[I wrote the first draft of the following piece in May 2008. In April 2009, it was published in Shareowner Rights across the Markets: A Manual for Investors, a joint project by Governance Metrics International and The CFA Institute Centre for Financial Market Integrity. The manual can be downloaded at http://www.cfapubs.org/toc/ccb/2009/2009/2?cookieSet=1]
Shareowner engagement in South Korea is often hindered by the country's conglomerates, whose circular, complex networks of cross-holdings shield them from market disciplines. Shareowner activism is also hindered by the country's regulatory ambiguities, which often undermine shareowners' abilities to fully exercise their rights. A prevailing management structure that fosters the infrequent placement of independent members on company boards further weakens shareowner rights in this market. Despite these obstacles, shareowners in the South Korean market hold considerable rights.
-. Current Engagement Practices and Shareowner Rights Developments
Although shareowner engagement in South Korea has evolved rapidly, political factors and other influences have prevented fully realized shareowner rights. The issue of shareowner engagement has traditionally been treated as political, and considerable focus remains on the omnipresent financial and political influence that the country's family-controlled conglomerates, or chaebols, exert on society.
The issues of shareowner engagement and corporate governance entered public debate in 1998, when South Korea began restructuring the chaebol system under the International Monetary Fund's mandate. As a result of this activity, public companies improved the accountability of their boards by substantially reducing board sizes and by seating board members from outside the chaebol on their boards. Most restrictions on foreign ownership also were removed. In 2001, People's Solidarity for Participatory Democracy (PSPD), one of South Korea's largest civic groups, took advantage of this opening and started a minority shareowner campaign. With a mere 1 percent of voting stock, PSPD activists challenged management at the shareowner meetings of Samsung Electronics, SK Corporation, and others, thus bringing the issues of shareowner rights and activism to media attention. Although its five-year campaign failed to bring specific improvements to the governance of the chaebol companies that it targeted, PSPD's high-profile efforts have sustained public debate about the issues of shareowner rights and activism.
PSPD had largely discontinued the campaign by 2006, and in late 2006, Jang Ha-sung, one of the two college professors who led the campaign, began to work as an adviser to Lazard's Korea Corporate Governance Fund, the first such fund formed by a foreign entity. Kim Sang-jo, the other professor, began to lead Solidarity for Economic Reform, a governance and regulatory reform advocacy group that involved some former supporters of PSPD. The divergent routes of these leaders marked a shift away from the public perception that shareowner engagement is primarily a social justice issue.
In South Korea, shareowner engagement is hampered by the absence of a strong local advocate. Local engagement consultants have begun to emerge, but their influence appears marginal. Policymakers have long proposed using the National Pension Service (NPS) as a vehicle for shareowner engagement. For example, in March 2008, the NPS, which currently invests KRW14.5 trillion (USD14.5 billion) in local stock exchanges, said it would vote against appointing the founders of Hyundai Motor Company and Doosan Infracore as board members because of their involvement in financial scandals. This move was a first-of-its-kind shareowner engagement by the fund. Furthermore, new legislation planned for 2009 that will allow brokerages to conduct banking business suggests that the landscape of shareowner engagement in South Korea will change yet again. Once brokerages become full-fledged investment banks in South Korea, the need to articulate shareowner rights and engagement practices will be even greater.
In South Korea, regulatory inadequacies often impede both the formation of independent corporate boards and the improvement of shareowner engagement practices. South Korean regulations require that 50 percent of the board of a public company with KRW2 trillion (USD2 billion) in market value be independent; for a public company with less than KRW2 trillion, at least 25 percent of the board's members must be independent. The regulations do not explicitly define the term "independent," however, and the terms "independent director" and "outside director" are used interchangeably. The materiality threshold for related-party transactions is set at KRW5 billion (USD50 million), and no materiality/time threshold has been set for professional/personal services provided by outside board members. These unclear rules cumulatively result in corporate boards that tend to be far less independent than the companies claim them to be. Board member elections are often staggered because many board members are elected to two- or three-year terms on different schedules, although practice varies. New board members may be appointed to fill vacancies between annual general meetings, but they must stand for election by shareowners at the next available general meeting (annual or extraordinary).
In South Korea, takeover rules are modest. Poison pills are not allowed, although talk of introducing them has been going on since 2006. Shareholdings that enmesh chaebol affiliates into a web of cross-shareholdings greatly hamper the market mechanism of takeovers. The complex networks of cross-shareholdings, further strengthened by routine related-party transactions between chaebol affiliates, seriously reduce the exposure of the conglomerates to market disciplines.
-. Legal and Regulatory Framework
Key shareowner rights are stipulated in three pieces of legislation: the Company Law, the Commercial Code, and the Securities Trade Law. Legislation is administered by the Financial Supervisory Service (FSS), which has a wide range of enforcement powers. Disclosure and key market regulations are governed under the Securities Exchange Listed Company Regulations, which has legislative backing. The FSS oversees the enforcement of takeover rules and regulatory disciplines but has no criminal enforcement authority.
A number of mechanisms are available in South Korea for shareowner engagement and activism. The one share, one vote system is generally entrenched, and some restrictions are in place to hold the influence of chaebols in check. South Korea's anti-monopoly and fair trade regulations restrict the voting rights of the financial and insurance units of the conglomerates with KRW5 trillion (USD5 billion) in market value connected with the shares they own in other units of the same conglomerates. Their voting rights are reinstated but with a 30 percent voting power ceiling, regardless of the number of shares they own, when they vote on such key issues as mergers and acquisitions or amendments to the articles of incorporation. As of June 2008, the restrictions affect 1,003 affiliates of 41 conglomerates. The Securities Trade Law imposes a voting cap of 3 percent in the election of audit committee or audit board members.
A request for an extraordinary general meeting or a shareowner proposal may be made by a shareowner holding a minimum of 3 percent of the voting shares for companies with less than KRW10 billion (USD10 million) in capitalization or holding 1.5 percent of shares for companies with more than KRW10 billion (USD10 million) in capitalization.
Shareowners may appoint proxies for general meetings without restrictions and are not required to block shares in order to vote. Board members may be removed without cause with a supermajority vote of shareowners or of the board. On 3 February 2009, the Capital Markets Integration Act took effect. It lowers regulatory walls between banks and non-banking financial institutions. The act was designed to realign the financial industry by encouraging mergers and acquisitions, but it may take some time for this change to come to fruition because of the global financial crisis and the limited amount of capital available for acquisitions in the current environment.
Another bill in the parliament would affect shareowners' rights through amendments to the Commercial Code. Ongoing gridlock in the legislature, however, has slowed the progress of this bill. The amendments, if passed, offer mixed results for the future of shareowner engagement. Some proposals could help weaken the one share, one vote principle by allowing shares with differing voting rights; other proposals are designed to make it easier for shareowners to take such actions as calling special meetings or filing derivative lawsuits. In conjunction with the amendment, the lack of a national consensus on whether chaebols should be allowed to own controlling stakes in lending institutions offers another point of political contention.
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