[Editorial] Dispute on commercial law

A dispute has been intensifying over the bill introduced by the main opposition party aimed at revising South Korea’s commercial law as top officials voice conflicting views and the business community expresses strong opposition to the proposed amendment.

The controversy started early this year as President Yoon Suk Yeol said that the government would push for an amendment to the law so that “boards of directors can reflect the interests of minority shareholders in a responsible way.”

At the heart of the issue is the Korean Commercial Act, which currently stipulates that directors must perform their duties in good faith in the interests of the company. The revision will expand the fiduciary duty of directors from the company to shareholders.

The proposed inclusion of shareholders’ interest in the clause of the Commercial Act may appear logical and reasonable. Executives are supposed to act in a way that protects and boosts the interests of shareholders, whether they are major or minor -- a sort of common sense in the global business community.

But it is not a simple issue in South Korea, where large family-controlled conglomerates have often conducted business focused entirely on the interests of a small number of controlling shareholders. As a result, minority shareholders have been impacted by unilateral business decisions on mergers, spinoffs and contracts made in the name of “the company.”

Such practices, linked to opaque corporate governance at Korean firms, are naturally cited as a key reason for the undervaluation of Korean stocks, known as the “Korea Discount.” The Yoon administration has sought to address this chronic problem as part of its “Corporate Value-Up” program to shore up the Korean stock market.

But not all government officials support the idea. A striking example is the comment made Sunday on a TV program by Kim Byung-hwan, chairman of the Financial Services Commission. Kim said corporate governance should be made more transparent, but more discussions are needed to see whether the revision to the Commercial Act should be implemented.

In outlining the potential drawbacks anticipated from the proposed amendments to the Commercial Act, Kim expressed several concerns: the potential for an increase in frivolous lawsuits by minority shareholders, delays and heightened uncertainty in corporate decision-making, excessive demands and hostile moves from foreign speculative capital, and the likely waste of company resources in defending against such threats.

As an alternative to revising the Commercial Act, Kim proposed amendments to the Capital Markets Act to better achieve shareholder protection. He said, “Governance issues have been raised in the context of mergers and demergers, and we need to address these through tailored institutional improvements.”

Kim clearly has a point, but the problem is that his perspective is not aligned with Lee Bok-hyun, the governor of the Financial Supervisory Service, who has called for the revision to the Commercial Act on many occasions.

Given that the two financial authorities represented by Kim and Lee are supposed to work together and voice a unified position on key issues, Kim’s latest remark suggests a split in opinion even among key financial policymakers on the revision led by the main opposition Democratic Party of Korea.

In a related development, the presidents of 16 major companies issued a joint statement on Thursday opposing the proposed revision of the Commercial Act. In the statement, they claimed that the changes would hinder the operations of boards of directors, citing an increase in lawsuits and attacks from foreign speculative investors. Critics, however, countered that if directors refrain from acting solely in the interests of controlling shareholders at the expense of minority shareholders, lawsuits are unlikely to arise in the first place.

Given the potential impact of the revision, the Yoon administration has to address conflicting views within the financial authorities, gather more opinions and seek cooperation with the main opposition party.