SM Entertainment “Organization” Review…Expansion of Outside Directors to a Majority, Establishment of Internal Transaction Committee

SM Entertainment will review the corporate control structure that has been criticized by investors and activist funds. The main point is to strengthen the independence and transparency of the board of directors and reorganize the board-centered management structure. To this end, we will increase the ratio of outside directors to a majority, and establish a new Outside Director Candidate Recommendation Committee to ensure the independence of outside directors.

SM said on the 15th, "We have decided to introduce a global upper-level corporate governance structure suitable for a global content company."

According to MSM, the ratio of outside directors will be significantly increased from 25% to a majority. The board of directors currently consists of three internal directors and one outside director, but has decided to expand the number of outside directors to four. In addition, the chairman of the board of directors was changed from the current representative director to an outside director.

A Committee for Nominating Outside Director Candidates will also be established. A temporary internal committee will be set up to recommend the outside directors scheduled to be appointed in March this year. It is a mechanism that allows more than two-thirds of outsiders to enter. After that, it was decided to formally establish an internal committee consisting of two-thirds or more of the outside directors after the general meeting of shareholders.

There are also plans to introduce at least three specialized committees under the board of directors. An SM official said, "In order to more efficiently support the authority and operation of the board, we have established three specialized committees under the board, such as the ESG (environmental, social, and governance structure) committee and the internal trading committee." and "In order to support the actual participation of outside directors in management, we have decided to introduce a system in which outside directors receive advice from an external advisory body and the company supports the costs," he explained.

In addition, an internal transaction committee with more than two-thirds of the members as outside directors will be established, and will be reviewed by the committee when dealing with general producer Lee Soo-man, subsidiaries, affiliates, etc. In addition, it plans to nominate female experts and foreign entertainment industry experts to increase the diversity of the board composition.

The improvement of SM's control structure is interpreted as accepting the opinions of shareholders who want to secure management independence and transparency in order to increase shareholder value. Recently, KB Asset Management, an institutional investor, and Align Partners, an activist fund, have constantly raised questions about strengthening the independence of SM's board of directors. In the end, he announced that if he did not accept the expansion of the board of directors and the introduction of internal committees, he would take action at the general meeting of shareholders in March.

SM explains that it is "willing to conform to global standards", but the ratio of outside directors of the three domestic entertainment companies is currently 46%, which is less than the majority. The average weight of outside directors in the top three domestic companies by market capitalization is 59%. 76% of global companies have outside directors.

The company said, "Through restructuring the board of directors to a global level, we will make a leap to become a global entertainment company and accelerate the improvement of shareholder value."