Corporate Governance for Both Innovators and Common Shareholders

Nam Gil-nam, Director of Capital Markets Office, Korea Capital Market Institute

At the end of October, Tesla became the first automobile company to join the $1 trillion market capitalization club, rising to the ranks of the world's top companies. However, even Tesla, which is doing so well, failed to pass two corporate governance proposals reintroduced by the board of directors after two years at the regular shareholders' meeting on October 7. This shows that even top-tier companies find it difficult to improve corporate governance. When Tesla went public on NASDAQ in 2010, it did not adopt dual-class voting rights, which had been popular among tech companies starting with Google. Instead, under the rationale of not being swayed by short-term profits, Tesla's articles of incorporation specified a staggered board term system that divided the expiration of all directors' terms into three segments, ensuring that no more than one-third of the directors could be replaced at once. Furthermore, a supermajority voting system was maintained, requiring two-thirds of all issued common shares to approve any amendments to the articles of incorporation. Elon Musk also concurrently served as the chairman of the board, composed of the CEO and directors friendly to him.

However, Tesla's corporate governance issues arose not from persistent short-sellers or competitors aiming for hostile takeovers, but from within the company itself. In August 2018, Musk mentioned the possibility of Tesla going private via social media, which led to regulatory sanctions and a sharp drop in the stock price. Ultimately, Tesla decided to settle the legal dispute with financial authorities early and improve corporate governance. Musk immediately stepped down as chairman of the board, and two independent directors were newly elected. At the regular shareholders' meeting, Tesla proposed shortening directors' terms to two years to allow half of the board to be replaced and abolishing the supermajority voting system that made amending the articles difficult. However, despite receiving absolute approval from over 99% of shares present at the 2019 shareholders' meeting, the proposals failed to secure the required two-thirds of all issued shares. The proposals were again rejected at this year's shareholders' meeting, leaving shareholder-friendly corporate governance improvements incomplete.

In fact, Tesla's corporate governance issues are not unique to the United States. Among domestic listed companies, the number adopting golden parachute provisions in their articles of incorporation?which require huge severance payments to directors who must step down mid-term due to supermajority voting systems or hostile takeovers?is increasing every year, exceeding 380 companies. However, unlike Tesla, these are mostly small- and mid-sized KOSDAQ companies, accounting for over 80%. Some companies even require 90% approval of issued shares or pay hundreds of billions of won to directors stepping down due to hostile takeovers, leading to growing collective opposition from ordinary shareholders.

The adoption of management rights protection provisions in the articles of incorporation of domestic listed companies is continuously increasing, especially among KOSDAQ companies where individual investors predominate. The conditions are often one-sided in favor of controlling shareholders to the extent that corporate value is impaired, which is concerning from the perspective of improving corporate governance. As seen in Tesla's case, when the corporate environment changes after adopting such provisions, efforts by management to reform may be hampered by overly stringent resolution requirements when attempting to repeal them.

Of course, behind the adoption of management rights protection provisions lies the desire of entrepreneurs to manage their companies stably from a long-term perspective. Therefore, in Korea as well, social discussion and consensus are needed on corporate governance measures that protect the interests of ordinary shareholders while not infringing on the management activities of innovators.

Nam Gil-nam, Director of Capital Markets Division, Korea Capital Market Institute

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