[Edaily Reporter Kim Kyung-eun ] The Korea Corporate Governance Forum criticized the recent shareholder return policies of SamsungElectronics(005930)and SK hynix(000660), stating they lack predictability and transparency. The forum argued that “strategic ambiguity”—the failure to clearly outline the scale and methods of shareholder returns—is actually leading to undervaluation of stock prices, and called for a shift from shareholder return policies based on free cash flow (FCF) to those centered on target capital structure.

The Korea Corporate Governance Forum stated this in a commentary released on the 24th, saying, “By opting for strategic ambiguity regarding shareholder returns, SamsungElectronics and SK hynix have starkly revealed a conflict of interest between controlling shareholders and minority shareholders.”

The Forum urged SamsungElectronics to: △ increase predictability regarding its shareholder return policy; △ provide realistic guidance (forecasts); △ shift to a target capital structure policy; △ disclose conflicts of interest related to share buybacks and cancellations; and △ pass resolutions for share buybacks and cancellations focused on preferred shares.

The Forum argued that SamsungElectronics’ FCF forecast for this year is excessively conservative compared to its own calculations and securities firms’ projections. Considering that SamsungElectronics’ shareholder return of 90 trillion to 110 trillion won represents 50% of its FCF, the company’s FCF estimate stands at approximately 200 trillion won, whereas the Forum’s simple estimate is 296 trillion won, and the forecasts by MIRAE ASSET SECURITIES and HYUNDAI MOTOR SECURITIES are 266 trillion won and 298 trillion won, respectively. The Forum estimated that, based on its own projections—which annualize quarterly earnings—this year’s shareholder returns could reach 148 trillion won.

The transparency of the FCF calculation method was also raised as an issue. SamsungElectronics decided to deduct advance payments under long-term supply agreements (LTAs) for memory products and expenses related to employee performance-based stock compensation from its FCF calculation. However, critics point out that the company should disclose the FCF calculation formula by distinguishing between the receipt of advance payments, revenue recognition, return conditions, and stock compensation-related costs.

They also argued that the criteria for shareholder returns themselves should be changed. Rather than the current method of returning a fixed percentage of FCF, the company should transition to a “target capital structure policy” in which it first determines the amount of cash it needs and returns any funds exceeding that amount to shareholders.

According to the forum, SamsungElectronics’ net cash at the end of the second quarter stood at approximately 168 trillion won. The forum demanded that SamsungElectronics’ board of directors establish an appropriate level of excess cash for the company and disclose this to shareholders. It cited the fact that competitors Micron and SanDisk have adopted policies of returning excess cash—after deducting funds necessary for business operations—to shareholders as supporting evidence.

Regarding shareholder returns, the Forum argued that the company should expand share buybacks and cancellations rather than relying on cash dividends. The Forum noted that while SamsungElectronics’ recent disclosure included guidance for a 30 trillion won cash dividend in the third quarter, it omitted any plans for share buybacks, excluding those intended for employee compensation.

If Samsung Electronics were to buy back and cancel its own shares, the stake held by Samsung Life Insurance and SamsungFire&MarineInsurance would rise, raising concerns that it would approach the 10% limit set by the Act on the Improvement of the Structure of the Financial Industry. The Forum argued that even though financial affiliates could address these regulations by selling their stakes in SamsungElectronics, if shareholder returns are skewed toward dividends, ordinary shareholders would bear the burden of tax inefficiency.

The forum pointed out, “From a shareholder’s perspective, dividends create inefficiencies because they must be reinvested after taxes are deducted, whereas share buybacks and cancellations do not,” adding, “Ultimately, it amounts to ordinary shareholders bearing the tax inefficiency to maintain the corporate governance structure.” It further demanded that the board of directors, led by independent directors, review the impact of dividends and share buybacks and cancellations on each stakeholder and disclose the basis for its decisions.

In particular, the Forum proposed that, especially in the current environment where stock prices are undervalued, share buybacks and cancellations should focus on preferred shares rather than common shares. The Forum analyzed that since SamsungElectronics’ preferred shares are trading at a price 26% lower than common shares, investing the same amount to buy back primarily preferred shares would allow for a 35% greater reduction in the number of shares. It also argued that, in the long term, measures to simplify the class structure of shares—such as a tender offer for preferred shares or an exchange with common shares—should be considered.

Regarding SK hynix’s shareholder return policy, the forum offered a more critical assessment, calling it “very disappointing.” It argued that since SK hynix has been buying back 40 trillion won worth of its own shares starting in August—following a 40 trillion won American Depositary Receipt (ADR) capital increase last July—the actual effect of shareholder returns for existing shareholders would be limited even if all the repurchased shares were canceled. He also pointed out that SK hynix’s policy—which states the company will return more than 50% of its cumulative free cash flow (FCF) from 2025 to 2027—needs to be made more predictable.

Concerns were also raised regarding the possibility of Solidigm’s listing on the U.S. stock market. The forum argued that SK hynix’s board of directors must protect the interests of the company and all shareholders when deciding on Solidigm’s capital increase, stake sale, or listing, and that it should consider measures to simplify the existing corporate governance structure rather than expanding dual listings.

The Forum emphasized, “Both SamsungElectronics and SK hynix must shift their shareholder return frameworks from a free cash flow-based approach to a target capital structure policy,” adding, “The board of directors should determine an appropriate level of excess cash for the company and communicate this to shareholders.” It further noted, “In the current environment of extreme stock undervaluation, the focus should be on share buybacks and cancellations.”