The proportion of outside directors in the board of directors, which monitors and checks corporate owners, should be increased.
Jung Seong-yeop, head of Morrow Sodali's Korean division, emphasized this during an interview with ChosunBiz on the 18th regarding ways to advance the governance of domestic small and medium-sized enterprises.
Morrow Sodali is one of the world's three largest consulting firms for shareholder identification and recommendations, advising on corporate board evaluations and annual general meeting responses.
Jung, who oversees Morrow Sodali's operations in Korea, is an expert in corporate governance and has previously served as the head of the Policy Analysis Division at the Daishin Economic Research Institute and head of the ESG department. Morrow Sodali Global changed its name from Sodali & Co. last July, and the Korean corporation is expected to change its name soon.
Outside directors are those who do not belong to the company's management and serve to monitor major shareholders, that is, corporate owners, and internal directors. Under current corporate law, listed corporations with total assets of over 2 trillion won must have more than half (50%) of their board composed of outside directors. For listed corporations with assets under 2 trillion won, this figure is 25%.
◇ Current outside director proportion of 25%, should be increased
Jung noted, “To prevent unilateral management by corporate owners, the proportion of outside directors under corporate law should be increased,” and added, “It is particularly important to closely examine the governance of corporations with total assets of less than 2 trillion won.”
He explained, “While it may be considered reasonable to worry about the burden of costs and reduced decision-making speed when organizing a board for smaller companies, that does not mean that the board can operate independently without oversight.” He further stated, “There should also be a process in place where an independent outside director recommendation committee, free from owner influence, can recommend and appoint independent outside directors.”
It is important not only to increase the proportion of outside directors but also to prevent outside directors from becoming mere "rubber stamps" for owners. Jung pointed out, “In the case of small and medium-sized enterprises, there are instances where outside directors are appointed who have ties to the owner, which inevitably reduces the independence of outside directors.”
Jung continued, “In the past, the domestic capital market was small and not complex, allowing for rapid decision-making by owners to enable corporate growth, but now the market has grown and become more complicated, making it risky for a single owner’s decision to drive the company.”
Jung emphasized that establishing an audit committee is also important for advancing the governance of small and medium-sized enterprises. According to data from Samil Accounting Corporation in 2024, the average proportion of outside directors in companies with total assets under 2 trillion won that have established an audit committee is 49%, whereas those without an audit committee have a proportion of outside directors at 29%.
Jung stated, “We should not just rush to meet the standard of 25% for the proportion of outside directors in the board; enhancing effective monitoring and oversight functions, such as establishing an audit committee, is key.”
◇ Owner risk, unmanageable by the owner... The role of the board is essential
Managing owner risk is also a critical aspect. Owner risk affects not only the company's stock price but also its corporate image. A representative example is Baek Jong-won, head of Theborn Korea, who has faced fierce criticism over issues like the "Baekham" controversy, leading to a continuous decline in stock prices.
Jung pointed out, “If owner risk arises in a corporation, it is crucial for the board to be accurately aware of the issue and address it,” adding, “However, in the case of small and medium-sized enterprises, often problems are not examined by the board, and owners tend to try to control matters directly.”
He added, “Owners themselves are often unable to make rational judgments regarding their issues,” emphasizing that “a listed corporation is not an owner-controlled entity. The management should be based on the board.”