Demerits outweigh merits

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Demerits outweigh merits

How much money directors of large companies earn made the news following shareholders’ meeting season. There were articles speculating that the average annual salaries of board directors of large companies are more than tenfold the average wages of regular employees.

But it is unfair to blindly compare wages of an ordinary employee who does work assigned to him or her and those of a director, whose responsibility and decisions could shape a corporation’s future and fate.

The National Assembly’s National Policy Committee rubber-stamped a bill to revise the capital market law to include a provision requiring listed companies to disclose how they calculate compensations for directors who earn more than 500 million won ($455,000) a year.

Once the law takes effect, the information will likely stir conflict between management and labor and among ordinary citizens. Moreover, the extra accounting work could increase the corporate workload. Salaries of directors might also be lowered and the details required to be revealed could infringe on confidentiality in corporate information.

Companies would likely struggle with business reports. Since 2011, local companies have been drawing up their financial papers according to the International Financial Reporting Standards, accounting language and codes practiced largely in Europe and not yet adopted by the United States and Japan. Listed companies are obliged to prepare consolidated financial statements and appendages to the statements, which leads to overwhelming work during the settlement season.

Some companies need to come up with documents in the hundreds of pages. The cost of the work also goes up. Philip Morris last year handed in a 95-page business report, of which 32 pages were descriptions of executive pay. Johnson and Johnson filled 38 pages of its 92-page annual report with details of executive pay. The public notice on directors’ compensation and how it’s calculated does not generate great benefits for the public, but enormous financial burdens on the companies.

Directors of Korea’s publicly traded companies are not paid astronomically high amounts. The median salary of the highest-paid three executives of Samsung Electronics last year reached 5.2 billion won. The average annual salary of the five highest-paid executives and CEO of Apple was 13.4 billion won. Samsung Electronics is the largest player in its field, but its executives on average earn substantially lower than their peers. It may be an overstatement to draw comparison of executive pay in different countries with differences in corporate culture and environment. But in the case of global companies like Samsung, comparison with rival companies makes sense.

The salary disclosures could cause various problems. The government in 2002 enforced a securities regulation requiring listed companies with assets over 2 trillion won to fill half of the board of directors’ seats with outside members. But companies responded by curbing the number of directors.

The disclosure of individual paychecks could spur a similar, drastic move; Companies may cut the number of registered directors. Even the corporate owners may want to be exempted from the list. KT&G left just one registered executive and filled the rest of its board seats with outside board members. Outside board members are mostly figureheads and excluded from the regular payroll.

Companies can come up with various ways to skirt the regulation. But this can lead to other problems. There will be fewer directors legally responsible for corporate mismanagement. There will be too many outside directors. The ominous signs already show.

Translation by Korea JoongAng Daily.

*The author is a professor of Sungkyunkwan University Law School.

By Choi June-sun
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