The government and the ruling party are again pushing for the third Commercial Act revision. Moves targeting corporate governance are also following, including strengthening the National Pension Service's voting rights and overhauling the corporate disclosure system. The business community says it is feeling fatigue as the abolition of the breach of trust offense is stalled while only moves to tighten regulations targeting corporations continue.
Han Jeong-ae, policy committee chair of the Democratic Party of Korea, said at a policy coordination meeting on the 29th, "The Democratic Party will concentrate its policy capacity on improving the fundamental framework of the capital market, including the third Commercial Act revision bill, for the Korea premium." The Democratic Party had planned to handle the third Commercial Act revision bill at The National Assembly's Legislation and Judiciary Committee meeting last week, but the schedule was pushed back as the National Assembly calendar overlapped with the death of former Prime Minister Lee Hae-chan. The plan is to ensure passage in the National Assembly in Feb.
◇After treasury share cancellations comes stronger National Pension voting rights
The third Commercial Act revision bill promoted by the Democratic Party mandates the cancellation of newly acquired treasury shares within one year and requires annual shareholder meeting approval for plans to dispose of treasury shares. Through this, the Democratic Party plans to prevent corporations from using treasury shares to increase controlling shareholders' control of a corporation.
The business community is concerned that it will become impossible to use treasury shares as a means of defending management control against hostile M&A (mergers and acquisitions) threats. The eight major business groups asked the government and the National Assembly in a position paper submitted on the 20th to exempt involuntarily acquired treasury shares in processes such as mergers from the cancellation mandate and to extend the approval period and the deferral period for cancellation. With domestically listed corporations alone holding treasury shares worth about 72 trillion won, mandatory cancellation of treasury shares would inevitably bring a major change to corporate management.
The Democratic Party went a step further and also unveiled a plan to improve corporations' governance through strengthening the National Pension Service's voting rights. The party has begun work on revising the National Pension Act to include compliance with the "stewardship code" as a criterion for selecting private outsourced asset managers who invest funds received from the National Pension Service. The stewardship code is a system that means active exercise of voting rights by institutional investors and was introduced in Korea at the end of 2016. However, because it is in the form of a voluntary norm, it has been criticized as lacking effectiveness due to the absence of enforceability.
The Democratic Party intends to give enforceability to stewardship code implementation by assessing whether managers investing the National Pension Service's money actively exercised voting rights. In other words, to receive National Pension mandates, managers must actively exercise voting rights. The party's position is that if the National Pension Service and institutional investors use their voting rights to demand improvements in corporate governance and stronger shareholder returns, Korea's capital market can rise to the level of advanced overseas markets. The National Pension Service has outsourced 719.9 trillion won, about half of its total 1,473 trillion won fund, to private asset managers.
A key official on the Democratic Party's KOSPI 5000 special committee said, "The stewardship code is an existing concept; the key is how much we make it applicable on the ground," adding, "We are trying to create a basis for the National Pension Service to reflect stewardship code evaluations and use them when selecting outsourced managers." Related bills are expected to be introduced in the National Assembly around Mar.
On the 30th, the Democratic Party also held a forum at the National Assembly to explore ways to activate shareholder engagement and shareholder proposals. Rep. Oh Ki-hyeong of the Democratic Party noted, "In Korea, the requirements for shareholder proposals are excessively strict, and the scope is limited to items requiring shareholder meeting approval."
The opposition party and some experts express concern about the move to strengthen the National Pension Service's voting rights. Floor leader Song Eon-seog of the People Power Party said at a forum on the 26th at the National Assembly titled "Constitutional issues in the National Pension Service's exercise of voting rights," "The National Pension Service shows a growing tendency to delve deeper into (corporations') decision-making, which is a dangerous idea," adding, "If a government that controls the National Pension Service decides to manipulate voting rights in private companies at will, the free-market economic order will completely collapse."
Choi Hwan-yeol, head of the Korea Financial Market Institute, also criticized the "stewardship code," saying it "directly violates Article 126 of the Constitution, which prohibits the nationalization of private corporations."
◇Let's fix the disclosure system too… voices say "the burden on corporations is heavy"
The Democratic Party is also reviewing an overhaul of the corporate disclosure system. The intent is to inform shareholders in detail of key capital indicators, such as return on equity (ROE), when paying dividends, and to thoroughly examine whether there were no alternative funding methods when issuing new shares or bonds. On the 15th, the Democratic Party held a roundtable at the National Assembly on "plans to revise corporate disclosures" and discussed how to revamp the corporate disclosure system in step with the Commercial Act revision. Rep. Lee Kang-il of the Democratic Party said, "Overseas investor corporations are strongly denouncing the opacity of our corporations' disclosure system," adding, "It needs urgent improvement."
Lee Yong-woo, former Democratic Party lawmaker (head of the Economy Plus Research Institute), who delivered the keynote that day, said, "Without an overhaul of the disclosure system, the Commercial Act revision cannot take root." For example, companies should disclose why the board chair is not appointed from among outside directors, how shareholder proposal rights such as general shareholders' recommendations of outside director candidates are handled, and compare the company's return on invested capital (ROIC) or ROE with the cost of equity (COE) to disclose dividends, treasury share purchases, and more. Lee also explained, "Recently, one outside director opposed Samsung Electronics' treasury share buyback; the reason for the opposition should be disclosed."
There is also a counterargument that the ruling party's moves place a heavy burden on corporate management. At the corporate disclosure system roundtable, Kim Chun, Deputy Minister of the Korea Listed Companies Association, said, "From the perspective of corporations, (such system overhauls) act as a disclosure burden," adding, "There has been a great deal of confusion following the Commercial Act revision. In light of this, revisions to the disclosure system should be carried out in stages."
In the business community, there is also significant dissatisfaction that the Lee Jae-myung administration's promised abolition of the breach of trust offense, instead of revising the Commercial Act, is being delayed. A large-corporation chief executive said, "If the improvement of the breach of trust offense is delayed, corporations will inevitably face a heavy burden on their business activities," adding, "As the scope of directors' liability expands with the Commercial Act revision, the breach of trust offense should be abolished quickly to reduce corporations' burden."
In the opposition, a "three-bill package to prevent hostile M&A" has been introduced to counter the third Commercial Act revision. Rep. Shin Dong-wook of the People Power Party proposed a Commercial Act amendment centered on strengthening the requirements for demanding cumulative voting, tightening reporting standards for acquiring other companies' shares, and introducing dual-class voting rights and rights to choose to subscribe for new shares. Shin said, "With the first and second Commercial Act revisions, corporations' weapons to defend management control have already been weakened, and if even the last shield (treasury shares) is forcibly taken away, they will be left defenseless to massive foreign speculative capital such as from China."