Forced Relaxation of Outside Director Term Limits and 5% Rule...Major Chaos from This Year's General Meeting of Shareholders

Deliberation and Resolution on Commercial and Capital Markets Laws
Enforcement from Next Month, Strengthened Verification Procedures
Job Postings Unavoidable for 566 Listed Companies

[Asia Economy Reporter Ji-hwan Park] Despite fierce opposition from the business community, the government has ultimately pushed forward with limiting the term of outside directors to six years and easing reporting obligations related to institutional investors holding more than 5% of shares. As a result, this year's shareholder meeting season is expected to be chaotic due to the shortage of outside director candidates at listed companies and the National Pension Service's active exercise of shareholder rights.

On the 21st, the government deliberated and approved amendments to the Commercial Act, Capital Market Act, and National Pension Act enforcement decrees containing these provisions at the Cabinet meeting held that morning. After presidential approval, the amendments to the Commercial Act and National Pension Act will take effect immediately upon promulgation, while the Capital Market Act enforcement decree will be enforced starting next month on the 1st.

According to the amendments to the Commercial Act, a person who has served as an outside director at a listed company for more than six years, or more than nine years including affiliated companies, cannot serve again as an outside director of the same company. The verification process for executive appointments has also been strengthened. Previously, only information on transactions between the candidate and the company and their relationship was disclosed, but the amendment mandates the inclusion of eligibility details such as the candidate's tax delinquency and whether they have served as an executive at insolvent companies.

For electronic voting, identity verification methods have been diversified to include mobile phone and credit card authentication. The agenda item mandating the submission of business reports and audit reports before convening shareholder meetings will be implemented with a one-year grace period, considering concerns that important decisions not finalized at the shareholder meeting would be included in the business report.

Initially, the Ministry of Justice had considered a one-year grace period for these laws in response to business community requests to repeal some provisions, including the outside director term limit and the requirement to notify business reports when convening shareholder meetings. However, after the appointment of Minister Choo Mi-ae, the ministry reportedly decided to proceed with the amendment to the enforcement decree on the outside director term limit as is. In this context, some have raised suspicions that the Blue House and ruling party intend to encourage companies to actively recruit pro-government figures as outside directors.

A Ministry of Justice official stated, "We have thoroughly listened to opinions from various institutions and reviewed the process," adding, "Since the average number of new outside directors appointed per company each year was about 1.3, the number of outside directors to be appointed after the amendment is expected to 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 has pushed forward with a decision that does not reflect the realities of companies. Applying the amendment, 566 listed companies will need to appoint new outside directors this March, with an estimated 718 new outside directors to be appointed. They argue that a shortage of outside director candidates is inevitable.

The situation is even more serious when looking at individual companies. According to CEO Score, among 853 outside directors at 26 listed companies within 59 major conglomerates, a total of 76 outside directors must step down at this year's shareholder meetings. Samsung and SK each need to appoint six new outside directors, while LG, Youngpoong, and Celltrion each need to appoint five. Particularly, Celltrion faces the most urgent situation, needing to replace five out of six outside directors at this shareholder 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 mass replacement at once in a limited pool of outside directors with such expertise raises concerns about gaps in the board of directors."

A representative from a listed company emphasized, "While large conglomerates might manage, small and medium-sized enterprises will face greater difficulties in securing talent due to a smaller talent pool and lower compensation."

Regarding the easing of reporting obligations related to institutional investors holding more than 5% of shares (the so-called 5% rule) under the Capital Market Act enforcement decree, critics argue it only increases the possibility of the National Pension Service intervening in management. Previously, demands for amendments to articles of incorporation affecting the board of directors, governance, and dividends at 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 management influence activities, allowing monthly simplified reports disclosing only major details within a month.

The Federation of Korean Industries criticized, saying, "Public pension funds making demands for amendments to articles of incorporation or requests for executive dismissal without declaring management participation increases government interference in companies and threatens corporate management autonomy," and added, "Requiring business reports to be attached when convening shareholder meetings undermines the completeness of business reports."

Additionally, the amendment to the National Pension Act enforcement decree legalizes the expert committees under the National Pension Fund Management Committee. Previously, under the Fund Management Committee, there were the Investment Policy Expert Committee, the Trustee Responsibility Expert Committee, and the Risk Management and Performance Compensation Expert Committee. The expert committees will be composed of six private experts and three full-time members.