[Opinion] Owner Risk

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

One of the terms frequently misused in South Korea regarding corporate governance is "owner." Although the true owners of a company, especially a joint-stock company, are the shareholders, the controlling shareholders?founders or their families?who exercise absolute influence over management decisions are referred to as "owners." Both the media and some academic circles consider these individuals as the rightful owners of the company who naturally hold absolute authority over corporate management, believing this to be efficient. Under the Fair Trade Act, when a business group is designated as a large conglomerate, a "same person" is appointed, which reflects the legal acceptance of the "owner" concept in practice. The "owner" risk can be understood as the possibility that these "owners'" management decisions or even everyday actions directly affect corporate management.

Recent incidents involving domestic companies clearly illustrate this "owner" risk. In the case of Coupang, where a firefighter tragically died in a logistics warehouse fire, the working conditions and industrial accidents involving employees in delivery and logistics warehouses have long been controversial, and this fire has exacerbated the difficulties. Additionally, it was revealed during coverage of the fire incident that on June 11, Chairman Kim Beom-seok resigned as the chairman of the board and registered director of Coupang Korea and took on the role of chairman of the board at the U.S. headquarters. The company stated that Kim resigned to focus on global management, but combined with ongoing controversies and the fire incident, the situation has deteriorated, with 170,000 people leaving Coupang after the warehouse fire. Although the timing of Kim's resignation is unrelated to the fire accident, Kim Beom-seok is a typical "owner" who holds 76% of voting rights through shares with differential voting rights granted during the listing process. The coincidence of the warehouse fire and his resignation has given consumers and the market the impression that the "owner" does not fulfill management responsibilities commensurate with their authority.

Another example of "owner" risk is Namyang Dairy Products, where the controlling shareholder's stake was entirely acquired by a private equity fund at the end of May, resulting in a change of management control. The controlling shareholder family, including Chairman Hong Won-sik, held an absolute stake of 53.08%, including 51.68% owned by Hong. Despite shareholder demands, including from the National Pension Service, the Hong family firmly maintained control even after the 2013 distribution center abuse scandal. However, following the Bulgari incident, which caused stock price declines and legal and social issues, they ultimately had no choice but to sell the company that had been passed down from previous generations. Unusually for a mid-sized company, Namyang Dairy Products had a managing director as its CEO. The Bulgari incident led to the resignation of both the CEO and Chairman Hong, leaving no executives, which created a situation akin to a ship without a captain or navigator. This made continued management impossible, leading to the sale of the company.

The case of Shin Yong-jin, Vice Chairman of Shinsegae, also clearly shows how even the daily life unrelated to management of an "owner" can impact corporate management. Chairman Chung Yong-jin stepped down as a registered director of the core company E-Mart in 2013. When Chairman Chung, who is active on social media, posted photos and comments that sparked controversy and threatened to trigger a boycott of E-Mart, he promptly apologized, and fortunately, this did not have a negative impact on corporate management.

The commonly cited advantage of "owner" management is that it alleviates the principal-agent problem of executives and enables fast, efficient, and long-term management decision-making. However, as recent cases show, concentrating all authority in the hands of the "owner" without effective checks and supervision by the board or shareholders means that poor management decisions or even personal controversies of the "owner" can lead to corporate difficulties. This is the reality of Korean companies. Recently, the Asian Corporate Governance Association ranked South Korea 9th out of 12 Asian countries in corporate governance levels, with little improvement from the previous year. This is likely due to the significant impact of "owner" risk. For Korean companies to develop and grow further, substantial improvements in governance that can overcome "owner" risk are essential.

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