Government Pushes Ahead with Term Limits for Outside Directors and Eases 5% Rule... Turmoil Expected from This Year's General Meetings

Despite fierce opposition from the business community, the government has decided to proceed with limiting the term of outside directors to six years and easing reporting obligations related to institutional investors holding more than 5% of shares.

On the 21st, the government reviewed and approved amendments to the Enforcement Decrees of the Commercial Act and the Capital Markets Act containing these provisions at the Cabinet meeting. Once the amendments pass the Cabinet meeting, they are expected to be implemented from early February after presidential approval.

The amendments stipulate that anyone who has served as an outside director for more than six years at a listed company, or more than nine years including affiliated companies, cannot serve again as an outside director at the same company. The verification process for executive appointments has also been strengthened. Previously, only information such as transaction history between the candidate and the company was disclosed, but the amendments mandate disclosure of personal career details such as tax delinquency and whether the candidate has served as an executive at a failing company.

Additionally, the means of authentication for electronic voting have been diversified to include mobile phone and credit card authentication. The agenda to mandate submission of business reports and audit reports before convening the general shareholders' meeting has been postponed by one year, considering concerns that important decisions not finalized at the shareholders' meeting would be included in the business report.

Initially, the Ministry of Justice had considered a one-year postponement of these laws in response to business groups' requests to repeal some provisions on outside director term limits and business report submission notifications for shareholders' meetings. However, after Minister Choo Mi-ae took office, the Ministry of Justice reportedly decided to proceed with the amendment to the Enforcement Decree of the Commercial Act on outside director term limits as is. In this context, some speculate that the Blue House and the ruling party may be positioning pro-government figures to be actively recruited by companies as outside directors.

A Ministry of Justice official stated regarding the outside director term limit system, "We listened to opinions from various institutions and went through a review process," adding, "Since the average number of new outside directors per company per year was about 1.3, it was found that the number of outside directors to be appointed after the amendment would be similar to usual levels, so we believe there will be no confusion among companies."

However, the business community is expressing difficulty, saying the government is pushing ahead with a decision that does not reflect the realities of companies. In fact, if the amendments are applied, 566 listed companies will need to appoint new outside directors by March this year, with an estimated 718 outside directors to be appointed. This raises concerns about a shortage of outside director personnel.

The situation is even more serious when looking at individual companies. According to CEO Score, an analysis of the tenure of 853 outside directors at 26 listed companies within 59 major conglomerates found that a total of 76 outside directors must step down at this year's shareholders' meetings. Samsung and SK each need to appoint six new outside directors, while LG, Youngpoong, and Celltrion each need to appoint five new outside directors. In particular, Celltrion faces the most urgent situation among individual companies, as five out of six outside directors must be replaced at the March shareholders' meeting.

A business community official pointed out, "Recently, outside director positions have been increasingly filled by accounting experts due to the emphasis on financial transparency," adding, "Forcing a simultaneous replacement in a limited pool of outside directors with such expertise could lead to gaps in the board of directors."

An official from a listed company said, "While large companies might manage, small and medium-sized enterprises will face significant difficulties securing personnel due to a limited talent pool and relatively low compensation."

Regarding the easing of reporting obligations related to institutional investors holding more than 5% of shares under the amended Enforcement Decree of the Capital Markets Act, there are criticisms that it only increases the possibility of management intervention by the National Pension Service. Previously, demands for amendments to articles of incorporation affecting the board of directors, governance, and dividends of listed companies were classified as activities aimed at influencing management rights, requiring detailed disclosure within five days. However, the amendment excludes such activities by public pension funds like the National Pension Service from being classified as activities aimed at influencing management rights, allowing simplified reporting of only major details within one month.

A Financial Services Commission official stated, "The 5% rule is a disclosure system triggered by changes in shareholding, not by shareholder activities themselves, so we believe there is no problem with this amendment."

The Korea Employers Federation previously criticized, saying, "This increases means for the government, civic groups, and political circles to interfere in corporate management," and added, "Easing the 5% rule is a matter for amending higher laws and opens the door for speculative capital to attack management rights."