The Korea Herald


Corporate Korea concerned about legislative moves

By Korea Herald

Published : March 1, 2017 - 15:26

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Concerns are deepening among South Korea’s businesses over moves by political circles that are intended to improve corporate governance, but risk putting their managerial stability in danger.

Liberal opposition parties have been pushing to revise the commercial code in the direction of restraining the power of large shareholders and protecting the interest of small shareholders.
(123RF) (123RF)

One of the most controversial proposals is to limit the voting rights of largest shareholders of listed companies to 3 percent in the election of board members to be designated auditors while foreign investors, including hedge funds, are not subject to such a restriction.

Another idea that has severely worried corporate executives and economists here is to introduce a cumulative voting system that would make it easier for minor shareholders to place candidates of their choice in the board room if they join forces. Under the system, the number of votes given to each shareholder is not one per share, but proportionate to that of board members to be elected.

A recent report from the Korea Economic Research Institute, a private think tank, cautioned that the proposed changes would leave most local firms vulnerable to profiteering or even hostile takeover attempts by foreign hedge funds.

The report said foreign hedge funds would be allowed to name at least one board member at four of the 10 largest Korean companies in terms of turnover and all auditors at six of them.

Shin Seok-hoon, a KERI researcher, noted that hedge funds have already been employing a tactic of purchasing the minimum amount of stake in a company that will allow them to name new board members, who will then demand the firm sell its key assets or businesses with a view to boosting stock prices and cashing in their gains.

“Local corporations are mostly not prepared well to defend themselves against foreign speculative capital, as they are struggling to stay afloat amid a prolonged economic slump,” said a corporate executive, asking not to be named.

Kim Yun-kyung, another researcher from the KERI, said limiting the voting rights of large shareholders to 3 percent is unprecedented throughout the world and only three countries -- Russia, Mexico and Chile -- currently oblige cumulative voting in the election of corporate board members.

With conservative lawmakers also objecting to the two controversial proposals, the three liberal opposition parties appear to concede more discussion would be needed to enact them.

But both conservative and liberal legislators have agreed to pass other changes to the commercial act by the end of this month, including measures to adopt an electronic voting system and allow a shareholder with over 1 percent stake in a parent company to file complaints against executives at subsidiaries implicated in illegal acts.

But there has been criticism that frequent lawsuits would weaken corporate activities, including investment decisions, and a mandatory electronic voting system would be exposed to the danger of hacking and make it easier to distort the will of shareholders by spreading fabricated information.

A former top economic policymaker, who spoke on condition of anonymity, said it was certainly necessary to enhance the accountability and transparency of corporate management but going so far as to rattle managerial stability would damage the business environment and the economy as a whole.

Economists say that the country’s business circles, especially some family-controlled conglomerates implicated in a massive corruption scandal that has led to the impeachment of President Park Geun-hye, are to be held partly responsible for the rising anti-business sentiment.

But they note the ongoing push to revise the commercial code cannot be seen as helpful for the economy, but politically motivated to win popular support by placing stricter restraints supposedly on large conglomerates.

Recent surveys show many intermediary companies are also worried about the possibility of being subject to attacks from international speculative capital if the envisioned revisions are put into practice.

Separately from the move to change the commercial act, political parties last week agreed to amend laws to introduce a system of punitive damages, which obliges companies to make a compensation up to three times as much as the loss their products have inflicted on customers.

“Korea alone goes against the global trend of becoming more cautious on punitive damages,” said KERI researcher Shin.

The moves by lawmakers to raise the country’s maximum corporate tax rate is also out of step with efforts by other major economies, including the US, China and Japan, toward reducing levies imposed on companies.

Economists warn that a further weakening of corporate activities amid tighter restrictions could lead to causing a crisis of the Korean economy, saying it may not be inconceivable that the country’s large corporations opt to move their headquarters abroad.

Hyun Jin-kwon, director of the Center for Free Enterprise, argued what Korea should do now is not to put more restraints on large corporations but eliminate all regulations to enable more companies to grow bigger.

Economic commentators say political parties should be more active on passing bills to relieve corporations of quasi-tax burdens, including non-voluntary contributions, which have increased over the past years.

By Kim Kyung-ho (