|Graphic by Bae So-young|
By Nam Hyun-woo
Concerns are growing among domestic businesses as lawmakers expedite efforts to introduce a set of new regulations on corporations that restrict the largest stakeholder's control of corporate boards.
Companies claim the regulations, dubbed "the fair economy act," will limit their capability to prevent activist funds' attempts to place outside directors of their choice on the board, denouncing that the government and the National Assembly are encouraging vulture funds.
Korea Chamber of Commerce and Industry (KCCI) Chairman Park Yong-maan lashed out at lawmakers recently saying they are turning a blind eye to businesses' opinions regarding the fair economy act.
"With parties and the government trumpeting that they will introduce the regulations anyway, businesses are in dire concern whether the politicians will listen to corporate voices," said Park, who heads the largest business lobby group in Korea. "If they think they don't need to listen to the voices of companies, they can make agreements within the political community, but I cannot agree that is a rightful move."
Park's comments came as the liberal ruling Democratic Party of Korea (DPK) attempts to revise the Commercial Act and the Fair Trade Acts during a regular session later this year. Including a new law monitoring financial groups, which was tabled by the government, the three regulations are called the fair economy acts.
As the conservative opposition People Power Party (PPP) also agrees on the necessity of the acts, the new regulations are showcasing an unprecedented pace of progress in going into effect.
Of the three, triggering the greatest concern is the revision to the Commercial Act. In the revision, companies are required to appoint more than one audit committee member from outside the board through shareholders' vote. In this process, the combined voting right of a company's owner and their affiliated persons and organizations ― the largest shareholders ― is limited at 3 percent no matter how big of a stake they possess in the company.
Not only in Korea but also in many other countries, an audit committee is considered an operating committee of the board, thus audit committee members are drawn from board members ― mostly outside directors. For example, Hyundai Motor Company's audit committee is comprised of five independent directors of the board.
Since they are selected by a company's largest shareholders, some criticize them as a rubber stamp committee, while others agree on sharing committee members because this can prevent excessive influence from outside while handling the most decisive and sometimes confidential matters of the company.
Due to this contradiction, the current Commercial Act allows a company to appoint board members without limits in voting rights, and places a 3 percent voting right cap only on the largest shareholders when the company is appointing audit committee members from board members through a shareholders meeting.
When the revision comes into effect, however, a company has to appoint at least one audit committee member from outside of the board, while the largest shareholders face the same 3 percent limit.
In this case, general shareholders can only exercise 3 percent too, but they can form a coalition between shareholders to increase their voting power. On the other hand, the voting power of the largest shareholders can be limited at minimum 3 percent, because the revision does not clearly state affiliated persons and organizations.
"When this revision comes into effect, it will be easier for activist funds to exercise their excessive influence in managing the company and take short-term benefits by sacrificing long-term growth potential," an official at a domestic conglomerate said.
"A company's largest shareholders have a limited level of rights in appointing audit committee members, but their responsibility goes as high as their stake in the company. Also, the revision increases the chances of corporate espionage by rival companies through audit committee members appointed against the largest shareholder's intention."
As companies detest the revision, the Federation of Korean Industries, Korea Federation of SMEs and four other business lobby groups in the country issued a joint statement, expressing worries on the fair economy acts' adverse effects on the economy.
"The revisions to the Commercial Act and other regulations place businesses' managing rights under greater risk, and will result in serious side effects by driving companies to use their resources for acquiring unnecessary extra stakes instead of for job creation and investments," the statement read.
Lessons from the past
Businesses' worries stem from past experiences.
From 2003 to 2005, SK Group staged a fierce battle against Monaco-based Sovereign Asset Management which attempted to oust Chairman Chey Tae-won by appointing audit committee members hostile to the chairman.
By exploiting SK Group's circular shareholding structure between affiliates and the share price downturn of SK Corporation, now SK Holdings, Sovereign purchased a 14.99 percent stake in the company in 2004. After acquiring the stake, Sovereign split it into five different funds each having less than 3 percent, so that it could avoid the 3 percent cap in appointing audit committee members.
While the largest shareholders ― Chey and SK Group companies ― held an approximately 24.5 percent stake in SK Corp., their voting rights were combined to 3 percent. Sovereign was able to exercise the full 14.99 percent stake because it was not subject to the rule which only affects the largest stakeholders.
Sovereign was seen to have audit committee members positioned for its benefit, so they could succeed in filling seats in the board as outside directors. However, the attempt did not completely succeed for Sovereign as other shareholders of SK Corp. sided with Chey in appointing new outside directors in a shareholders meeting in March 2004.
This was described as a "partial success" by local media outlets because one of the outside directors appointed in the meeting was recommended by both SK Group and Sovereign, and he was double hatted as an audit committee member. Through this battle, Sovereign is believed to have raked in more than 1 trillion won of profit by selling SK Corp. shares in 2005.
Along with the revision to the Commercial Act, businesses raise concerns over the revision to the Fair Trade Act, which will enhance the regulations on trading between affiliates.
Currently, the country's Fair Trade Commission regulates intra-group trade toward a listed affiliate when the owner family's stake in the company surpasses 30 percent. The revision will lower this to 20 percent, meaning more conglomerate units will be subject to the regulation.
For example, Hyundai Motor Group Chairman Chung Mong-koo and his son Euisun have 6.7 percent and 23.29 percent stakes respectively in logistics unit Hyundai Glovis. To avoid the strengthened regulation, they have to sell a 9.9 percent stake, which amounts to 545.7 billion won as of Sept. 21.
"Due to the economic fallout of the COVID-19 pandemic, companies are making desperate efforts for survival, but it is hard to understand what politicians are doing these days for them," Park said. "It is worrisome that politicians are closing their eyes and ears to the economy and confining themselves in their own politics."