Corporate Governance Reform in Korea Improving Listing Requirements and Compliances

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Corporate Governance Reform in Korea Improving
Listing Requirements and Compliances

• November 15, 2006
• Belgrade
• Hasung Jang

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Evolution of Corporate Governance in Asia

• Convergence in regulations has taken place after
  1997 Crisis
• Globally compatible rules and regulations are
  introduced
• New rules and regulations are intended to
• Enhance transparency and accountability
• Strengthen minority shareholders right
• Outside directors and audit committee are
  required in most of East Asian countries

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Corporate Governance Reforms in East Asian
Countries
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Listing Requirements to Improve Corporate
Governance

• Outside Director
• Outside directors should be 25 or more of the
  board
• For large company with asset greater than 2
  trillion won (2.1billion),
• Board should have at least 3 outside directors
• Outside directors should be the majority

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Listing Requirements to Improve Corporate
Governance

• Audit Committee
• Audit committee is mandatory for company with
  asset greater than 2 trillion won (2.1billion)
• Outside directors should comprise 2/3 or more of
• audit committee
• Outside director candidate nomination committee
  is required for large company

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Listing Requirements to Improve Corporate
Governance

• Delisting
• If outside director requirements are not
  maintained for two consecutive years
• If audit committee is not maintained for two
  consecutive years
• Serious violation of disclosure requirements

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New Regulations to Improve Corporate Governance

• Improved Disclosure
• Combined financial statement Top 30 chaebols
• Electronic disclosure system introduced
• Mandatory disclosure for institutional
  shareholders
• Minority Shareholder Rights Strengthened
• More Regulation on Related Party Transactions
• Stricter regulation on capital asset
  transactions
• Cross debt guarantee prohibited
• Limit on Foreign Equity Ownership Removed

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New Regulationsto Improve Corporate Governance

• Increased Liability of Controlling Shareholder
• Fiduciary duty of directors
• Responsibility of shadow director
• Mandatory Compliance Officer
• Investment Trust Co. Mutual Fund
• Integrated Supervision Agency Established
• Financial Supervisory Commission
• Integrated supervision Bank, Securities,
  Insurance
• Corporate Governance Guideline

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Positive Changes in Corporate Governance

• Increased awareness on corporate governance
• Disclosures are more reliable
• Related party transactions decreased
• Investor relation is active
• Emergence of good guys in corporate governance
• Kookmin Bank, POSCO, KT
• Emergence of active institutional investors
• Only few, but a positive direction National
  Pension Fund
• Korea Corporate Governance Fund

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Positive Changes in Corporate Governance

• Shareholder activism brings practical changes
• PSPD Minority shareholder activism since 1997
• Minority shareholders rights are exercised
• Spill-over impact on the public sector
• Transparency in public sector is in demand
• New court rulings sets the standard
• Derivative lawsuit Korea First Bank, Samsung
  Electronics
• Court Ruling against lack of business judgment

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Persistent Problems inCorporate Governance

• Old habits are hardly changing
• Mindset of controlling family is the same
• Persistent moral hazard problems in chaebol
• Enforcement of regulation is not effective
• Finding loop holes in new regulations
• Entrenchment of controlling family
• Circuitous and pyramidal ownership among
  affiliates

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Persistent Problems in Corporate Governance

• Independence of outside director in question
• Over 90 are chosen by controlling shareholder
  Mgt.
• Self dealing of directors
• Capital subsidy through financial institutions
• Cross group subsidy thru affiliated financial
  institutions

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What Will Expedite Changes?

• More Direct Regulations on Corporate Governance
• Independent Board
• Mandatory Cumulative Voting
• Enhancing Accountability of Management
• Security Class Action Suit
• Strengthening Minority Shareholders Right
• Regulation on Cross/Circular ownership
• Enforcement of Regulations
• Voluntary adaptation is rare
• Some regulation should be mandatory

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What Will Expedite Changes?

• Legal System
• Fair and effective court system
• Fair and independent prosecution
• Corporation
• Voluntary adaptation of global standard
• Market
• Pro-active role of institutional investors
• Civil Society
• Active participation in policy making NGOs
• Minority shareholder activism

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Corporate Governance and ValuationCountry
Average PER vs CG Score by CLSA
Taiwan
Hong Kong
Philippines
Thailand
China
Malaysia
Korea
India
Indonesia
Russia
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Corporate Governance and Corruption
Hong Kong
Taiwan
Malaysia
Korea
China
Thailand
Philippines
India
Indonesia