FSS warns of risks in Commercial Act amendment amidst director lawsuit concerns

Lee Bok-hyun, head of the Financial Supervisory Service, criticized the proposed amendment to the Commercial Act again. The amendment, which enlarges the target of the duty of loyalty for directors from 'the company' to 'shareholders,' recently passed the National Assembly's Legislation and Judiciary Committee. Lee noted that while protecting shareholder rights is a national task, there needs to be a moderation of speed.

On the 13th, Lee stated at an open discussion held by The Federation of Korean Industries in Yeouido, Seoul, that "the Commercial Act merely declares a principled duty to protect shareholders, and it is necessary to evaluate whether it overlooks several issues that may arise during actual amendments."

As of June last year, Lee emphasized the need for amendments to the Commercial Act, stating that the courts were interpreting the law too narrowly. He indicated that the limited view of directors' duties led to recurring cases of mergers, capital increases, and listings that do not conform to global standards. Nonetheless, Lee held the position that the crime of breach of trust should be abolished due to the potential for excessive lawsuits.

However, recently, Lee has taken a stance against the proposed amendments to the Commercial Act itself. He suggested that since many companies are affected by the amendment, only problematic issues should be corrected immediately through amendments to the Capital Markets Act.

On that day, Lee emphasized that "to ensure that corporate management decisions do not become an excessive target of criminal judgment, we must enhance clarity and predictability through the abolition of special breaches of trust or the presentation of guidelines." He also stated that detailed procedures for protecting shareholder rights should be explicitly provided in the Capital Markets Act and that protective measures for reasonable decision-making by boards of directors are necessary.

He requested, "If you try to pull up rice to make it grow faster, it will wither and die," urging all stakeholders, including shareholders and authorities, to work together to reach balanced and political conclusions. He also called for activist organizations to launch campaigns for sustainable corporate growth and urged institutional investors to actively exercise their voting rights.

At the discussion, Park Lee-yeon from the Korea Financial Investment Association, who presented on 'ways for asset management companies to exercise their voting rights faithfully,' noted that both the voting rights system and related regulations need to be improved.

Regarding system improvements, Park suggested that a dedicated organizational team should be mandated to enhance the expertise of asset management companies concerning exercising voting rights. She also proposed the establishment of an independent internal voting rights exercise committee, participation of external experts, strengthening communication processes between companies and asset management firms before exercising voting rights, and the establishment of a monitoring system.

On improvements to the system, she stated that public pension funds, such as the National Pension Service, should strengthen evaluations of stewardship code compliance when selecting trustees. The stewardship code is a guideline concerning institutional investors' fiduciary responsibilities. She also proposed the issuance of stewardship activity reports and public disclosure of adherence to the stewardship code.

Ahn Hyo-seop, head of the Korea ESG Research Institute, presented on 'trends and implications of shareholder activism,' analyzing the pros and cons of domestic activist investing. Encouraging management centered on shareholders is positive, but the pursuit of excessive short-term revenue can negatively impact ordinary shareholders.

He viewed that publicly listed companies should consider their relationship with shareholders as a partnership rather than an adversarial one and that cooperation among market participants, including individual investors, activist investors, and publicly listed companies, could resolve the Korea discount. Ahn added that this would lead to the establishment of desirable activist investment practices.