A Better LG Presentation
Transcript of A Better LG Presentation
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TABLE OF CONTENTS
Executive Summary
3
Why the Spin-Off Should Be Opposed
Misalignment Between the Controlling Family and
Minority Shareholders
Deficient Corporate Governance Practices
Conclusion: How to Build a Better LG
ABOUT LG
LG is a Korean conglomerate primarily comprised of holdings in listed companies and cash
5
Company Snapshot (KRX: 003550)
Founded in 1947, LG is the fourth largest Korean
Conglomerate by market capitalisation
• 87% of its value consists of cash and holdings in listed
companies that have their own management and
Board of Directors
• LG’s operating revenue consists of dividend income
from its subsidiaries, brand royalties and rental income
from subsidiaries
• Key subsidiaries consist of:
• LG Chem: worth 130% of LG’s share price
• LG Electronics: worth 51% of LG’s share price
• LG H&H : worth 50% of LG’s share price
Ownership Structure
The Koo Family holds 46% of LG Corp shares, valued at
KRW 7.4 trillion
• The holding company structure allows the Koo
Family to control KRW 118.8 trillion in publicly
listed assets with its KRW 7.4 trillion investment
LG shares trade at a 66% discount to its asset value
Source: Bloomberg, Morgan Stanley, company data. *LG ownership %. Listed holding values calculated using current market prices. Figures as of 2 March 2021.
LG Corp Sum of the Parts
Businesses
LG CHEM LTD 62,898 30% 20,969 121,519 130%
LG ELECTRONICS INC 24,384 30% 8,209 47,573 51%
LG HOUSEHOLD & HEALTH CARE 23,505 30% 8,000 46,360 50%
LG UPLUS CORP 5,239 38% 1,991 11,538 12%
LG HAUSYS LTD 642 34% 240 1,391 1%
LG INTERNATIONAL CORP 1,048 25% 259 1,500 2%
SILICON WORKS CO LTD 1,090 33% 360 2,089 2%
LG MMA (book value) 50% 115 668 1%
Cash to NewCo 146 845 1%
Other Businesses 2,501 14,492 16%
Brand 2,207 12,787 14%
Property 1,506 8,727 9%
Total Business value 46,503 269,491 289%
Net Cash 1,504 8,716 9%
Total Asset Value 48,007 278,207 298%
LG Corp Market Cap 16,100 93,300 100%
Discount to market value -66% -66%
Value per LG
share (KRW)
% of Share
Price
Market Cap
(KRWbn)
LG
Ownership
Value to LG
(KRWbn)
ABOUT WHITEBOX
Whitebox is a meaningful, long-term shareholder of LG
6
• Whitebox is a multi-strategy alternative asset manager with more than $5.5 billion in assets under management
• Founded in 1999, Whitebox invests across asset classes, geographies and markets through the hedge fund vehicles and institutional accounts it advises
• Whitebox’s Equity team invests in three core strategies, with the largest by assets being holding companies
• Whitebox’s portfolio managers have invested in holding companies in a variety of geographic locations for over three decades (public examples below), making HoldCos a core investment strategy for Whitebox
LG’S SPIN-OFF CREATES A MINI CONGLOMERATE TO BE CHAIRED BY KOO BON-JOON
Non-core assets will be transferred into a new holding company (“NewCo”) and spun off to LG shareholders
7Source: LG, Bloomberg, Whitebox estimates. Figures as of 2 March 2021.
NewCo
Mkt. Cap: KRW 376 billion
LG Corp
Mkt. Cap: KRW 16,100 billion
ELECTRONICS
LG Electronics
LG Display
LG Innotek
Silicon Works
Others
CHEMICALS
LG Chem
LG H&H
Hausys
MMA
Others
TELECOM & SERVICES
Uplus
CNS
GIIR
S&I
International
Others
66%
discounted
ELECTRONICS
Silicon Works
CHEMICALS
Hausys
MMA
TELECOM & SERVICES
International
Net Asset Value: KRW 48,007 billion Net Asset Value: KRW 1,121 billion
LG’s Stated Rationale:1. Portfolio Optimization
2. Value Uplift
3. Partnership
Koo Kwang-mo
ChairmanKoo Bon-joon
Chairman
WHITEBOX STRONGLY OPPOSES THE SPIN-OFF TRANSACTION BECAUSE IT FAILS TO ENHANCE CORPORATE VALUE AND PERPETUATES THE UNPRECEDENTED DISCOUNT TO NAV
8
In our view, the Spin-Off does not achieve its stated objective of enhancing corporate value
– instead, value is sacrificed
The Spin-Off does little to streamline LG, disproportionately sacrificing dividends, royalties and
cash, and creating a new family-controlled holding company
The Spin-Off perpetuates LG’s most pressing issue, which is the unprecedented discount at
which the Company trades relative to its assets
LG’s discount to net asset value (“NAV”) widened to an all-time low of 70% after the announcement
of the Spin-Off proposal, reflecting investor exasperation
The decision to proceed with the Spin-Off reflects poorly on LG’s corporate governance
Despite the universe of potential alternatives and possible unaffiliated transactions, the Board
unanimously approved a plan that we believe sacrifices minority shareholder return in order to
resolve a family succession issue
9
LOCAL MEDIA AND ANALYSTS AGREE THE PRIMARY OBJECTIVE OF LG’S SPIN-OFF IS TO RESOLVE A SUCCESSION ISSUE AND LACKS CONSIDERATION FOR MINORITY SHAREHOLDERS
November 2020
Spinoff to give LG chairman's uncle his own conglomerate
“The spinoff is not unusual for LG considering the
conglomerate’s history of the first son taking on the family
business and handing over subsidiaries to other male family
members, creating an increasingly diverse network of separate
companies run by a very extended family.”
November 2020
“During the Q&A session, the CFO acknowledged that
there is a high chance of a share swap among controlling
family members after the spin-off, and this seems to be
part of LG Group affiliate separation (similar to the GS/LS
group case in the mid-2000s)”
November 2020
“Why are they setting up a new holdco? We think it could be
for the business separation within the major shareholder
family”
“In our view, the brand royalty may decline for LG Corp after
2022 because the new holdco will have a new brand name”
“The potential for capital management talks remains, but we
think its capital management plan announcement will be after
finishing the spin-off process”
December 2020
“The move was considered an initial step for Bon-joon to
establish his own business group”
WE WANT TO HELP BUILD A BETTER LG FOR ALL SHAREHOLDERS AND STAKEHOLDERS
To help urgently restore investor trust and improve the Company’s standing in the investment community, we believe
LG should take the following actions in the near-term:
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Immediately Abandon the Proposed Spin-Off
LG should cease the current transaction as constructed and delay all succession planning until the share
price of LG more accurately reflects the value of its assets
Establish a Corporate Governance Committee
The Board should create a Corporate Governance Committee – comprised of truly independent directors
with minority shareholder representation – to assess material corporate actions and related party
transactions to ensure all shareholders are treated equally and fairly
Prioritize the Implementation of a Capital Management Plan
The Board should prioritize the implementation of a Capital Management Plan to address one of the
largest discounts to asset value of any major publicly traded company globally – LG’s Capital
Management Plan has been delayed time and again, despite its importance to unlocking corporate value
THE SPIN-OFF AS STRUCTURED IS NOT CREDIBLE
A Spin-Off where one discounted conglomerate is converted into two discounted conglomerates achieves nothing
12
Spin-offs create value for shareholders when:
• The spun off assets are worth more as
independent entities than as part of a
conglomerate
OR
• The surviving company is sufficiently
streamlined through the transaction
The economic benefits of a corporate action –
like the Spin-Off – must be clear because there
are significant costs associated:
• Transaction costs: Advisory fees, legal fees,
potential dis-synergies
• Opportunity costs: Loss compared to more
favorable transactions such as direct
distributions, third party disposals, or other
strategic initiatives
• Reputational costs: Any damage to the perceived
quality of corporate governance tends to be
reflected in a wider discount to NAV
This is not a credible Spin-Off:
• By creating a new mini-conglomerate, LG has
foregone the opportunity to create value
• 98% of LG’s assets remain in situ
THE SPIN-OFF DOES NOT CREATE VALUE FOR LG OR ITS MINORITY SHAREHOLDERS
13
• Spinning off 2% of assets does little to streamline LG
o It is unlikely these businesses are a material draw on management resources
o Three out of four affiliates are publicly listed companies with their own management and Board of Directors
• The creation of a new conglomerate negates any benefit from spinning out independent assets
o We anticipate that KRW 1,121 billion of asset value will trade at a market value of KRW 376 billion, in line with LG’s discount
o Like LG, NewCo will be a controlled entity with the appointment of a family member as Chairman
• The spun-off entities derive from different LG Core Business Areas and have no obvious synergies, raising suspicion that the
transaction as structured reflects the interests of Koo Bon-joon and Koo Kwang-mo
o The Solidarity for Economic Reform issued a report on January 19, 2021, “Analysis of the Effects of Corporate Restructuring,
including Spin-off: Focusing on LG Chem Ltd and LG Corp,” that supports the contention that this Spin-Off is completely unrelated
to the interests of minority shareholders
LG’s purported rationale for the Spin-Off is not credible
~4% of
royalty
revenue
~9% of
cash
balance
~17% of
dividend
revenue
THE SPIN-OFF MATERIALLY REDUCES THE COMPANY’S ABILITY TO INVEST GOING FORWARD
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The Spin-Off sacrifices
Source: LG, Bloomberg, Whitebox estimates. Figures as of 2 March 2021.
Movement of Assets (KRW billion) Current RemainCo % Total SpinCo % Total
Net Asset Value 48,009.4 46,885.9 97.7% 1,120.7 2.3%
Revenue (FY2019) 874.7 785.3 89.8% 89.4 10.2%
of which: Dividends 476.2 396.6 83.3% 79.6 16.7%
of which: Royalty Revenue 270.6 260.7 96.3% 9.8 3.6%
of which: Rental Income 127.9 127.9 100.0% 0.0%
Cash 1,649.9 1,504.0 91.2% 145.9 8.8%
Though the Spin-Off impacts only 2.3% of LG’s assets, it disproportionately reduces LG’s revenue by 10.2% and cash by 8.8%, reducing its ability to invest in and develop new technologies
NEWCO WILL TRADE AT A SIGNIFICANT DISCOUNT TO THE VALUE OF ITS ASSETS
We believe creating a new controlled entity will cost shareholders KRW 745 billion
15
• NewCo will trade at a significant discount to its NAV due to the nature of the holding company structure
o The average Korean holding company trades at a discount to NAV of 54%
o LG currently trades at a 66% discount to NAV
o Typically, smaller market cap holding companies trade at wider discounts than large, liquid holding companies
• In our view, prioritizing a structure that facilitates an easy transfer of control will result in foregone value of KRW 745 billion
o The quantum of the likely discount means that these assets will be worth 60-70% less in a holding company than they would under diversified ownership
Pro-Forma NewCo
Source: NH Investment report, 11 January 2021. Pro-Forma NewCo calculated as of 2 March 2021.
KRW 745 billion lost
NewCo Sum of the PartsMarket Cap
(KRWbn)
NewCo
Ownership
(%)
Value to NewCo
(KRWbn)
Value per NewCo
share (KRW) % of NAVBusinesses
LG HAUSYS LTD 642 34% 240 3,147 21%
LG INTERNATIONAL CORP 1,048 25% 259 3,394 23%
SILICON WORKS CO LTD 1,090 33% 360 4,726 32%
LG MMA (book value) 50% 115 1,512 10%
Total Business Value 975 12,779 87%
Net Cash 146 1912 13%
Total NewCo Value (NAV) 1121 14,692 100%
Target Discount to NAV -66% -66%
Market Value of NewCo 376 4,927
INVESTORS WERE CLEARLY DISAPPOINTED BY NEWS OF THE SPIN-OFF
LG underperformed the KOSPI by 6.5% on the day the transaction was announced, with the discount to NAV reaching an all-time wide of 70%, confirming the market’s negative view of the Spin-Off
16Spin-Off Announcement
LG’s Discount to NAV
The discount only
recovered after the
announcement of
LG Electronics’ JV
with Magna and the
disposal of the
mobile business
(70)
(65)
(60)
(55)
(50)
(45)
(40)
1/2/2017 7/2/2017 1/2/2018 7/2/2018 1/2/2019 7/2/2019 1/2/2020 7/2/2020 1/2/2021
Source: Bloomberg. Calculated as of 2 March 2021.
THE MOST URGENT ISSUE LG FACES IS THE UNPRECEDENTED DISCOUNT AT WHICH ITS SHARES TRADE
Korean conglomerates trade at some of the widest discounts to NAV globally, which is widely attributed to a misalignment of interests between controlling and minority shareholders
18
LG currently trades at the widest discount to NAV among its peer group
Source: Bloomberg; CLSA. Calculated as 2 March 2021.
0%
10%
20%
30%
40%
50%
60%
70%
LG SCT Lotte SK KCC Hanwha CJ Doosan LS
Korean Conglomerate Discount to NAV
Average = 54%
DUE TO THE DISCOUNT, SHAREHOLDERS HAVE NOT PARTICIPATED IN THE PERFORMANCE OF LG’S UNDERLYING ASSETS
Despite the impressive performance of LG Chem and LG Electronics over the past three years, LG shares have lagged
19
Value
Gap
KRW
32
trillion
+47%
+5%
Today, there is a KRW 32 trillion gap between the value of LG’s assets and its market capitalization
• LG’s minority shareholders have not
benefitted from the strong underlying
performance of the Company’s assets
• If an investor bought $100 worth of shares in
LG in January 2018, those shares would be
worth $105 today
• If instead, that investor had bought $100 in
the underlying assets of LG, it would be worth
$147 today
• LG shareholders have seen a 5% increase in
the value of their shareholding, despite a 47%
increase in value of net assets
Source: Bloomberg, Morgan Stanley. Rebased to Jan 2018. Calculated as of 2 March 2021.
40
60
80
100
120
140
160
180
NAV Share Price
+47%
+5%
Share Price and NAV Performance*
THE SPIN-OFF HIGHLIGHTS THE CONFLICT BETWEEN THE CONTROLLING FAMILY AND MINORITY SHAREHOLDERS
We believe that the Spin-Off was conceived as a solution to a succession problem – reflecting an agency problem at LG –and that the proposed structure facilitates a change of control of NewCo rather than maximizing corporate value
20
Koo Family and Affiliates
46%
Koo Kwang-mo
15.95%Koo Bon-joon
7.72%
Family
Affiliates
22.33%
Minority
Shareholders
54%
• A share swap may occur post Spin-Off to allow Koo
Bon-joon, the Chairman of NewCo, to increase his
shareholding in NewCo
• Assuming NewCo trades at a similar discount to NAV
as LG, Koo Bon-joon can acquire all of the affiliates’
shares in NewCo with only 12% of his holding in LG
• This would give Koo Bon-joon 46% control of NewCo
and leave him with a 6.8% stake in LG
• The Spin-Off demonstrates a significant conflict
of interest between the Board and LG’s minority
shareholders
KOREAN MEDIA AGREES THE PRIMARY OBJECTIVE OF LG’S SPIN-OFF IS TO RESOLVE A FAMILY SUCCESSION ISSUE
21
LG PRIORITIZING THE PRIVATE INTERESTS OF THE FAMILY UNDERMINES TRUST AND EXACERBATES THE COMPANY’S DISCOUNT TO NAV
The discount to NAV at which a holding company trades is directly related to corporate governance and shareholder value creation
22
If weak corporate governance allows owner
families to favour their own interests over the
profitability of some affiliated companies, it is
rational for investors to pay less for their shares.
If investors anticipate the extraction of private
benefits of control, this will have a negative effect
on the price they are willing to pay for the shares
of the holding company.
We believe the Spin-Off demonstrates LG’s priorities are not aligned with minority shareholders
Explanation for the Holding Company Discount: Theory
and Application, Organisation for Economic
Cooperation and Development (2018)
Explanation for the Holding Company Discount: Theory
and Application, Organisation for Economic
Cooperation and Development (2004)
”””
”
Source: OECD Economic Surveys: Explanation for the Holding Company Discount: Theory and Application (Korea 2018). Marc Deloof and Marc Jegers (January 2004).
THE SPIN-OFF HIGHLIGHTS DEFICIENCIES IN LG’S CORPORATE GOVERNANCE STANDARDS
24
Rationale for the Spin-Off
Transactions designed to pass corporate assets from one
family member to another may be the norm in Korea,
but this is an unacceptable rationale in most jurisdictions
Board Approval of the Spin-Off
Received unanimous approval from the Board as it was
believed to be the best option for the Company and its
shareholders
Change in Control without Corresponding
Mandatory and Chain Bids
The likely share swap would result in a change in control
at NewCo if Koo Bon-joon increases his holdings over
30%, which is likely since Family Affiliates will own 46%
of NewCo
Though the transaction is small relative to the size of
LG, it took considerable time away from the Board
and delayed other corporate actions that are seen as
crucial to the value of the Company
It is clear to us that selling NewCo assets to a third
party would have resulted in superior returns for the
Company and minority shareholders
In many jurisdictions, this would require a
mandatory bid for NewCo plus a bid for the
underlying subsidiaries under the Chain principle
Source: CG Watch 2018, ACGA and CLSA. World Economic Forum, Morgan Stanley Research.
LG RANKS AS A CORPORATE GOVERNANCE LAGGARD WHEN COMPARED TO GLOBAL BEST PRACTICES AND EVEN DOMESTIC COMPETITORS
25
We believe the decision to spin off these assets
demonstrates that LG’s corporate governance practices:
1. Trail domestic competitors
2. Are not consistent with global best practices
3. Fail to represent the interests of shareholders
At a time when environmental, social and governance (“ESG”) considerations are at the forefront of investors’ minds
LG’S CORPORATE GOVERNANCE PRACTICES TRAIL FAR BEHIND ITS KOREAN PEERS, WHICH HAVE THE WORST ESG RATINGS IN ALL OF ASIA
The Company’s governance profile compares unfavorably to Samsung C&T Corporation (“SCT”) – whose Vice-Chairman JY Lee was just sentenced to two and a half years in prison for bribery
26
LG has a tremendous opportunity to improve its governance profile and lead the way
in Korea for its peers
LG Samsung C&T
Separate CEO/Chairman No Yes
Committees Audit Audit
Independent Director Nomination Independent Director Nomination
Management
Related Party Transaction
Compensation
Governance
Shareholder Advocate No 2 (one Korean, one non-Korean)
Notice period for AGM 15 days 23 days, target for 4 weeks
Foreign Shareholder
notification
English data sent if requested English reference material available on
website and sent to key institutional
investors, standing proxies and proxy
advisory firms
Voting results Published in Compliance Report Disclosed on day of meeting, published on
website
WHEN COMPARED TO GLOBAL BEST GOVERNANCE PRACTICES, LG ALSO DISAPPOINTS
If LG followed global best practices, we do not believe the Board would have approved the Spin-Off
27
Global Best Practice LG Implication
The Board should be chaired by an independent non-executive director (ICGN) Lack of independent oversight and
strategy advisory role
There should be a sufficient mix of directors with relevant knowledge,
independence, competence, industry experience and diversity of perspectives
to generate effective challenges, discussion and objective decision-making
(ICGN)
Unanimous approval of Spin-Off despite
the universe of potential alternatives and
possible unaffiliated transactions
The Board, particularly non-executive directors, should make available
communication channels for meaningful dialogue on governance matters with
shareholders (ICGN)
Shareholder views not considered
Remuneration should be designed to effectively align the interests of the CEO
and executive officers with those of the company and its shareholders (ICGN)
No link to Discount to NAV
Rights of all shareholders should be equal and must be protected (ICGN) Transactions made for the benefit of
certain shareholders
Source: ICGN Global Governance Principles (see here).
WE WANT TO HELP BUILD A BETTER LG FOR ALL SHAREHOLDERS AND STAKEHOLDERS
To help urgently restore investor trust and improve the Company’s standing in the investment community, we believe LG should take the following actions in the near-term:
29
Immediately Abandon the Proposed Spin-Off
LG should cease the current transaction as constructed and delay all succession planning until the share
price of LG more accurately reflects the value of its assets
Establish a Corporate Governance Committee
The Board should create a Corporate Governance Committee – comprised of truly independent directors
with minority shareholder representation – to assess material corporate actions and related party
transactions to ensure all shareholders are treated equally and fairly
Prioritize the Implementation of a Capital Management Plan
The Board should prioritize the implementation of a Capital Management Plan to address one of the
largest discounts to asset value of any major publicly traded company globally – LG’s Capital
Management Plan has been delayed time and again, despite its importance to unlocking corporate value
THANK YOU
www.ABetterLG.com