Major Conglomerate Heads Do Not Register as Directors... 99.5% of Board Agenda Items Approved as Proposed

Institutional Investors Exercise 72% of Voting Rights... 94% of Shares Cast in Favor

[Asia Economy Reporter Moon Chaeseok] Among 20 large business groups including Samsung and Hanwha, the group heads did not hold any director positions in their affiliates. The boards of directors failed to move beyond the role of a 'rubber stamp,' approving 99.5% of all agenda items as originally proposed.

On the 9th, the Fair Trade Commission (FTC) disclosed the '2020 Status of Corporate Governance of Publicly Disclosed Business Groups,' which includes this information. The FTC compiled data on the registration of group heads and their family members as directors and the operation status of boards of directors for 58 publicly disclosed business groups (large business groups) from May last year to May this year.

Among the 1,905 affiliates of 51 business groups with a group head, only 16.4% (313 companies) had at least one member of the group head’s family registered as a director.

Among these business groups, 20 groups?including Samsung, Hanwha, Hyundai Heavy Industries, Shinsegae, CJ, Daelim, Mirae Asset, Kumho Asiana, Hyosung, Kolon, E-Land, DB, Naver, Hankook Tire, Taekwang, Dongwon, Samchully, Dongkuk Steel, Hite Jinro, and Eugene?did not have the group head registered as a director. Half of these groups also had no second or third generation family members serving as directors.

Comparing 21 business groups continuously analyzed by the FTC over the past five years, the proportion of affiliates with group family members as directors was 13.3%, down from 17.8% in 2016 and 14.3% in 2019.

This trend is interpreted as an attempt to avoid legal responsibilities such as liability for damages that may arise when group family members serve as registered executives.

However, in the case of core companies (listed companies with assets exceeding 2 trillion KRW) or holding companies within large business groups, the proportion of group family members registered as directors was higher. Specifically, 39.8% of core companies, 80.8% of holding companies, and 54.9% of companies subject to private interest regulation had group family members serving as directors.

Sung Kyung-je, head of the Corporate Group Policy Division at the FTC, stated, "Core companies and holding companies have a high proportion of group family members registered as directors due to their significant shareholdings. While registering as directors to strengthen accountability is positive, the boards still lack the capacity to effectively check controlling shareholders."

Among 266 listed companies affiliated with the 58 business groups, there were 864 outside directors, accounting for 50.9% of all directors.

The attendance rate of outside directors at board meetings reached 96.5%, but only 0.49% of all agenda items over the past year (May last year to May 2020) failed to pass as originally proposed due to opposition from outside directors.

Of the agenda items submitted to the boards, 99.51% were approved as originally proposed. In particular, among 692 large-scale internal transaction agenda items between affiliates, all but one were approved as originally proposed.

This has led to criticism that outside directors, who are supposed to perform internal monitoring functions, have effectively acted as 'rubber stamps.'

Meanwhile, the 266 listed companies had committees within their boards such as outside director candidate recommendation committees, audit committees, and internal transaction committees.

These committees also approved all but 13 of 2,169 agenda items submitted over the past year (May 2019 to May 2020) as originally proposed.

The approval rate of original proposals by board committees was higher in groups with a controlling shareholder (99.6%) than in those without (97.1%).

Sung said, "Among internal transaction agenda items concluded by private contracts, nearly 78% did not specify the reasons for private contracts. This indicates that proper review of large-scale internal transactions was not conducted."

Additionally, among the 58 large business groups, 19 groups appointed 42 former executives of affiliates as outside directors in 35 companies.

The FTC views the appointment of retired executives as outside directors as potentially undermining the independence of the board, making it difficult for them to fulfill their primary role of internal monitoring.

During the investigation period, domestic institutional investors participated in shareholder meetings of 257 companies affiliated with publicly disclosed business groups and exercised voting rights. The ratio of exercised voting rights to voting rights held by domestic institutional investors was 72.2%.

Of the voting rights exercised by institutions, 94.1% were in favor, while 5.9% were opposed.

Sung explained, "Since the introduction of the Stewardship Code, the exercise of voting rights by domestic institutional investors has been active, but recently the voting rate has slightly declined."

The adoption and implementation of electronic voting systems, which help minority shareholders exercise their rights, have increased.

Among the 266 listed companies, 49.6% adopted electronic voting systems, and 48.1% of voting rights were exercised through this method.

The proportion of companies adopting electronic voting systems rose compared to the previous year (34.4%).