With the Commercial Act amendment reaching its one-year mark this month, corporations are changing their overall management environment, including strengthening board agenda reviews. However, as directors' duty of loyalty has been expanded to "the company and shareholders," litigation risk has grown, dampening investment appetite. There are calls for more specific guidelines on this.
According to the results of the "One year since the Commercial Act amendment: survey on changes in the management environment and support tasks for entrenching the system" released by the Korea Chamber of Commerce and Industry on the 12th, 84.3% of responding corporations said "board operation methods have changed since the Commercial Act amendment." The share saying there was no change was 15.7%. The survey covered 300 listed corporations.
These changes stem from the first Commercial Act amendment in July last year, which immediately expanded the target of directors' duty of loyalty from "the company" to "the company and shareholders." At the time, the increase in the ratio of independent directors was included and is set to take effect at the end of this month, and the mandatory electronic general meeting of shareholders is scheduled to take effect in Jan. next year.
The second amendment in Sept. last year—mandating cumulative voting and expanding separate elections for audit committee members—applies to listed companies with assets of 2 trillion won or more and will take effect in Sept. The mandatory cancellation of treasury shares took effect immediately with the third amendment in Mar.
Looking specifically at the changed corporate management landscape, "establishing and strengthening in-house review procedures such as prior review by legal and compliance teams" was most common at 47.0%. This was followed by "expanding external expert advice on law and accounting" (45.7%) and "preparing detailed board minutes, including each director's for-or-against position" (43.7%).
Regarding the changes in board operation methods, 39.6% of corporations assessed that there were positive effects, such as greater accountability in decision-making and improved transparency in governance.
On the other hand, 22.4% said corporations' burdens have increased, including higher compliance costs and delays in decision-making. Those saying there has been no perceptible change came to 37.3%.
The concern is litigation risk. A majority of responding corporations (53.7%) said litigation concerns—such as shareholder derivative suits or damage claims—have increased since the expansion of directors' duty of loyalty. Only 6.0% said concerns had decreased. Corporations saying there was no change accounted for 40.3%.
This litigation risk is leading to the side effect of discouraging corporations' willingness to invest. Since the Commercial Act amendment, 21.7% of corporations said that, in pursuing major decisions such as investment and business reorganization, "strengthened legal review led to delays, holds, or cancellations of key decisions." Those reporting no change were 71.7%, and those saying decision-making became faster were 6.6%.
As for the decisions delayed, put on hold, or canceled, "new investments and business entries," such as exploring new businesses or mergers and acquisitions (M&A), were the most frequent at 30.8%. Other categories were "finance and capital raising" (18.5%), "appointment and compensation of executives" (16.9%), "asset acquisition and disposal" (15.4%), and "intra-affiliate transactions and structural changes" (15.4%).
Although the Commercial Act amendment provisions are set to take effect in succession, on-site preparation by corporations remains insufficient. Regarding the mandatory electronic general meeting of shareholders to be introduced in Jan. next year, only 16.0% of corporations among the applicable listed companies with assets of 2 trillion won or more said they had completed establishing the system and operating framework.
Among listed companies that must meet the requirement to expand the ratio of independent director appointments by the end of Jul. next year (assets of at least 100 billion won and less than 2 trillion won), only 17.6% had finished selecting candidates.
Corporations are calling for policy support to embed the new Commercial Act framework. The strongest request, at 37.3%, was to enhance the specificity of guidelines on directors' duty of loyalty, such as judgments on labor unions' demands for distribution of company profits. Urgent tasks also included "codifying the business judgment rule" (20.3%) and "supporting legal and compliance education for on-site practitioners" (12.7%).
Choi Eun-rak, head of research at the Korea Chamber of Commerce and Industry, said, "For the system to take root on the ground, it needs not only corporations' efforts but also concrete guidelines that reflect field cases and on-site, hands-on policy support that eases practical burdens."