[Square] Autonomy of Corporate Management on the Edge of a Cliff

Yoo Jeong-ju, Head of Corporate Innovation Team, Korea Economic Research Institute.

Recently, the business environment for our companies has been changing rapidly. The most notable feature is the strengthening of regulations related to corporate governance, such as the Capital Markets Act and the Enforcement Decree of the Commercial Act. It was somewhat anticipated that the current administration would tighten regulations related to corporate governance. From the presidential election pledges, reform of the chaebols was emphasized, and it has traditionally been a staple topic in elections.

The policy approach initially pursued by the current administration for chaebol reform was legislative amendment. Various chaebol reform bills are currently pending in the National Assembly, including amendments to the Commercial Act that strengthen corporate governance regulations such as the introduction of a multiple derivative lawsuit system, mandatory cumulative and electronic voting, and stricter qualification restrictions on outside directors, as well as a complete revision of the Fair Trade Act to strengthen regulations on the ownership structure of corporate groups.

However, the situation in the 20th National Assembly was not favorable for passing these bills. The government chose an alternative approach by revising administrative legislation such as presidential decrees and administrative rules or by mobilizing the National Pension Service. Amendments were made to the Enforcement Decree of the Act on the Aggravated Punishment of Specific Economic Crimes, the Enforcement Decree of the Capital Markets Act, the Enforcement Decree of the Commercial Act, and securities issuance regulations. The National Pension Service even approved guidelines for active shareholder engagement on December 27 last year. Within just a few months, subordinate statutes that significantly impact corporate management were hastily approved and implemented.

Strengthening corporate governance regulations through subordinate statutes raises significant procedural concerns. Among the amendments to the Enforcement Decree of the Capital Markets Act, expanding the National Pension Service’s scope to intervene in corporate management is tantamount to strengthening regulations on core aspects of corporate activities.

The Enforcement Decree of the Commercial Act, which restricts the qualifications of outside directors, is similar. Since this issue involves restricting the constitutional freedom of occupational choice, it must be amended by law.

The impact is enormous in terms of content as well. A total of 712 outside directors of listed companies must be replaced simultaneously at the shareholders' meetings in March this year. Companies are worried about a crisis regarding outside directors. Especially, small and medium-sized enterprises and mid-sized companies will face increased difficulties in finding outside directors. Moreover, since there are few management experts who can serve as outside directors, the proportion of bureaucrats and professors as outside directors is expected to rise. This contradicts the purpose of the amendment to the Enforcement Decree of the Commercial Act, which aims to enhance the independence and expertise of outside directors.

The amended Enforcement Decree of the Capital Markets Act is also likely to have a negative impact on corporate management. This is because the government can intervene in corporate management by utilizing the National Pension Service. This amendment to the Enforcement Decree of the Capital Markets Act is solely for the National Pension Service. In other words, it was designed to make it easier for the National Pension Service to intervene in management, such as replacing executives or requesting amendments to articles of incorporation in companies it has invested in.

The problem lies in the governance of the National Pension Service. The chairperson of the Fund Management Committee, the highest decision-making body of the National Pension Fund, is the Minister of Health and Welfare. Furthermore, vice ministers from key ministries such as the Ministry of Economy and Finance, Ministry of Agriculture, Ministry of Industry, and Ministry of Employment, as well as the chairman of the National Pension Service, attend as ex officio members. It is reasonable to infer that the government can exert decisive influence over fund management.

This structure allows the government to use the National Pension Service to realize specific corporate policies or to steer corporate governance as it desires. Such intervention by the National Pension Service in corporate management not only contradicts its founding purpose of securing citizens’ retirement income but also severely infringes on corporate management autonomy.

When many experts and companies raised doubts about the independence and expertise of the National Pension Service, the government amended the Enforcement Decree of the National Pension Act to address the issues. It improved the system by reorganizing expert committees such as the Trustee Expert Committee and replacing some non-standing members with standing members. However, it did not touch the governance of the Fund Management Committee itself. The core problem of government personnel participation in the Fund Management Committee remains intact.

Recently, unexpected variables such as the novel coronavirus and continuous sluggishness in exports and domestic demand have rapidly worsened the business environment. On top of this, the comprehensive strengthening of governance regulations has put corporate management autonomy on the brink of a crisis. Companies facing both internal and external difficulties cannot see how to overcome this crisis.

Yoo Jeong-ju, Head of Corporate Innovation Team, Korea Economic Research Institute (Ph.D. in Law)

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