Corporate governance reform
A popular theme ahead of the presidential election this year is reform of corporate governance, another way of calling for more democracy in the business community. Due to the worsening of income disparities and an economy mired in low-growth, some kind of improvement in the ownership structure of Korea Inc. has become more imperative than five years ago. Corporate governance should be reshaped in order to ensure fair and efficient profit-sharing and effective decision-making for investment for future growth.
The Korean capital market has run for slightly over 60 years. Compared with advanced markets with capitalistic histories of 250 years, Korea has become the world’s 11th largest economy in terms of gross domestic product over a stunningly short period of time. The Korean style of corporate governance relies on capable chaebol families to concentrate limited resources in certain areas that helped to drive fast growth until the late 1990s.
Korea Inc. is now faced with an entirely different set of challenges compared to 60 years ago. The trickle-down effect from growth led by chaebol ceased working since the 1997 Asian financial crisis. The Organization for Economic Cooperation and Development and foreign investors have repeatedly pointed to our outdated corporate governance system and blamed it for getting in the way of further advances for the Korean economy.
In a study in September 2016, one foreign securities company rated the governance structure in Korean the lowest among 12 Asian equity markets and even below China’s. It cited various side effects like collusive ties between businessmen and bureaucrats and politicians, unfair business transactions and practices, and inefficient spending of corporate capital to keep the controlling families of Korea Inc. in charge despite their small stake-holdings in the groups they control.
Since the 2008 global financial meltdown, institutional investors in advanced markets have been trying to exercise their voting rights to enhance engagement in shareholders’ meetings and improve long-term returns for shareholders. Guidelines for institutional shareholders can help maintain checks and balances between companies and investors and ensure efficient management of corporate capital.
Ultimately, improvement in national capital productivity would bolster corporate profits to fuel a benign cycle in the economy. The monitoring of corporate investment can contribute to improving corporate governance and reinvigorating investment in companies and growth in the economy. Private institutional investors began to adopt the guidelines late last year.
Companies essentially are greedy. To maximize profit, companies should compete fiercely, create jobs and make the society richer. By seeking profit, companies would contribute to national growth. But this is not so if decision-making serves primarily to fatten the controlling family and management. Self-serving corporate profits would distort appropriation of resources and cause inefficient management.
The biggest flaw of the Korean ownership structure is that control of listed companies is handed down to family members regardless of their capabilities. As the corporate empire is passed down from one generation to the next, entrepreneurship from a sense of ownership and bold management would wane. The corporate head would be perfectly happy with maintaining the status quo.
Without some animalistic spirit from the entrepreneur, an enterprise cannot survive in a fast changing business environment at a time of transition to the so-called fourth industrial revolution. As long as Korea Inc. keeps its traditional structure, Korea’s listed companies will lack responsiveness and competitiveness in the new age. In short, there would be no future for the Korean economy.
Many naively believe that pension funds’ enhanced role in voting rights would lead to public control over private enterprises, and foreign shareholders’ increasing engagement could mean predatory invasions of local companies. Foreign shareholders have rightful interests in local enterprises and their investment helps prop up stock prices.
Of course, there are side effects. But if returns to shareholders help stock values, we need not be over-anxious about hedge fund attacks. Pension funds won’t likely interfere with local management decisions, and foreign hedge funds will not target companies that become too expensive from stock price gains. Spread of stewardship practices would help improve corporate governance in Korean Inc. and serve as a breakthrough for the slow-moving economy.
What the people really want from our society is clean and corruption-free national governance and transparent and just corporate governance.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Feb. 20, Page 29
*The author is CEO of Zebra Investment Management.
Bruce Wonil Lee