A heated debate is taking place in the Korean business and financial sectors about potentially revising the Commercial Act to expand the fiduciary responsibilities of corporate directors to include protecting the interests of shareholders.

Currently, Article 382-3 of the act outlines the duty of loyalty for corporate directors, specifying that they "shall perform their duties in good faith for the interest of the company."

The clause, which only references the "interest of the company" and excludes consideration of "shareholders," has faced sustained criticism from shareholder activists. They contend that this omission has perpetuated a legal framework that disproportionately benefits major shareholders, particularly chaebol owners, enabling them to enjoy excessive financial rewards and influence over corporations disproportionate to their ownership stakes.

The advantages in rewards and control afforded to major shareholders, often to the detriment of minority shareholders, are frequently cited as a significant factor contributing to the so-called "Korea discount," which describes the consistent undervaluation of Korean stocks in the market.

Against this backdrop, financial authorities, actively pursuing the Corporate Value-up Program to tackle the "Korea discount," are pushing to amend the act. The proposed revision aims to expand the duty of loyalty for corporate boards to include safeguarding the interests of shareholders. This issue holds particular significance for over 14 million retail investors in Korea, who advocate for a fair and equitable environment that supports minority shareholders.

Financial Supervisory Service Governor Lee Bok-hyun delivers a speech on the necessity of revising Korea's Commercial Act to extend corporate directors' fiduciary duties to include protecting the interests of shareholders, during a corporate governance seminar in Seoul, Wednesday. Yonhap

Expanding duty to address Korea discount

Supporters of the revision argue that it will establish a solid foundation for the healthy development of domestic stock markets, providing enhanced protection for the interests of minority shareholders.

One of the most vocal proponents is Financial Supervisory Service (FSS) Governor Lee Bok-hyun, who emphasizes that the revision will positively contribute to the corporate value-up initiatives.

"Corporate governance reforms are essential to ensure equitable treatment for all shareholders. The board of directors must not only set strategic directives for the company and oversee management effectively but also uphold responsibilities toward both the company and its shareholders. Resolving the Korea discount hinges on equally protecting the interests of controlling shareholders and minority shareholders," Lee stressed in a speech in late June.

Many law professors agree with that view.

Lee Sang-hoon, a law professor at Kyungpook National University School of Law and an expert in corporate governance, underscored that the amendment to the act should be at the core of the government-led Corporate Value-up Program.

"In Korea, the gap between corporate value and stock value is too wide. Government-led corporate value enhancement programs that focus on metrics like return on equity (ROE) or price-to-book ratio (PBR) address the outcomes but not the root causes of the Korea discount. We need to identify and resolve these root causes. The fundamental problem of undervaluation in Korean stocks originates from the erosion of shareholder value. The remedy lies in restructuring the board to prevent this value destruction and mandating its improvement," the professor told The Korea Times.

"What the government can do to effectively address the Korea discount is to expand the scope of a corporate board's duty of loyalty to include the protection of ordinary shareholders' rights, so that shareholders' proportional rights can be properly respected," he emphasized. "It is all about establishing a clear principle of corporate boards — when the interests of a few controlling shareholders and those of ordinary shareholders clash, boards should prioritize the interests of the entire shareholders. It should be the target of the corporate value-up initiatives."

Professor Chung Joon-hyug from Seoul National University Law School also noted that it is an "undeniable reality" that there is a widespread perception among foreign investors and retail investors that Korea does not have sufficient protection for minority shareholders.

"Discussions on revising the Commercial Act whether to expand board directors' fiduciary duties are necessary to change this perception," Chung said during a recent seminar held by the association of Korea's listed companies and the Federation of Korean Industries (FKI).

This position also aligns with global standards. The Principles of Corporate Governance released by the G20 and OECD in 2023 state: "The corporate governance framework should protect and facilitate the exercise of shareholders' rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders."

gettyimagesbank

Business associations bristle

On the other hand, the business community, particularly concerned about sensitive issues such as corporate management succession, vehemently opposes the proposed change.

Eight business associations, including the FKI, the Korea Chamber of Commerce and Industry (KCCI) and the Korea Federation of SMEs, issued a joint statement in late June expressing their opposition to the proposed revision to the act. They delivered this statement to the government and the National Assembly.

They expressed concerns that expanding the fiduciary duty of board directors to include protecting ordinary shareholders could not only create significant confusion in management decisions, but also increase judicial risks.

"Expanding directors' fiduciary duties could hinder swift management decisions, undermine competitiveness, and potentially be exploited by hostile takeover forces," their statement reads.

They explained that amid heightened pressure from activist hedge funds leveraging shareholder rights against listed Korean companies, the proposed revision could further complicate defending management rights. They argue that without tools like poison pills or differential voting rights, it could become increasingly challenging to uphold the authority of existing management.

"With over 14 million retail investors in Korea, each with diverse investment objectives, it is practically impossible for board directors to pursue proportional benefits for all shareholders," Kwon Jae-yeol, professor at Kyung Hee University Law School, pointed out during the FKI seminar.

"Excessive civil liability could clearly impede directors from pursuing innovative management strategies," he remarked.

The professor added that if the revision is passed, the country would need to prepare additional legal frameworks to mitigate potential side effects, such as establishing principles for managerial discretion.

Supporting this stance, an industry insider from a high-tech venture company noted that currently, recruiting outside directors remains challenging due to concerns about potential lawsuits from minority shareholders.

"If the Commercial Act is revised, companies might have to appoint outside directors who may lack relative expertise," he said on condition of anonymity.

gettyimagesbank

Minority shareholders seek more rights

In response to this stance, the Korean Corporate Governance Forum, an association of shareholder activists, questions whether it is acceptable for the disproportionate influence of controlling shareholders, who do not hold a proportional corporate stake, to remain unchecked.

"Over decades, the stake of ordinary shareholders has dwindled while the influence of controlling shareholders has grown stronger through mergers, spin-offs, and the establishment of holding companies," the forum said in a statement. "Promises of bright prospects are made to ordinary shareholders when companies raise substantial capital through listing. Why then is there a reluctance to bear the responsibility to protect the interests of ordinary shareholders fairly, akin to controlling shareholders?"

It is often noted that Korean conglomerates frequently demonstrate a globally unique corporate governance structure. Here, controlling shareholders, who hold a small stake but wield significant influence through shareholdings in subsidiaries, effectively dominate the entire conglomerate.

The forum points out that many retail investors and institutional shareholders of listed companies are not only being deprived of their rightful returns in major capital transactions, such as mergers, divisions, voluntary delistings, and transitions to holding companies, but also systematically excluded from corporate governance.

The majority of public opinions expressed on online bulletin boards align with the forum's stance.

"The board of directors merely serves as a rubber stamp for controlling shareholders," an anonymous online user wrote on a portal site.

"They've been disregarding small retail shareholders for so long, thinking they could get away with it. Are they now concerned they won't get away with it anymore under the proposed revision?" another commented.

"Just let the controlling shareholders play by themselves. Ordinary investors will eventually move to overseas markets anyway," another user noted.

The National Assembly in Seoul / Yonhap

Both the government and opposition parties are pushing for revisions to the act to bolster the rights of minority shareholders.

Rep. Kang Hoon-sik of the main opposition Democratic Party of Korea proposed revision bills to the Commercial Act and the Capital Market Act, to enhance the fiduciary duties of directors to ordinary shareholders and mandate the introduction of electronic voting systems for listed companies.

Rep. Jeong Jun-ho from the same party also proposed a similar bill in early June, aiming to protect the proportional benefits of shareholders.

"Proportional benefits for shareholders essentially align with the principle of shareholder equality," he said.

Abolition of breach of trust

Amid the ongoing controversy, another contentious issue has emerged regarding the possible elimination of charges related to breach of trust.

The FSS governor first raised this issue in mid-June, amid heightened opposition from the business community against expanding the fiduciary duties of directors. Lee proposed discussing the complete abolition of breach of trust charges as part of a comprehensive package.

"It would be better to abolish, rather than maintain, breach of trust charges, which currently target even minor offenses," Lee said during a press briefing. "A board decision could unreasonably fall under the target of criminal penalties as breach of trust under the criminal law, which doesn't align with global standards."

The business community has long contended that the broad application and severe penalties for breach of trust hinder corporate activities.

Sung Tae-yoon, national policy director at the presidential office, echoed the FSS governor's stance.

"If the government expands the scope of directors' fiduciary duties to include shareholder protection, it should also consider either abolishing charges of breach of trust altogether or creating conditions under which directors can be exempt from such charges."

However, shareholder activists have expressed concerns that abolishing breach of trust charges could undermine the intended purpose of the Commercial Act revision.

They argue that addressing both issues simultaneously could potentially favor majority shareholders. They contend that without charges of breach of trust, minority shareholders would be left with civil litigation as their only recourse to hold directors accountable, raising doubts about the likelihood of success in such cases.

"The point of all these discussions on amending the Commercial Act is to strengthen investor protections for corporate value enhancement. If we are overly cautious due to the business community's opposition and end up creating a formulaic law that does not carry substantial changes, the Korea discount could worsen. Moreover, eliminating breach of trust charges for directors, under the pretext of strengthening their responsibilities, would effectively grant them immunity," Kang Sung-boo, CEO of the Korea Corporate Governance Improvement Fund (KCGI), stressed.