proxy fight “a turning point.”

Kang said Walter, Hanjin CEO since 2014 and Korean Air CEO since 2016, should take responsibility for the airline’s debt-to-equity ratio of above 800% – one of the highest among airlines – which he attributed to management decisions such as its 2014 takeover of doomed Hanjin Shipping and aggressive fleet expansion.

“Both the brother and sister are not good managers,” he said. Heather was briefly jailed in 2015 from the nut rage incident.

Hanjin said among aviation firms that tend to have higher debt ratios, Korean Air chose an aircraft retention strategy for stable operation and growth, and it is on track to sell non-core assets.


Jamie Allen, Secretary-General of Asian Corporate Governance Association, said family-controlled conglomerates often lack checks by outside board directors, who “may just say yes to the family.”

“This is why we’re interested in the work being done by KCGI, because it’s been pushing for board improvements.”

But the fate of Kang’s bid remains uncertain as both sides compete to build up their stakes and doubts persist over the viability of the overhaul.

One of Korean Air’s employee unions said professional managers proposed by KCGI are no more than “ceremonial figures,” and criticized Heather for joining hands with “a speculative fund” seeking short-term profits and restructuring to “drive employees to the streets.”

“It is like sleeping with the enemy. They have formed an alliance against a common foe,” said Park Sang-in, a professor and chaebol reformist. “(Heather) Cho is very unpopular, and she is a stumbling block to winning votes.”

Kang, who earned a business degree from the country’s prestigious Seoul National University and wrote several books about corporate governance, started KCGI in 2017 with some investors who were rewarded by his earlier successful exit from mid-sized builder Yonjin Construction & Engineering.

Kang said KCGI seeks to enhance long-term corporate value and reiterated there will no workforce restructuring if he wins the battle.

But he acknowledged that it will be an uphill battle this time.

“It is a miracle that we have come this far given the situation in the Republic of Korea.”