FKI "There Are 5 Key Issues in the Profit-Sharing System, Careful Review Needed"

[Asia Economy Reporter Kim Hyewon] The Federation of Korean Industries (FKI) has called for careful consideration regarding the 'COVID-19 Profit Sharing System' being promoted mainly by the political sphere.

On the 17th, the FKI released a document titled 'Five Issues of the Profit Sharing System,' stating that discussions about the profit sharing system are increasing uncertainty in the corporate environment.

The COVID-19 Profit Sharing System proposed by Lee Nak-yeon, leader of the Democratic Party of Korea, on the 11th, is said by the FKI to have five key issues: ▲unclear profit calculation ▲infringement on shareholder equity ▲possible judicial punishment of management ▲fairness with foreign companies ▲weakening of growth incentives.

The justification for the COVID-19 Profit Sharing System starts from the assumption that profit increases due to COVID-19 are clear. However, it is practically impossible to define corporate performance caused by COVID-19. This is because a company's profits and losses are determined by various factors beyond the COVID-19 situation, such as the global economy, product competitiveness, marketing capabilities, market trend changes, business conditions, and exchange rates. It is difficult to judge whether each company's profit is due to COVID-19 or other factors. Even if there is a correlation with COVID-19, it is even more difficult to determine the extent, according to the FKI's assessment.

Currently, the targets for profit sharing include large semiconductor and home appliance companies, as well as platform and non-face-to-face companies such as Naver, Kakao, and Baedal Minjok. The FKI cited the electronics industry as an example, stating that if these companies had not made prior investments in facilities and research and development (R&D) to prepare for the future, they would have been eliminated from competition rather than benefiting from COVID-19. In fact, leading domestic IT companies have experienced negative sales growth but maintain a high rate of increase in R&D investment. The increase in online platform sales cannot be explained without considering the distribution trend of shifting to online shopping before the outbreak of COVID-19. This is why there is an opinion that discussing only the COVID-19 special is inappropriate.

Next, there is a view that the profit sharing system may infringe on shareholders' property rights. The performance sharing system, which is already widely implemented by large companies based on the Win-Win Cooperation Act, is a system that shares the results of joint cooperation between large companies and partner companies, such as new product development, productivity improvement, and cost reduction. In contrast, the current profit sharing system is a concept of sharing the profits of large companies, non-face-to-face, and platform companies benefiting from COVID-19 with small and medium-sized enterprises and small business owners who are suffering losses.

In a capitalist society, shareholders are claimants of residual income generated from corporate activities, meaning they are entitled to the net profit remaining after paying the rightful compensation for the inputs necessary for production. The FKI pointed out, "If a portion of corporate profits that could be returned as dividends goes to companies or small business owners unrelated to the company, it directly infringes on shareholders' interests." There are also concerns that additional litigation risks for companies may increase, given that many systems making corporate management difficult, such as derivative lawsuits and strengthening of minority shareholder rights, have recently been introduced.

Even with good intentions, if corporate profits are arbitrarily divided, management could face civil and criminal liability. In fact, the Supreme Court precedent states that when a director resolves to make a donation, failure to sufficiently review all conditions such as the nature of the donation, its impact on the company's purpose and public interest, the appropriateness of the amount, and the relationship between the company and the donation recipient constitutes a breach of fiduciary duty.

There is also a risk of reverse discrimination against foreign companies. The current COVID-19 Profit Sharing System is likely to apply only to domestic companies, excluding related foreign companies such as YouTube, a video platform, and Netflix, a leader in online video services (OTT). This is to avoid becoming embroiled in international disputes. The domestic industry has already been voluntarily promoting win-win activities with small business owners suffering from COVID-19 difficulties, such as returning advertising fees, reducing commissions, and providing technical support. If the profit sharing system is additionally promoted, it could act like a quasi-tax limited to domestic companies, creating an uneven playing field with foreign companies. Domestic companies would inevitably be at a greater disadvantage in competition with foreign companies that already hold overwhelming market shares.

Finally, the FKI believes that the profit sharing system could weaken companies' profit-seeking and innovation incentives. The essentially compulsory profit recovery method dampens companies' motivation to pursue profits. American economist Ludwig von Mises criticized the profit sharing system in his book Socialism as a socialist system that reduces the efficiency of the market economy.

The FKI pointed out, "Existing voluntarily promoted win-win activities may shrink or be traded off for a uniform method demanded by the political sphere."

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