"Public Interest Corporations Ensuring Owner Independence Must Review Governance Models"

Ownership-Control Controversy, Succession Difficulties Persist
Preliminary Improvement of Public Interest Corporation Regulations Needed

[Asia Economy Reporter Choi Seoyoon] There is a claim that public interest corporations, which have been criticized for being exploited in the ownership structure of owner families, can rather be utilized as a rational alternative to strengthen corporate governance. It is argued that this is entirely possible if they are thoroughly independent from the owners and are given obligations to faithfully carry out public interest activities. However, it is pointed out that they must have self-regulatory capabilities to prevent owners from 'self-appointing' as chairpersons.

The Korea Chamber of Commerce and Industry (KCCI) held the 8th Fair Competition Forum on the 8th at the KCCI building in Jung-gu, Seoul, under the theme "Corporate Public Interest Corporations, Seeking New Corporate Governance Models in the Era of Great Transformation."

Experts on the panel included Professor Emeritus Choi Jun-sun of Sungkyunkwan University, U.S. attorney Lee Seok-jun of Yulchon LLC, Professor Oh Yoon of Hanyang University, Advisor Kim Hyun-jong of Kim & Chang Law Office, and Professor Jang Bo-eun of Hankuk University of Foreign Studies. Economic panelists included Woo Tae-hee, Executive Vice President of KCCI, Lee Hyung-hee, SV Committee Chair of SK Supex Council, and executives in charge of fair trade in major companies.

"A Time for a New Model"

Professor Emeritus Choi Jun-sun, who gave the keynote presentation, compared the past and present of Korean corporate governance, explaining, "Since the 1990s, Korean corporate governance has undergone remarkable changes such as ▲resolution of cross-shareholding ▲control through holding company systems ▲operation of outside directors and various internal committees."

He continued, "Since corporate governance varies by country and there is no clear global standard, domestic policy has encouraged transition to holding company systems. At this point, where corporate sustainability and ESG (Environmental, Social, and Governance) practices have become important issues, it is necessary to explore new corporate governance models such as the public interest corporation system."

In fact, after the 1997 foreign exchange crisis, the government encouraged transition to holding company systems for simple and transparent ownership structures. Currently, among 76 publicly disclosed business groups, 29 have transitioned to holding company systems, owning 43 holding companies.

U.S. attorney Lee Seok-jun of Yulchon LLC stated, "Over the past 20 years, the ownership and control structures of large business groups have not significantly improved. Looking at the top 10 groups with owners, the ownership stake held by the owner families in the entire business group has been decreasing (3.1% in 2004 → 2.4% in 2022), while the internal ownership through affiliate investments, which is a form of fictitious capital, has been increasing (47.1% in 2004 → 59.1% in 2022)."

Professor Jang Bo-eun of Hankuk University of Foreign Studies said, "Considering the recent importance of ESG management, the establishment of corporate public interest corporations is expected to increase, and discussing the public interest corporation system in terms of expanding corporate public interest activities is desirable. However, since public interest projects must remain central, there are limitations to using corporate public interest corporations as a governance model."

"'Reverse Discrimination' Regulation on Holding Companies... Governance Improvement Fails and Corporate Value Declines"

Professor Choi Jun-sun cited the limitations of the holding company system, the Korea Discount, and difficulties in corporate succession as reasons why alternatives in corporate governance are needed.

He said, "Increasing reverse discrimination regulations applied only to domestic holding companies are weakening the global competitiveness of our companies. The Korea Discount issue, argued by some due to concentrated benefits to controlling shareholders and lack of trust in asset management companies leading to stewardship code failures, continues. Considering excessive tax policies threatening corporate sustainability, it is necessary to consider the well-operating corporate public interest corporation system overseas as a governance model."

KCCI explained that domestic companies face a structure where the founder's 100% ownership stake sharply decreases to 40% in the second generation, 16% in the third generation, and 6.4% in the fourth generation, making corporate succession virtually impossible. This is an arithmetic calculation considering the inheritance tax rate reaching up to 60% including the premium valuation of major shareholder stocks.

In Sweden, when inheritance tax sharply increased from 20% to 60% in 1948, corporate ownership was transferred to public interest foundations to ensure corporate sustainability. The Wallenberg family in Sweden has operated a governance structure owning more than 100 subsidiaries through corporate public interest foundations. They have grown their business over five generations for 150 years through social service and dedication.

Professor Jang said, "It should be considered that public interest corporations were originally designed not for governance purposes but to encourage private sector public interest projects. A cautious approach is needed regarding the idea that corporate public interest corporations can replace holding companies."

"Need to Improve Public Interest Corporation Regulations"

Professor Choi argued that to utilize corporate public interest corporations as a new paradigm in governance, three regulatory improvements must precede: ▲abolition of voting rights restrictions under the Fair Trade Act ▲increase in tax exemption ratios under inheritance and gift tax laws ▲supplementation of merger provisions under the Public Interest Corporation Act. He especially emphasized, "The voting rights regulation on public interest corporations, which will be enforced from the end of this year, is a regulation that fundamentally blocks the emergence of new governance models, so it is desirable to abolish it."

Professor Jang pointed out, "Since there are cases where public interest corporations are abused to form or strengthen control rather than for their original public interest purposes, it is difficult to exclude the practical necessity of regulations on public interest corporations."

Meanwhile, U.S. attorney Lee Seok-jun said, "Under the premises of independent operation from the owner family, alignment with the founding purpose, and faithful execution of public interest projects, corporate public interest corporations can be considered as a new ownership and control alternative. However, considering the reality of owners appointing or dismissing chairpersons and using them as means to maintain control or succession, it is still premature."

Woo Tae-hee, Executive Vice President of KCCI who chaired the discussion, said, "So far, biased views on corporate public interest corporations have led to regulation-heavy policies. In this era of great transformation, it is time to open new discussions that allow companies to strengthen social contribution activities through public interest corporations while simultaneously utilizing them as ownership and control structures."

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