Korea’s outside directors suffer credibility gap

Board directors have been a crucial part of the corporate management system, monitoring companies and executives to ensure they are operating fairly and transparently.

Outside independent directors have been especially relied upon and placed alongside inside directors to help and guide the decision-making process in the interest of shareholders to avert stock price losses or any other value depreciation.

Korea implemented the outside director system in the aftermath of the 1997-98 Asian financial crisis, when a number of companies faced collapse in part due to a lack of transparency and poor governance, as well as aggressive expansion that relied on over-leveraging.

The so-called “Korean Discount” was coined by foreign investors because of such practices.

Things have, without doubt, improved in Korea, analysts said, since the adoption of the outside independent director system. Various corporations saw their credit ratings climb while the notion of the Korean Discount, or chaebol discount, has lessened somewhat.

However, analysts said that companies have not yet fully established independent board systems as they still bring in outsiders with whom chief executives, chairmen or owners had previous relations.

“Korean outside directors, who are supposed to be fully independent, remain in the ‘influential shadow’ of corporate executives or insiders,” said Lee Su-jeong, a researcher at the Economic Reform Research Institute. ERRI has issued six reports analyzing Korea’s board system.

Although having independent outside directors at corporate boards is not a panacea, they do have a positive effect, for instance, on companies’ stock prices and brand value as those outside board members improve transparency and governance, said the Corporate Governance Service, citing various studies.

However, other data show that it is more effective for companies, for instance, that are highly focused on technology research and development for operations to have insiders lead the board as they have more specific knowledge and expertise than outsiders.

Listed companies are required by law to have 25 percent of their boards consist of outside independent directors. However, this can differ in accordance with corporate asset size.

If a company has assets of over 2 trillion won, outsiders must take more than half of the board or committee seats. Generally, there are one to two outside director seats at a table for a total of six on average per company board, according to the CGS.

There were about 800 outside directors at 250 listed subsidiaries and affiliates of 51 business groups as of last year, according to ERRI.

About 30 percent of them were “friendly outsiders” or yes men, meaning that they had a close relationship with insiders on the board and rarely opposed any management agenda set before them.

They might have built their relationship while going to the same university, or could be from companies with which insiders have strategic business partnerships. Other friendly outsiders are executives from subsidiaries and lawyers that represented insiders in the past.

About 30 percent of outside directors in Korea have been management-friendly over the last six years, but analysts said this could be higher as there could be outsiders who have family ties with inside executives.

This is the reason Korea’s outside director system is still being criticized over its professionalism and independence, said the CGS in a report.

“Overall, the most important factor that brings up the flaws (in the system) is that a majority of outside directors are being recommended and appointed by top executives of companies,” researchers at the CGS said.

Lee of ERRI said that there has not been significant change at top conglomerates’ outside director system with most major renowned business groups such as GS, Doosan and Samsung still having a large number of friendly outsiders.

State-run companies that had been privatized such as KT&G, POSCO and Korea Gas Corp., or companies with no major shareholders or owners may have run sound outside director systems.

But analysts said that it is hard to pick one solid company that has been shown to run a board consisting completely of independent directors.

They said that laws concerning board directors should be further strengthened and standardized to boost their independent monitoring functions.

By Park Hyong-ki (hkp@heraldcorp.com)