The Korean Commercial Act stipulates that directors shall perform their duties in good faith for the interest of the company.
Financial authorities seek to revise the act by adding shareholders in league with the company. The revision is meant to impose on directors the duty of working for the interest of shareholders as well as for the company. This step is part of the government’s “Corporate Value-Up” program aimed at boosting the Korean stock market.
Lee Bok-hyun, governor of the Financial Supervisory Service, emphasized the necessity for such a new duty in a press briefing Friday.
It reflects domestic stock investors’ claims that the undervaluation of the Korean stock market, dubbed the "Korea Discount,” is attributable to directors’ decisions that go against the interest of minority shareholders.
It is the right direction to try to protect the interest of small shareholders. The necessity for the protection of minority investors has been raised largely by backward corporate customs that prioritize the interest of controlling stockholders. Minority shareholders have frequently suffered losses due to spinoffs benefitting major shareholders, arbitrary business contracts among affiliates controlled by family members of major stockholders, biased merger ratios and the like.
Authorities, however, must listen to the business circle that is worried about a possible surge of stockholders’ litigation against directors over falls in stock prices.
According to a recent survey of 152 listed companies conducted by the Korea Chamber of Commerce and Industry, 52.9 percent said that they would reconsider, scrap or cancel their merger plans if the law is revised.
Takeovers and investment decisions are bound to involve risks. If stock prices fall due to takeovers or investments, directors could face lawsuits from stockholders on charges of breach of duty.
Excessive litigations by shareholders would likely pour cold water on plans to invest in future growth industries where short-term results are uncertain.
Besides, in a situation where interests conflict between major and minor shareholders, and between short-term and long-term investors, it would be practically impossible for the board of directors to make decisions in the interest of the stockholders as a whole.
Lee said that he would like to do away with the crime of breach of trust rather than letting it stay, if he could choose. He argued that punishment for the crime is severe in Korea compared to other countries. His remark was meant to ease concern that shareholder litigations could increase sharply if the Commercial Act is revised to require directors to serve the interest of shareholders.
Public opinion that small shareholders must not be sacrificed for the interest of controlling shareholders turned into a Democratic Party of Korea bill, but it was abandoned when the 21st term of the National Assembly expired in late May.
Then, Rep. Jeong Jun-ho of the main opposition party proposed to the new Assembly a Commercial Act revision bill that includes the “proportional interests of shareholders” in the duty of directors’ loyalty.
Considering that the government and the opposition party speak with one voice on this issue, which is a rare sight amid political standoffs, the law is likely to be revised.
Obviously, breach of trust is a crime to punish, but when it comes to applying it to businesses, caution is required. If directors are held responsible for the consequences of their decisions taken in good faith, management cannot but be withered. The pursuit of personal interest needs to be defined in detail. Exemption of responsibility deserves examination if directors made rational decisions based on sufficient information.
It is unconvincing that Korean stocks are undervalued because the Commercial Act does not stipulate the duty of loyalty to stockholders.
There is more to blame than the lack of such a clause. Opaque governance practices have had a bad influence on the proper roles of directors. Revising the Commercial Act and relaxing conditions for breach of trust are justifiable, but the government and lawmakers must first gather more opinions to prevent side effects.
