Introducing Transparency in

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OECD/KDI Conference Corporate Governance in Asia
Introducing Transparency in Corporate Groups
Korean Context
Panel Discussion by Il-Sup Kim
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Background
Thirty largest business groups (called
Chaebol or Group) occupy 13 of GNP in
1997 - Combined Revenue 401
trillion (U.S.321 billion) - Combined
Assets 421 (
337 ) - Combined Net Loss
3 ( 3
) - Combined Value Added 54
( 43 ) Chairman of
the Group traditionally dominated management,
board of directors and shareholders
meeting Growing criticism over excessive
concentration of economic and management
power by the Group chairman Corporate
governance issue first raised in 1995 by
Committee on Globalization Policy,
followed by policy measures on governance
practice of the Group in 1996
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Background
, Continued
Commitments by Korean government with IMF and
World Bank to improve corporate
governance - Reduction of guarantees of
payment between member companies of
the Groups - Upgrading financial
accounting standards and disclosure requirements
to be consistent with international
accounting standards - Release of
combined financial statements of the Groups
- Outside directors mandatory for public
companies - External auditor selection
committee mandatory for public and
the Group companies - Only
internationally recognized accounting firms may
audit large financial institutions
- Mark-to-market accounting for all
financial institutions D. J. Kims
government reform agenda of the large Groups
- Accelerated implementation of combined
financial statements - Prohibition of
cross guarantees of payment -
Accelerated business restructuring -
Improvement of corporate governance and
transparency in management
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Criticism Over Governance Practice of the Groups
Expropriations by controlling shareholders
Lack of creditors and minority shareholders
influence over corporate governance
Misappropriation of funds Lack of legal
liability by Group chairman and his/her staff
Lack of transparency in management and
external monitoring function Lack of external
discipline over mismanagement Succession of
management rights
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Transparency Issues in Korea
No genuine demand for transparency under Korean
social and business environment, and
current ownership and management structure
External auditors are frequently under
influence of controlling shareholder
Financial accounting standards lack rigorous
interpretation Supervisory authorities often
revised accounting rules for benefit of
financial service industry Korean accounting
standards deviated from internationally
accepted accounting standards Lack of reliance
on financial statements by financial
institutions who based lending decisions more on
collateral and guarantee of payment than
analysis of financial information Lack of
interest in internal control structure and risk
management
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Recent Development
Minority shareholders with more than 0.01
ownership are allowed to file derivative
suit Minority shareholders are entitled to
propose items on the agenda at the general
shareholders meetings Beginning in 1999,
public companies are requested to fill at least
one quarter of the board of directors with
outside directors Public companies with assets
of 100 billion Won or more are required to
appoint at least one full time statutory
auditor Koreas financial accounting standards
have been amended to be substantially
consistent with international accounting
standards, effective January 1, 1999 Thirty
largest business Groups are to file the audited
combined financial statements from the fiscal
year ending December 31, 1999
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Recent Development
, Continued
Financial accounting standards for financial
service industry have been fully upgraded
to be consistent with international best
practices, effective January 1, 1999 Poor
performance of audit is to be subject to
increased review and heavier sanctions
MOFE/World Bank funded studies are underway
- Improvement of auditing profession -
Strengthening regulation and discipline over
audit market - Enhancing the role of the
Korean Institute of CPAs - Introduction
of audit committee - Establishment of
independent standards-setting organization
(KASB)
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Combined Financial Statements
Required of 30 largest Groups Pro forma
financial statements Based on management
control as defined under the Monopoly
Regulation and Fair Trade Act Eliminate
inter-company transactions and substantially
identical to consolidated financial statements,
except that minority interest is not
identified Disclosure of inter-company
transactions, financial information of
individual companies and segment information
Will lose ground when guarantees between member
companies are eliminated
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Suggestions
Anti-corruption legislation should be
strengthened Transactions with related
parties should be strictly regulated,
monitored and disclosed Internal control
structure, internal monitoring system and
risk management system should be strengthened for
public companies and Group companies
Independence and professionalism of statutory
auditors should be secured.
Institutional investors should be more active at
the shareholders meeting
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Suggestions
, Continued
Role and independence of external auditors
should be improved - Auditor change
should be closely monitored and disclosed
- Review of the audit quality should be
reinforced - Heavier sanction on audit
failure - Higher audit fee should be
allowed - Ethical standards and
enforcement thereof should be
strengthened - Reform of self-regulating
organization - Introduction of audit
committee should be considered Private
independent standards-setting organization,
e.g. Korean Accounting Standards Board, should
be established
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Challenges Ahead
Role and power of outside directors
Attitude of government and political circle
Social culture respecting relationship
Enforcement of ethical rules Discipline of
capital and financial market Protection of
whistle blowers Self-regulating ability of
auditing profession
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