As the amendment to the Commercial Act, which expands the scope of those to whom directors must be loyal to include shareholders, passes the National Assembly, the shortage of outside directors at domestic listed companies is expected to worsen. In an already challenging environment for appointing outside directors due to numerous regulations such as dual position restrictions and equity holdings, the implementation of the amendment will increase the legal risks that outside directors must bear, leading to more individuals refusing offers to serve as outside directors.
Industry voices suggest that, similar to other countries, the opportunities for businesspeople to serve as outside directors need to be expanded to broaden the talent pool of outside directors and enhance the board's capabilities. They advise that establishing cases similar to those where Satya Nadella, the CEO of Microsoft, and Tim Cook, the CEO of Apple, served as outside directors at Starbucks and Nike, respectively, will significantly enhance the practical capabilities of boards in Korea.
According to an analysis by the corporate analysis firm Korea CXO Research Institute, the ratio of outside directors from business backgrounds among the new appointments at the top 50 groups in Korea as of March 7 was only 27.3%. When the scope is narrowed to the top 30 groups, this ratio increases, but it still only reaches 31.2%.
The ratio of outside directors from business backgrounds is much higher in major advanced countries. The Korea Enterprises Federation investigated the ratio of businessperson outside directors relative to the total number of outside directors in the top 10 companies by market capitalization in 2022, finding that in the United Kingdom, the proportion of businessperson outside directors reached 84.2%. The United States (81.9%), Japan (61.5%), and Germany (50.9%) also had high ratios of businesspeople. In contrast, South Korea's figure was a mere 16.7%.
The reason why the ratio of outside directors coming from business backgrounds is low in Korea is due to the many disqualifications for outside directors that do not exist in other countries, such as dual position restrictions, equity holdings, and terms of service. For instance, Korean law stipulates that an outside director may hold position concurrently in only one additional company beyond the listed company. Those who own more than 1% of the company's equity or have served as outside directors for over six years (including nine years for affiliates) are excluded from being candidates for outside directors. These regulations do not exist in the United States or Japan.
The scope of related parties in South Korea is also stricter than in other countries. In Korea, the family of a major shareholder is defined to include relatives up to six degrees of kinship and four degrees of affinity. In contrast, Japan defines related parties as relatives within two degrees, and the United States only includes direct family and household members. Additionally, Korean law defines insiders to include former or current employees and staff in the company and its affiliates, while Japan only includes the company and its parent and subsidiary firms, and the United States only includes the company itself.
Under these circumstances, the amendment to the Commercial Act, which includes duties of loyalty to shareholders, passed the National Assembly on the 13th. The business community fears that the shortage of outside directors for listed companies could deepen. In particular, smaller listed companies, which cannot offer outside directors salaries in the millions of won like larger corporations, may face greater difficulties. With lower compensation and greater responsibilities, the number of candidates willing to serve as outside directors for small listed companies is expected to decline.
Many listed companies are already seeking help from organizations such as the Korea Listed Companies Association and the Korea Securities Dealers Association. They are increasingly inquiring about recommendations for outside directors. A member of the listed company association stated, 'Many member companies contact us directly after failing to find suitable candidates while searching through the outside director talent bank we operate.'
Experts advise that solutions should be sought to utilize individuals from business backgrounds as outside directors. Jeong Hyung-min, a senior researcher at the listed company association, noted, 'If we relax the disqualification criteria for outside directors and provide incentives for companies that appoint businesspeople as outside directors, it will greatly help alleviate the shortage of outside directors.' He also mentioned the need to shift disqualification criteria from legal restrictions to market regulations (soft norms).