[PRO] Business judgment is not a crime

*Misappropriation charge should not apply to big business

In the name of “economic democratization,” the latest buzzword, there have been calls for stricter punishment of embezzlement and misfeasance. Some claim that the application of misappropriation charges would unduly restrain corporate management and investment. In academic circles, some call for a legal clause to exclude legitimate business judgments from misfeasance charges.

The misfeasance charge is defined in criminal law, commercial law and the act on the aggravated punishment of specific economic crimes. Misfeasance in office is an act that goes against the duty of someone who is in charge of another person’s business. When the person entrusted with responsibility receives illicit financial gain, the act is punishable by law. The special misfeasance charge applies to members of the board of listed companies and is applied through commercial law.

I want to make it clear that I am not arguing for elimination of the misfeasance charge. Rather, I am merely proposing that the commercial law should be revised to exempt the members of corporate boards of directors from being punished for special misfeasance when their business judgment results in a loss to the company.

When board members make business decisions, they are doing their job.

Someone who receives bribes from a client or embezzles company funds should be punished justly. However, there are many cases of criminal indictments involving big losses that resulted from mistakes in business operations. And punishment standards for misfeasance are rather ambiguous, stating that directors and executives can be punished not only for actual personal gain or corporate loss, but for the “risk” of loss as well. The criminal law’s purpose is to deal with the legal violations that caused damage. But punishment for causing risk amounts to intervention by the state before any actual legal violations occur. Compared to other criminal charges, the acquittal rate for misfeasance is five times higher because of the ambiguity of precisely what constitutes a violation.

The essence of misfeasance is betrayal. Betrayal is an ethical matter that should be dealt with by civil law. The misfeasance crime should be resolved through civil - not criminal -means. It is an excessive intervention of punitive authority that poses a risk to an individual’s liberty. Therefore, punishable acts need to be clarified.

According to the act on the aggravated punishment of specific economic crimes, misfeasance is subject to a prison term of at least five years when the gain is more than 5 billion won ($4.6 million), and three years for a gain of 500,000 won to 5 billion won. Former and incumbent Saenuri Party lawmakers formed the Economic Democratization Action Group and proposed the first bill for economic democratization in July. According to the bill, misfeasance that results in more than 30 billion won is subject to imprisonment of a minimum of 15 years and misfeasance should be exempt from stays of execution or pardons.

Today, because of economic expansion and a decline in the value of the currency, many cases involve more than 500,000 won. The standard of 30 billion won is not so big as it might sound, considering the size of projects that global corporations handle. The market environment is rapidly changing, and global competition is extremely intense. For corporate management, taking risks is part of the job, but risks today are incomparably bigger than they were in the past. If businessmen have to be concerned about criminal charges, they will inevitably become more risk averse and less able to compete.

We need to introduce the business judgment rule acknowledged in American judicial precedent and German securities law to exclude legitimate business decisions from misfeasance charges.

The clauses on special misfeasance charges in commercial law should include a statement that business judgment is not punishable. When a manager makes a judgment based on reasonable business practice with no intention of personal gain, he should not be held legally accountable for any loss.

*The author is a professor at Sungkyunkwan University Law School.
By Choi Jun-son