A shield against speculative capital

Min Se-jin
The author is a professor of economics at Dongguk University.

Environmental, social and corporate governance (ESG) is a dominating theme on the corporate scene. The string of seemingly unassociated words reflects a consensus in the global capital market that corporate governance structures can appeal to investors when companies consider the impact of their management decisions on the environment and society for sustainable growth.

Environmental commitment is understandable considering public concerns about climate change and international endeavors towards carbon neutrality. The social area is somewhat ambiguous, but can be associated with the events that hurt corporate reputations such as labor conflicts and issues with consumers.

Corporate governance is the most complicate issue in any ESG evaluation. It raises suspicion that multinational investors added environment and social commitments to find polite excuses to exercise their influence in the governance structure of companies around the world. Ownership structures are a direct stumbling block to investment in various companies across the world.

Corporate governance structure refers to a system of making management decisions. It matters to shareholders to draw management decisions in favor of shareholders.

To understand the importance, it could be studied in the context of the global capital market. In the United States, which leads other countries’ capital markets, hostile mergers and acquisitions were common in the 1980s. Hostile takeover can be attempted through the purchase of shares up to the level of commanding a controlling stake without consulting with the management of the company. Such investors were called corporate raiders due to the predatory nature of laying off workers and selling assets to streamline a company and redeem investment capital as early as possible.

Companies have come up with defense mechanisms against predatory M&As. Various defense tactics have become legal due to serious side effects from corporate restructuring by predatory forces. The U.S. now has the world’s best financial and legal infrastructure in services related to M&As and reasonable protection against predatory attacks.

Since capital has flowed into various corners of the world from the 1990s, different legal systems and practices related to corporate governance have become irksome to investors. They needed a legal mechanism to challenge existing major shareholders, in particular. To help draw foreign capital, governments had to promote advances in corporate governance structure to meet their demands on shareholder protection.

Laws related to enhancing the rights of shareholders in emerging economies also have become similar to those of developed economies. Research shows that regulations to protect the rights of stockholders have been significantly raised across the world rather than protect the rights of employees and creditors.

Since such regulations can protect domestic investors as well foreign investors, they are desirable. But developments leading up to the campaign by multinational capital to improve corporate structure to the standards of western markets need to be studied. In Korea, corporate structure improvement has emerged as a state agenda since the 1997 Asian financial crisis in the context of reforming the chaebol — family-owned conglomerates — and their dynastic tradition. But local companies have been denied repeated pleas for effective mechanisms to defend their management rights amid escalating regulations to weaken the power of large shareholders.

Amid skepticism about globalization and worsening Sino-U.S. confrontation, companies need a stronger shield against speculative capital before it is too late. The government has a duty to protect domestic companies contributing to the economy from predatory investors from overseas.
Translation by the Korea JoongAng Daily staff.