Economic democratization gone awry

Korean companies fear greater regulatory hurdles than before as amendments to the Fair Trade Act, Commerce Act and Financial Group Supervisory Act have gained traction to pass the ruling party-dominated National Assembly. The three bills were resubmitted to the legislature after the conservative party, citing negative impacts to business, struck them down in the last Assembly.

The bills this time would likely pass the legislature easily, as the ruling Democratic Party (DP) commands a comfortable majority. The main opposition People Power Party (PPP) is also not fighting as hard as it previously did. Kwon Tae-shin, vice chairman of the Korea Federation of Industries, met with Kim Chong-in, acting leader of the PPP to plead for opposition, but did not get a positive answer. Kim, who supports economic democracy, said the PPP won’t oppose the DP’s bills for opposition’s sake. Other business organizations also had made the same plea, to little avail.

The bills are considered radical even by international standards. They threaten business management independence, protected by the Constitution, and are overly employer-unfriendly. The most controversial provisions are those on representative shareholder litigation and the appointment of outside auditors for big companies with assets of more than 2 trillion won ($1.72 billion). Designed to promote more transparent management of family-owned conglomerates, they could instead make Korea Inc. easy prey for predatory capital.

The multiple representative shareholder litigation system enables shareholders of a parent company to file a lawsuit against an executive of its subsidiary. Since the new right covers unlisted companies, all companies could come under suits for investments and business decisions. Korean companies under the holding company system could come under habitual lawsuits.

The separation of auditors also could open board rooms to predatory forces, allowing foreign shareholders to join forces to appoint auditors. Such meddling in auditors’ boards does not even exist in advanced markets like the United States and Japan.

If such antibusiness bills take effect, local companies will be more engrossed with protecting their management rights than with investments and business affairs. A company cannot stand in the global market if its management becomes insecure and lacks investment steam.

Excessive regulations go against the government’s will to revive the economy. Transparency in corporate governance is essential, but the transition should be incremental.