Management in Korea is a regular column written by the members of Egon Zehnder Seoul, touching on various aspects of Korean enterprises and business leaders and offering management tips. The second part of this column will be published in March -- Ed.

By Eugene Kim and Olivia de Patoul

Governance is only as good as those whose job it is to uphold it. Corporate directors are responsible for acting in the interest of the company and the shareholders, holding management accountable for strategy and decisions, and ensuring other stakeholders, including customers and citizens, are treated fairly.

In Korea, however, the corporate governance lens tends to be much narrower, and directors focus on helping owners maintain control of the company. This lack of attention at shareholders leaves investors -- particularly minority shareholders -- overlooked and oftentimes unable to receive a fair return on their investments. To reform corporate governance, boards must exercise effective leadership with a diverse set of independent directors who can ensure all stakeholders are considered in decision-making. Investors, too, must play an active role in this transformation. 

Why governance became marginalized 

Several factors have caused the devaluation of corporate governance in some Korean companies. One is a lack of information from companies. There is little incentive to disclose information -- especially anything that could be perceived as negative -- out of concern that it would jeopardize companies’ competitive edge or anger customers. Company owners also keep information under wraps because they do not want to attract external investors, believing that is the quickest way to weaken their control over the company. The result of this type of control is a web of inter-related companies, excessive cash positions, and a limited focus on shareholder returns.

With limited shareholder engagement and disclosures, directors may feel as though they work for the company owners instead of shareholders. Comparatively, in Europe and in the US, investors actively -- and publicly -- take on companies where they believe misconduct is happening or if information is being withheld. There is also a rising stakeholder movement in regions questioning companies about their greater purpose and their impact on environmental, social, and governance issues.

Another contributor to fledging governance is that there have seemingly been no consequences for the boards and management of companies when they fail to deliver on shareholders’ expectations. While minority shareholders have complained and communicated their displeasure, there have been no true penalties.  

How investors can help

The power to change governance is in the hands of investors. They provide the capital that businesses need to grow, compete, succeed, and create jobs. They are the fuel that keeps the engine of the Korean companies and economy moving.

It may feel like a daunting task to take on these companies for their lack of good governance, especially since the vast majority of investors make their living on Main Street, not Wall Street in Korea. They are schoolteachers, taxi cab drivers, and white-collar and blue-collar workers. These hard working Main Street Koreans are the investors who need to be kept in mind as companies think about corporate governance. Even the most capable management, left unchecked, can make bad decisions, leading to undesirable results for a company and its shareholders. 

Investors are not left without options to improve corporate governance and make sure someone is held accountable in case of mismanagement. Accountability is an essential concept in corporate governance: without it, good governance is meaningless, just a shallow statement. Because of the capital structure of some companies in South Korea, the management may be inclined not to pay enough attention to its accountability toward investors that are not aligned with the controlling family.

Korea is a fast-evolving market and investors are now willing to change this tendency, especially since the implementation of the stewardship code and its recommendation to have investors more involved in corporate governance matters. From a legal perspective, tools in Korea are widely available for investors seeking the enforcement of accountability rules toward the management.

Preventive measures, such as requesting the convocation of an extraordinary general meeting in case of disagreement with a management decision could be a first step for investors to show a disapproval. A shareholder or group of shareholders holding more than 1.5 percent of the shares of a listed company can require the board to convene an extraordinary shareholders meeting.

Additionally, a shareholder or group of shareholders holding more the 0.5 percent of shares will be entitled to request a point be added to the meeting agenda to ensure the matter is discussed (for example, the removal of a biased director). At the end of the day, the minority shareholder might not reach the required threshold to have the decision effectively passed, but at least they will have raised their voice and have their position recorded in the minutes. Should investors decide to concretely enforce these rights, management will become the subject of greater scrutiny and ultimately accountability.

Part two of our series will focus on how investors can use the court system if their shareholder rights are being violated. 


Eugene Kim is the managing partner of advisory firm Egon Zehnder Seoul. He can be reached at Eugene.Kim@egonzehnder.com. 

Olivia de Patoul joined Deminor Recovery Services in 2018 and is in charge of the Asia Pacific Region based in Hong Kong. Deminor Recovery Services defends the interests of investors since 1990, with offices in Hong Kong, New York, London, Brussels, Milan and Luxembourg. She can be reached at olivia.depatoul@deminor.com.