[VIEWPOINT] Where Minority Shareholders Err

The Outside Directors Recommended by The Civic Organizations Can Hurt Fairness

Three years have passed since Korea's financial crisis happened. Since then, many intentional and unintentional changes have taken place in Korea. Some issues suddenly became a matter of concern and interest. The minority shareholders movement, which tries to enhance the influence of this group of investors on company management, is one of the most important of these issues. It is very encouraging that this movement provides an opportunity to restore the rights and interests of minority shareholders, which were nearly forgotten. Through this challenge management of firms can be improved under the principles of transparency and responsibility, which contribute to strengthening the fundamentals of Korea's economy.

The outside director system, introduced in 1998 as a product of the minority shareholders movement, has been the focus of attention recently. The outside director system is one of the measures implemented to improve controls by supervising internal transactions and protecting minority shareholders. Most of all, this system is intended to prevent the monopolization of decision-making procedures by major shareholders or the CEO and initiate transparent management.

Since personnel management is of utmost importance, the point of the debate surrounding this system is the method used to select outside directors. Especially controversial is pressure by civic organizations to influence the selection of outside directors. One civic organization persuaded the shareholders of a company to consider their choice as an outside director and the shareholders are demanding that this recommendation be acted on. When new systems are initiated and implemented we should set up a concrete plan to alleviate the chance for misunderstandings, which can bring about great pain. Of course it is possible for shareholders who have enough shares to recommend outside directors in the name of representative shareholders. But recommending outside directors under the name of a civic organization is a totally different matter from the rights of the shareholders, and it is an issue that can cause problems for the entire economy.

First of all, the civic organizations' recommendations could be a great blow against the authority of the recommendation committee. An outside director is an executive of the company and has an independent position at the same time. The fairness of the recommendation committee, which is in charge of selecting the right person, should be guaranteed. If an influential organization forces a selection, not only the fairness, but also the rights of the recommendation committee will be threatened.

The logic that the management of a firm would become transparent if the firm accepts the candidate recommended by the civic organization is very poor. In addition, there is the possibility that a person without the necessary experience could be recommended, increasing the possibility of the evasion of responsibility in a management crisis.

The dark side of the minority shareholders movement can be seen in other countries, where this movement was launched several decades ago. In several cases there are movements to restrict the rights of minority shareholders. A few years ago, the United States introduced laws to apply a brake to the minority shareholders movement. It can be presumed that the movement infringed on individual rights, which is against the intrinsic values of a public company, and it could degrade into a political movement. In fact, in the United States, which introduced the outside director system, recommendations for outside directors is under the purview of the CEO.

When excessive curbing by minority shareholders shrinks management rights, it reduces profits and hurts the potential growth of the entire economy. These facts should be the object of more consideration in the controversy involving recommendations and the naming of outside directors.

writer -----------------------------------------------------------------------

The writer is a professor of economics at Sogang University.

by Kim Joon-won