"Six-Year Term Limit for Outside Directors Raises Concerns of 'Minority Shareholder Harm and Excessive Management Rights Infringement'"

566 Listed Companies Must Elect 718 New Outside Directors in March

Minister of Justice Choo Mi-ae (Photo by Asia Economy DB)

[Asia Economy Reporters Kum Boryeong, Lee Dongwoo] As the six-year term limit for outside directors is being enforced starting this year, concerns have been raised that small shareholders may suffer damage as a result. The business community has protested, calling it an excessive infringement on management rights.

Jung Wooyong, Vice Chairman of the Korea Listed Companies Association, said in a phone interview with Asia Economy on the 15th, "Although the six-year term limit for outside directors is implemented under the pretext of protecting small shareholders, it could ultimately backfire and cause harm."

On the 10th, the Ministry of Justice announced that the Ministry of Government Legislation had completed the review of the amendment to the Enforcement Decree of the Commercial Act, which includes the establishment of a term limit for outside directors. The amendment stipulates that if an outside director has served more than six years at the same listed company, or if the combined period of service at the listed company and its affiliates exceeds nine years, they cannot serve as an outside director.

As a result, starting from the shareholders' meeting in March this year, reappointment will be impossible for those who have served as outside directors for more than six years, requiring companies to elect new directors. Vice Chairman Jung pointed out, "Companies that need to replace outside directors have only about a month to prepare, which is insufficient." According to the Korea Listed Companies Association, 566 listed companies will need to elect new outside directors in March this year, totaling 718 new appointments. Among these, mid-sized and small companies account for 87.3% (494 companies) and 85.7% (615 directors), respectively.

In particular, there is a severe shortage of personnel. Vice Chairman Jung explained, "Most outside directors are experts. Since each company has different characteristics, outside directors must be found to match those characteristics. You cannot just appoint anyone like lawyers or professors as outside directors." He added, "Outside directors play a crucial role in important company decisions and must also bear responsibility for those decisions. Because of this, there is a growing tendency nowadays to avoid serving as outside directors."

He believes that if outside directors cannot be found, the damage will be directly borne by the company and its shareholders. Vice Chairman Jung emphasized, "If outside directors are not appointed, it does not end there; the company may be classified as a management oversight company or face delisting due to failure to meet governance requirements." He added, "Although becoming a management oversight company or being delisted is an extreme case, if such a situation occurs, small shareholders suffer the greatest damage." He further stated, "We need to reconsider whether this amendment is realistic and effective."

The business community views this as an excessive infringement on management rights. Kim Hyunsoo, Corporate Policy Team Leader at the Korea Chamber of Commerce and Industry, argued, "Outside directors provide opinions from the perspective of third parties in various fields and decide autonomously according to the company's circumstances. Setting a uniform term limit infringes on this autonomy."

Professor Jang Youngsoo of Korea University Law School also said, "The state limiting the term of outside directors is essentially seen as restricting management rights. If the purpose of the amendment is to restrict inappropriate outside directors and strengthen independence, then inappropriate outside directors should be controlled accordingly. Limiting the term is difficult to see as reasonable."

This content was produced with the assistance of AI translation services.