[Value-Up Success Factors] ① 'Value-Up Keymen' Board of Directors... In Reality, 4 out of 10 Are from Academia

Government Value-Up Policy Emphasizes Board Responsibility
Dual Role in Decision-Making and Management Oversight
US Dally... Calls for Strengthening Expertise and Independence of Korean Outside Directors

Editor's NoteThe corporate value-up program has been unveiled. It is a policy promoted at the pan-government level to resolve the 'Korea Discount' (undervaluation of the Korean stock market). The key is to provide incentives without penalties to encourage voluntary participation by listed companies. The market expresses disappointment over tax support and doubts the success of the corporate value-up program. Is that really the case? Capital market experts emphasize that the success of the corporate value-up program depends not on tax policy but on the 'will of the listed companies.' The return on equity (ROE) of domestic companies is similar to that of Japan, but the dividend payout ratio is about 10% lower than Japan's. Unlike U.S. CEOs who meet shareholders directly, Korean listed companies hold formal investor relations (IR) meetings. It is not the listed companies that should demand incentives but that they should respond. It is now time for listed companies to promise shareholders through disclosures what and how they will do to enhance corporate value.

One of the key points emphasized by the government in the 'value-up policy' is the responsibility of the board of directors. A stable decision-making structure is essential for sustainable corporate growth. This is why the role of the board, which is both a decision-making and management oversight body, is more important than anything else. However, in Korea, the board is often viewed negatively, such as being called a 'rubber-stamp board.' In fact, 4 out of 10 outside directors of domestic listed companies are current or former professors, and many come from powerful institutions such as the prosecution, legal circles, and the National Tax Service. This is why voices are calling for internal changes and legal and institutional improvements to strengthen the expertise and independence of corporate boards in Korea.

"Contrast with the U.S., where 80% of Outside Directors Are Business Executives"

According to the '2023 Board Trends Report' published on the 13th by the Samil PwC Governance Center, among 967 outside directors of 267 large non-financial listed companies in Korea, 40% are current or former professors. The second largest group is business executives (21%), followed by law firms (19%). The 2022 report also showed academia at 38% as the top group, with law firms (21%) and business executives (11%) following similarly.

Many individuals from academia or law firms are presumed to be former government officials. For example, Samsung C&T nominated Kim Kyung-soo, former Daegu High Prosecutor (lawyer at Yulchon LLC), as an outside director candidate; Samsung Fire & Marine Insurance nominated Sung Young-hoon, former chief prosecutor and former chairman of the Anti-Corruption and Civil Rights Commission (lawyer at Bae, Kim & Lee LLC). Hanwha Aerospace nominated Jeon Hyu-jae, former Seoul High Court judge (professor at Sungkyunkwan University Law School), and Lotte Himart nominated Hong Dae-sik, former Seoul District Court judge (professor at Sogang University Law School) as outside directors. According to an analysis by the Corporate Analysis Research Institute Leaders Index of shareholder meeting convocation resolutions for 71 companies that recommended new outside directors by March 4 among 237 affiliates of the top 30 groups by sales in 2024, 39.8% (41 out of 103) of newly recommended outside directors have experience in the prosecution, courts, National Tax Service, Ministry of Trade, Industry and Energy, Financial Services Commission, Ministry of Economy and Finance, Ministry of Land, Infrastructure and Transport, etc.

In contrast, the situation in the U.S. is different. According to a 2023 report by management consulting firm Spencer Stuart, among 388 newly appointed independent directors (outside directors) of S&P 500 companies, 30% were current or former CEOs, the largest group. Financial executives such as CFOs, investment bankers, investment managers, and accounting firm professionals accounted for 27%, individual department heads 16%, P&L (Profit & Loss) leaders 10%, and chairpersons, chairmen, and COOs 4%. Nearly 90% (87%) are from business-related backgrounds. For example, in the boards of global companies like Apple and Microsoft (MS), 80% of outside directors are former CEOs.

The difference is explained by companies as due to Korea's shorter corporate history and smaller market size compared to the U.S. and Japan. A business official said, "In the U.S., because companies have a long history, there is a rich pool of outside directors from business backgrounds. On the other hand, Korea has a much more conservative corporate culture than the U.S., and the market is much smaller, so there are many from the same industry, making it burdensome to bring in directors from competitors." He also explained that confidentiality clauses required by companies for retired executives are another constraint.

Governance experts pointed out that the demand for global experts is directly linked to the board's expertise and management capabilities. Namwoo Lee, chairman of the Korea Corporate Governance Forum, said, "Not only in the U.S. but also in Japan, companies that recently pay attention to governance try to bring in industry experts from overseas if they cannot find them domestically," adding, "This is because objective advice and coaching for the company are possible only then." Professor Kyung-seo Park of Korea University Business School said, "Professors or former bureaucrats may have expertise in specific areas such as accounting and supervision, but often lack expertise or experience in overall corporate decision-making," and added, "If we broadly consider bringing in professional managers who have run other companies, even if not from the same industry, there should be no major constraints in the pool of outside directors."

"Need for Figures Who Can Represent Interests of Ordinary Shareholders, Not Major Shareholders"

There are also calls for appointing individuals who can represent the interests of ordinary shareholders rather than major shareholders to ensure substantive, not just formal, board independence. In fact, domestic activist funds included outside director appointments in shareholder proposals at shareholder meetings in March this year. These include Taekwang Industrial (Truston Asset Management), JB Financial Group (Align Partners Asset Management), Kumho Petrochemical (CHA Partners Asset Management), and Daol Investment & Securities (Presto Investment Advisory). Among them, Taekwang Industrial is a representative case where activist funds achieved results. Taekwang Industrial approved the appointment of outside director candidates Kim Woo-jin and Ahn Hyo-sung and inside director candidate Jung An-sik, proposed by Truston Asset Management. This was thanks to continuous shareholder activism since the initial share purchase. Align Partners Asset Management recommended five director candidates at the JB Financial Group regular shareholder meeting held on March 28, with Kim Ki-seok and Lee Hee-seung appointed as outside directors.

Professor Park said, "Legally, domestic boards meet independence requirements, but some outside directors have a weak sense of fiduciary duty," adding, "Monitoring of important decisions related to transactions between affiliates or controlling shareholders should be properly conducted, but this is not well done internally, and regulation through civil lawsuits is difficult." Lee Chang-hwan, CEO of Align Partners Asset Management, said, "Although Korea has an outside director system, major shareholders control appointment rights and recommend people who are comfortable and friendly to the president or major shareholders," and raised his voice, "No matter how formally independent outside directors are appointed, they cannot speak frankly. If they strongly oppose company proposals, rumors spread in the industry, and they cannot be recommended as outside directors anywhere, making it impossible to perform their duties with conviction."

There are also suggestions that specialized education is needed to improve the financial literacy of board members. Currently, most Asian countries including Hong Kong, Singapore, Malaysia, Thailand, and Japan operate associations called 'Institute of Directors.' Chairman Lee said, "In the value-up policy process, value indicators must be selected, and the board that decides this must properly understand the content to make correct judgments." Jamie Allen, former secretary-general of the Asian Corporate Governance Association (ACGA), also said in an interview with Asia Economy, "For the value-up program to succeed, education on financial management and profitability is necessary for board members," and added, "All participants in the board, including senior executives and internal and external directors, must receive education."

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