Global pension funds and sovereign wealth funds, among other institutional investors, have urged the Korean National Assembly to amend the Commercial Act.
According to the financial investment industry on the 22nd, the Asia Corporate Governance Association (ACGA), a non-profit organization, recently expressed this opinion in an open letter sent to the Korean National Assembly.
ACGA was established in 1999 to improve corporate governance in Asia. It has 101 member companies, including pension funds, sovereign wealth funds, asset management companies, and investment banks across 18 markets worldwide. The total assets under management of the member companies that include pension funds and asset management companies amount to $40 trillion (approximately 5,800 trillion won).
ACGA stated in its open letter that it supports a proposed amendment to the Commercial Act that would clarify the responsibilities of directors not only to companies but also to all shareholders, enabling a strong and effective board of directors to realize shareholder value.
It also noted, “We urge the Korean National Assembly to take decisive action regarding the amendment to the Commercial Act, as this will be a crucial step for Korean corporations to regain the trust of foreign investors.”
ACGA also pointed out that while the Korean National Assembly and financial authorities have made significant efforts to align corporate governance regulations with other markets, fundamental changes in the governance practices of large corporations and treatment of minority shareholders have not yet been achieved. It observed that group restructuring, mergers, and abuse of treasury shares appear to be designed for the benefit of management or controlling shareholders and often harm minority shareholders.
ACGA raised concerns about Article 382-3 of the current Commercial Act, which limits the duty of loyalty of directors solely to 'the company'. This excludes the duty of loyalty to shareholders.
Additionally, ACGA pointed out that controlling shareholders can hold significant power even with a small equity stake, and that boards of directors are not independent in decision-making from controlling shareholders. It also highlighted that shareholders' rights are restricted regarding issues requiring shareholder approval, and there are no effective means for minority shareholders to hold management and the board accountable. It emphasized that if these issues are not resolved, the only option left for investors will be 'divestment.'
ACGA emphasized, “The Korean market stands at a crossroads of whether to advance corporate norms or to continue outdated practices,” adding that explicitly including the duty of loyalty to all shareholders in the Commercial Act would be an important measure that could guide outside directors, particularly in decision-making where the interests of controlling and minority shareholders conflict.
ACGA also mentioned that the share of the Korean market in the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index dropped from 16.1% in 2014 to 9.1% this year. If the share falls below that, external perceptions of the Korean market could worsen.