Change the rubber stamps into real watchers

Lee Jong-sub
The author is a professor at the Seoul National University Business School.

Interest in the remarkable growth and dynamics of the Korean economy is building at home and abroad. The quantitative growth of the past is amazing, but the future possibilities detected in each field are also interesting. On top of its traditional foundation of manufacturing and services, Korea has shown outstanding performance in the information and communication technology (ICT) industry. Now, many companies and entrepreneurs are thriving in high-end industries such as digital, bio, space and aviation.

But many have voiced concern. Critics say that excessive regulation and antimarket sentiment will eventually hinder growth. Some are concerned about capital market issues such as the lopsided concentration of investments. There has also been outcry over structural issues such as the limited supply of talent, shortage of industrial manpower and geopolitical risks.

Another obstacle is the shackle companies put on themselves. It is a corporate governance issue. Despite constant criticism that the corporate sector’s vulnerable governance structure will eventually hinder growth, not much improvement has been made. Fortunately, the side effects of management by major shareholders — which have long been the subject of criticism and vigilance — are being filtered through various braking systems. But the board of directors — the core of corporate governance — shows no signs of functioning properly.

The board of directors is largely in charge of providing executives with oversight and management advice. Currently, oversight relies on independent outside directors. In the early 2000s, following large-scale fraud cases at Enron and WorldCom, the failure of the corporate board’s internal monitoring became a big issue in the United States. The Sarbanes–Oxley Act (SOX) was enacted in 2002 to define the board as the most important listing standard for American companies.

What efforts have been made in Korea to restore the function of the board of directors? The outside director system was first introduced to Korea in 1996. But the system is not working well. The answers from experts and investors who have experienced the board of directors are generally cold. The competency and enthusiasm of board members is also a problem, but independent directors do not meet shareholders’ expectations.

A decade ago, I contributed a paper on the importance of independent boards of directors to a prestigious journal of financial economics. I pointed out that maintaining independence of the board afterwards is as important as the composition of the board, because the independence of the board can be seriously damaged if internal members of the board share interests with external members. If outside board members cannot secure independence, they can hardly protect the interests of shareholders.

Posco Holdings, whose leadership recently changed, makes me realize that such concerns are becoming a reality. The board of directors must have known the dangers of insider trading. In December 2022, the U.S. Securities and Exchange Commission recognized the seriousness of the issue and revised the law to strengthen the informational disclosure standard on buybacks. But the Posco executives who had lost trust due to the suspicion of insider trading were nominated by a recommendation committee — composed of outside directors nominated by the same executives — as board members again. The board immediately accepted their recommendation.

Unlike financial institutions, Posco does not have an oversight agency. When more than 75 percent of its shareholders are individual investors, the role of the board is especially important and a stricter standard of independence should be applied. But at Posco, the function seems to have stopped working.

If the board of directors — the last bastion of protection shareholders have — gives up its role, its company no longer has a safety mechanism. The situation in which the board of directors is protecting management, beyond the level of rubber stamping, is not desirable.

A board of directors must go beyond nominal independence and pursue substantial independence. Efforts from all stakeholders are needed to lay the foundation for the corporate “value-up” mantra — not only for major shareholders, but for all shareholders.

Translation by the Korea JoongAng Daily staff.