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OCTOBER, 1999

KOREA: Corporate Governance In Korea - Recent Developments
David A. Laverty


Though the economic recovery in Korea continues to progress, the severe financial problems of the Daewoo Group, and recent moves toward its break-up, are viewed by many as further evidence that Korea's chaebol reform efforts must be pushed forward. While credited with helping to transform Korea into an advanced OECD-member economy, the dominance of the chaebol by founding families, and decision-making which has emphasized personal power and relationships over efficiency and professional management, has led the Korean government to seek ways to improve the corporate governance of the chaebol.

Mandatory outside directors

Efforts to limit family influence include an attempt to require listed Korean companies to fill half of their boards with outside directors. While this requirement was expected to apply even more broadly, the Ministry of Finance and Economy (MOFE) announced in September 1999 that the outside director requirement would apply to only the largest listed companies, those with assets of over 1 trillion won (about US$840 million). Similar requirements are to apply to large non-bank financial institutions such as merchant banks, securities houses and insurance firms. By end of 1998, 139 of the 687 Korea Stock Exchange-listed companies had asset sizes of over 1 trillion won.

Though originally planned to take effect in 2000, the MOFE position as of October is that the boards of these large listed companies must be one-half composed of outside directors by 2001. As an interim step, in 2000, the proposal would require such 1 trillion won-plus firms to appoint three outside directors each, and form outside director recommendation and management inspection committees.

The Federation of Korean Industries (FKI), the principal chaebol trade association, has been vigorously attempting to limit such outside director requirements. The FKI and other chaebol representatives have argued that such mandatory outside director rules are contrary to free market principles, will result in inefficient corporate decision-making (due in part to the presence of ill-informed outsiders without a stake in the company) and will even lead to leaks of corporate secrets (as a result of the presence of too many outside directors).

Limits on inter-affiliate financing

The Korean government is also seeking to limit cross-shareholdings within the chaebol, announcing as of September 1999 a proposal that would require that not more than 25-30% of a chaebol affiliate's capitalization is to be invested in other affiliates of the same chaebol. The government is seeking to impose this ceiling on the largest chaebol by early 2001. The FKI had been pushing for a ceiling of 40% of an affiliate's capitalization.

Minority shareholder protection

Proposals designed to protect minority shareholders have been circulated in Korea. These have included a lowering of the ownership stake required to bring a motion at a company's annual meeting and cumulative voting. Though the ownership stake required to bring a motion has been lowered, recent government statements have suggested that the focus of minority shareholder rights protection will be through the outside director requirements.

Implications for foreign investors

Foreign companies negotiating with chaebol affiliates as potential joint venture partners, acquisition targets, licensing candidates or even as agents or distributors need to become students of the pressures at work in forcing change on the chaebol. While any movement away from decision-making steeped in family, old-school and intra-group ties and towards a greater bottom-line orientation is likely to be welcomed by foreign traders and investors, the chaebols' long-standing control of the economy and strong anti-reform efforts suggest that President Kim Dae-Jung and other reformers may, in the meantime, see their wish lists further eroded.



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