Corporate reform bill in limelight once again

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Corporate reform bill in limelight once again

Opposition parties’ proposed reforms for Korea Inc., which include limiting the power of the families that control Korea’s conglomerates, are back in the limelight after the nation’s top economic policymaker sided with the business communities.

The reforms include a proposed revision to the commercial law aimed at limiting the power of large shareholders - such as the controlling families and their allies - to 3 percent for the selection of auditors and outside directors.

Korea Inc. says this will leave companies vulnerable to hostile takeovers, especially by foreign entities like hedge funds. Reformers say they want to boost the power of small shareholders to improve oversight and checks-and-balances to management decisions.

At a Monday meeting with Korea Chamber of Commerce and Industry Chairman Park Yong-maan, Deputy Prime Minister for the Economy and Finance Minister Yoo Il-ho said there were too many regulations restricting business activities, especially with the challenging current economic environment.

“A continuous rolling out of regulatory regulations will not be helpful [to businesses],” Yoo said on Monday. “If we are to partially adopt the [reform] regulations, there’s a need to introduce regulations that will help defend management [against hostile takeovers], which are almost nonexistence.”

Yoo’s comment followed KCCI Chairman Park’s complaint about the reforms pushed by the opposition parties, which he said will kill businesses rather than helping them.

“Among the 590 bills that are proposed, 407 bills are regulations,” Park said. “While bills to boost the economy are failing to pass the National Assembly, regulations limiting economic activities are passing through like a tsunami.”

The business community has been stepping up its opposition to the reform bills of the opposition parties.

On Feb. 16, the Korea Listed Companies Association, Kosdaq Listed Companies Association and the Association of High Potential Enterprise of Korea released a joint statement protesting the commercial regulation reforms and delivered it to lawmakers.

The statement argued that most of the reform bills are excessive corporate regulations that can’t be found in any other country and that they leave Korean companies vulnerable to unwanted takeovers from foreign companies.

It said the proposed regulations would inflict major damage on small and medium size businesses rather than on conglomerates.

“Eighty-six percent of small, midsize and medium businesses have nothing to do with conglomerate reform,” the statement read.

“And yet the possibility that they will be harmed is high. Excessive regulation of listed companies will only harm the development of the [country’s] capital market as companies will avoid being listed [on the stock exchanges.]”

The reforms include the adoption of cumulative voting, which allows small investors to choose board members that represents their interests.

The business community has been raising the need for defense systems against outside predators, particularly the so-called poison pill strategy, which makes a company’s stock unattractive to external raiders.

One strategy is to allow shareholders and not raiders to purchase newly issued shares of the company below market value, increasing management’s defense against attacks including hostile takeover attempts.

Foreign hostile takeovers have been a sensitive issue in Korea after several high-profile cases, including Sovereign Asset Management’s attempt to pull down SK Group Chairman Chey Tae-won, which went on 2003 and 2005, and a hostile bid from U.S. investor Carl Icahn for KT&G in 2006.

Until the 1990s, hostile takeovers were almost nonexistent due to tight government regulation that protected Korean businesses. But after Korea’s economic doors were forced open during the late 1990s Asian financial crisis, there were several attempts.

Some market analysts say the reforms could resolve the so-called Korea discount, which refers to Korean stocks being undervalued due to several factors, including geopolitical risks and the current governance structure, in which every decision is highly influenced by the founding families of conglomerates.

“The commercial reform bill, which allows one or two directors with neutral stances to be on a board, will not threaten management rights,” said Choi Nam-gon, an analyst at Yuanta Securities.

“Most institutional investors, including foreign capital, don’t exercise their voting rights in order to harm the businesses. In fact, it could resolve the Korea discount as it will contribute to improving [some of the decisions from management].”

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