7 out of 10 Listed Companies Face Challenges with Separate Election System for Audit Committee Members

Survey of 336 Listed Companies by Korea Employers Federation
68% Facing Difficulties with Separate Election of Audit Committee Members

Seoul Jung-gu Korea Chamber of Commerce and Industry. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Donghoon Jeong] It has been revealed that listed companies are facing difficulties due to various laws and regulations introduced in 2020 to strengthen the independence of audit committees established within the board of directors and to enhance the rights of minority shareholders.

The Korea Chamber of Commerce and Industry conducted a survey titled 'Recent Difficulties in General Shareholders' Meetings and Changes in Shareholder Activities' targeting 336 listed companies, and 68.2% of the listed companies responded that they have 'already experienced or are currently experiencing difficulties due to the introduction of the separate election system for audit committee members.'

Listed companies pointed out the following issues regarding the separate election of audit committee members and the 3% rule: ▲the possibility of rejection of director appointments due to lack of quorum (68.2%) was the most frequently mentioned, followed by ▲the possibility that speculative funds and others may introduce unfriendly individuals into the board of directors (55.7%), and ▲the possibility of management involvement by small shareholders who are more interested in short-term gains or dividend increases than in mid- to long-term investments (42.9%).

A listed company A that responded to the survey said, "With the maximum shareholder voting rights capped at 3%, we are trying to encourage small shareholders to participate in the general shareholders' meeting as much as possible to handle the agenda of appointing audit committee directors, but in reality, most of them show little interest in exercising their voting rights, so there is a risk that the agenda will be rejected." In fact, there were responses complaining that the election of audit committee members was rejected last year due to lack of quorum, as in this company.

Regarding this, a representative from the Korea Chamber of Commerce and Industry added, "The separate election of audit committee members and voting rights restrictions are regulations not found in other advanced countries, infringing on the basic principles of stock companies and imposing additional burdens on domestic companies."

88% of Listed Companies Say 'Preparing for General Shareholders' Meetings Is More Difficult Than Before'

Due to increased openness of information such as the prior provision of business reports, phased mandatory ESG disclosures, and increased information requests from small shareholders, the administrative burden that corporate practitioners must bear during the preparation process for general shareholders' meetings has increased compared to the past.

When asked about the workload related to preparing for general shareholders' meetings compared to the past, 88.4% of respondents answered that "it has become more difficult than before," while only 11.6% said "there is no significant change."

The reasons for the increased difficulty in preparing for general shareholders' meetings were cited as ▲the obligation to provide business reports before the meeting (59.2%), ▲the continued spread of COVID-19 (49.7%), and ▲expanded shareholder rights activities such as shareholder activism (33.9%).

Regarding the obligation to provide business reports in advance, which entered its second year of enforcement, listed companies expressed difficulties at the frontline. The obligation requires companies to finalize business reports and audit reports and provide them to shareholders at least one week before the regular general shareholders' meeting, and it has been enforced since last year.

Listed company B said, "We have to finalize the reports earlier, which shortens preparation time and process, increasing the burden, and the possibility of subsequent correction disclosures has also increased, making the workload heavier," expressing their difficulties.

Ongoing Difficulties Due to COVID-19... 81% Willing to Use Non-Face-to-Face General Shareholders' Meeting System if Introduced

It was found that difficulties due to the prolonged COVID-19 pandemic are continuing. 49.7% of respondent companies cited the spread of COVID-19 as the second most significant reason making preparation for general shareholders' meetings difficult.

In a survey asking about specific difficulties, ▲lack of a system for non-face-to-face (online) general shareholders' meetings (51.6%) was the most frequently mentioned, followed by ▲delays in settlement and external audit schedules due to COVID-19 (44.6%), and ▲difficulty securing venues due to social distancing and quarantine measures (37.8%).

Under the current Commercial Act, general shareholders' meetings must be held face-to-face at the company's head office location or an adjacent area, making full non-face-to-face or online meetings impossible. However, hybrid offline-online meetings are possible by operating an electronic voting system in parallel, but electronic voting is only allowed until the day before the general shareholders' meeting, so voting online on the day of the meeting is not permitted.

When asked if they would be willing to use a non-face-to-face (online) general shareholders' meeting system if institutionalized, 81.0% of respondent companies answered affirmatively.

In this regard, a bill to amend the Commercial Act is currently pending in the National Assembly, which would allow the location of the general shareholders' meeting to be decided by the board of directors' resolution and enable shareholders to participate electronically without physically attending.

61% of Listed Companies Say National Pension Service's Strengthening of Shareholder Activities Should Be Approached Cautiously

Listed companies feel that shareholders' voices are growing louder and that active shareholder rights exercises are increasing. Compared to the past, listed companies identified the following shareholders as showing more active movements: ▲small shareholders (55.7%), ▲institutional investors (39.9%), ▲pension funds (37.8%), and ▲activist hedge funds (26.8%).

Regarding specific shareholder activities, small shareholders frequently requested meetings with management (29.2%), exercised opposing voting rights (28.6%), and requested company information such as shareholder registers (22.3%). Institutional investors frequently exercised opposing voting rights (22.6%), requested company information such as shareholder registers (14.6%), and sent shareholder letters (12.5%).

Regarding the strengthening of shareholder rights exercises, listed company C said, "There has been a sharp increase in small shareholders demanding various corporate information disclosures both online and offline, and with the strengthening of shareholder activism, cases of institutional investors such as the National Pension Service sending shareholder letters are also increasing."

Regarding the National Pension Service's recent moves to strengthen shareholder rights, such as transferring representative lawsuit decision authority (from Fund Management Headquarters to the Stewardship Responsibility Committee), 61.3% of listed companies responded that "it should be approached cautiously as it may be influenced by political and social interests."

Kim Hyun-soo, Director of Economic Policy at the Korea Chamber of Commerce and Industry, said, "Recently, more companies are using general shareholders' meetings as a platform for substantive communication rather than just a rubber-stamp meeting as in the past. Since burdens on listed companies are increasing due to Commercial Act provisions that do not align with global standards, we hope the next government will rationally improve the system in a way that does not burden business activities."

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