[Opinion] 21st National Assembly, Legislation for Improving Corporate Governance

On the 30th of last month, the 21st National Assembly officially commenced. This National Assembly is expected to pursue various reform legislations as the ruling party secured an absolute majority of seats. To this end, it first secured the position of the chairman of the Legislation and Judiciary Committee despite strong opposition from the opposition party. Regarding corporate governance, the reintroduction of three bills known as the Fair Economy 3 Acts has begun in earnest. On the 2nd, the ruling party held a 'Corporate Governance Improvement Forum' to express its determination to re-push amendments to the Commercial Act. The government also announced legislative proposals: the Fair Trade Commission and the Ministry of Justice each proposed a full revision of the Fair Trade Act and amendments to the Commercial Act, respectively, while the Financial Services Commission announced a bill to enact the 'Act on the Supervision of Financial Groups.'

The most notable bill is the amendment to the Commercial Act, focusing on protecting the rights of minority shareholders and controlling the arbitrary actions of controlling shareholders. First, by introducing a multiple derivative suit system, if a director of a subsidiary causes damage to the subsidiary due to neglect of duty, shareholders of the parent company can also file a representative lawsuit against the subsidiary’s director. This aims to prevent harm to affiliates and shareholders that may occur when controlling shareholders of corporate groups pursue private interests through unlisted subsidiaries and to provide a means to hold them accountable afterward.

The amendment to the Fair Trade Act mainly aims to improve the practices of large business groups. For newly established or converted holding companies, the shareholding requirements for subsidiaries and sub-subsidiaries will be raised from the current 20% for listed companies and 40% for unlisted companies to 30% and 50%, respectively, to curb excessive expansion of control through holding companies. To control the expansion of control by conglomerates restricted from cross-shareholding through affiliated public interest corporations, the exercise of voting rights on domestic affiliate stocks will be generally restricted. However, if the affiliate is a listed company, voting rights may be exercised within a 15% limit combined with special related parties only for reasons such as appointment or dismissal of executives and mergers.

The Financial Services Commission announced a legislative proposal for the 'Act on the Supervision of Financial Groups,' establishing a legal basis for supervising non-holding financial groups among complex financial groups with financial assets exceeding 5 trillion won. Corporate groups designated as complex financial groups must establish group risk management policies centered on the financial company selected as the representative company, install and operate risk management organizations, and assess and evaluate capital adequacy at the financial group level considering the possibility of overlapping capital use among financial companies, reporting to the Financial Services Commission. Through this, supervision of important non-holding financial groups in the financial system will be strengthened, expected to enhance the overall stability of the financial system.

Regarding these bills, the business community and civic groups have shown contrasting reactions. The business community opposes the promotion of the Fair Economy 3 Acts, arguing that excessive regulations will make management more difficult amid the hardships caused by the COVID-19 crisis. On the other hand, civic groups claim that the current bills are insufficient to prevent the arbitrary actions of large corporations and controlling shareholders and demand broader legislation.

Examining the discussions surrounding the Fair Economy 3 Acts reveals the uniqueness of Korea’s governance structure and the differing opinions of various stakeholders. Founding families, as controlling shareholders, hold absolute authority over corporate management and have inherited shares and management rights, which has led to various social controversies. The Fair Economy 3 Acts can be seen as an attempt to resolve these issues through legal regulations. However, it is difficult to expect that the problems that have been controversial so far will be resolved at once and that governance will improve simply because these laws are enacted and enforced. Considering the maturity of our economy and society, it seems necessary to reflect together on what the best measures are for sustainable corporate management and to seek a way forward.

Shin Jin-young, President of the Korea Corporate Governance Service and Professor at Yonsei University Business School