Corporate reform bills raise the ire of chaebolIn the wake of a massive corruption scandal involving the president and the country’s biggest conglomerates, a flurry of bills in the National Assembly focused on boosting corporate transparency and minority shareholder rights is gaining traction among opposition parties and civic groups.
Not surprisingly, companies likely to be affected by the bills are far from happy, given that many of the amendments could complicate their businesses in an already slow economy.
The main opposition Minjoo Party has settled on 23 bills to pass in the legislature’s regular session, which is set to end on Jan. 9. Eight of the bills are related to “economic democratization,” a buzzword for granting small stakeholders more rights.
“A sizable portion of economic democratization-related bills won’t be welcomed, but it’s hard for us to openly complain about it under the current atmosphere,” said an executive at a conglomerate.
One major bill that will heavily affect Korea’s chaebol is an amendment to the Commercial Act. The change would force Korean companies to separately name board directors and audit committee members (who are also part of the board) and would limit major shareholders’ voting rights to 3 percent when appointing audit committee members. This will greatly limit the influence of key shareholders.
But some speculative players like hedge funds might take advantage of the new system by splitting their shares in a company to below 3 percent or by changing their names to find loopholes in the system and beef up their power in naming audit committee members. Analysts say the amendment, originally meant to protect minority shareholders, opens up the risk of having a conglomerate be swayed by external forces.
The adoption of a cumulative voting system is also set to negatively affect conglomerates. The system gives each shareholder one vote per share multiplied by the number of board directors to be elected. It could work positively for individual investors, since they can focus their attention on a single candidate or decision point.
But some companies with more shares owned by stakeholders from abroad than held by major Korean shareholders (who have at least a 4 percent stake) run the risk of having management controlled by foreign investors. Under the current equal voting system, each shareholder has one vote per share.
“There are only three countries in the world that have formalized cumulative voting - Russia, Mexico and Chile,” said an executive at a conglomerate. “Countries such as the United States, Japan and Italy have introduced the system, but it is up to respective companies to actually use it.”
Shin Seok-hoon, a senior researcher at the Korea Economic Research Institute, a private think tank, says the chance of speculative funds dominating a majority of board seats will grow if the Commercial Act is revised. Under such a scenario, conglomerates with a holding company structure such as SK Group, LG Group and GS Group may have their governance threatened. “Politicians establishing regulations in pursuit of popularity and without through contemplation is wrongful intervention in the corporate sector,” he said.
“A serious discussion on whether any specific regulation is truthful to the global standard and is really necessary for Korea Inc. in the 21st century is crucial before its adoption,” said Cho Myeong-hyeon, a professor of business administration at Korea University.
A revision of the Fair Trade Act is believed to end the long-held practice of an owner family controlling a company through a minimal stake. Under the existing law, most Korean conglomerates have split their parent company into a holding and operating company. The holding company can offer its own shares to investors in exchange for shares in the operating company, thus boosting the parent company’s stake in the operating company. In this way, an owner family can raise its stake in the parent company.
A revision of the act is expected to put the brakes on Samsung Electronics and SK Telecom’s plans to change their corporate governance structure.
Samsung Life Insurance is paying attention to whether the Insurance Business Act will be amended. Under the current law, an insurer is barred from investing more than 3 percent of its own assets in shares of its subsidiaries. The 3 percent is calculated on the basis of price at the point of acquisition, but the revision will base it on the current market price.
When it comes to Samsung Life Insurance, the value of the 7.3 percent stake it purchased in Samsung Electronics before the 1980s totaled 570 billion won ($490 million), but as of late November, the shares are worth a jaw-dropping 24 trillion won. If the amendment passes, the insurance arm of Samsung will be forced to sell off 15 trillion won worth of shares in Samsung Electronics, but given the astronomical figure of the shares, it won’t be easy to find any subsidiary willing to take them.
Professor Cho suggests companies wait and see how the amendments will pan out before jumping to conclusions. “Those companies hit hard by foreign hedge funds are mostly far from transparent or have a vulnerable governance structure,” he said. “Conglomerates are not supposed to protest without proper ground. It should accept regulations that won’t affect their management to an extreme degree and encourage minority shareholders’ participation with an open mind.”
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