Outside Directors' Consecutive Cabinet Appointments... "Majority Board Rule Rendered Meaningless"

[Asia Economy Reporter Yoo Hyun-seok] Recently, cases have emerged where the legal requirement under the Commercial Act that the majority of directors on the boards of major conglomerates must be outside directors is not being met. This is due to appointments of these directors as prime ministers and ministers in the new government.

Boards lacking sufficient outside directors may continue this situation until the regular shareholders' meeting in March next year. In such cases, concerns are raised that the effectiveness of the outside director system, which monitors and checks major decisions made by major shareholders and top executives, is diminished.

According to industry sources on the 23rd, the number of outside directors on Samsung Electronics' board has decreased from six immediately after the regular shareholders' meeting in March to four currently.

Newly appointed outside director Han Hwa-jin resigned last month after being nominated as the inaugural Minister of Environment in the new government. Additionally, outside director Park Byung-guk suddenly passed away on the 17th. As a result, Samsung Electronics' board composition reversed from the previous 6:5 ratio of outside directors to inside directors to the current 4:5 ratio. The number of outside directors, who are supposed to check inside directors including the CEO and other key executives, has become fewer than inside directors.

The outside director system was first introduced domestically in 1998, right after the IMF (International Monetary Fund) foreign exchange crisis, following criticism that boards failed to properly monitor management, leading to business failures. The system was designed to enhance the fairness and transparency of boards.

Outside directors, composed of external figures such as professors or lawyers who have no relation to major shareholders, play the role of supervising and monitoring major corporate decisions and the arbitrary actions of major shareholders from an independent position.

Under the current Commercial Act, to prevent inside directors from dominating the board, listed companies with total assets of 2 trillion won or more are required to appoint outside directors as the majority of the total number of directors (at least three).

However, as in the case of Samsung Electronics, even if outside directors were appointed as the majority at the regular shareholders' meeting, problems arise when outside directors leave mid-term due to resignation or death.

The current Commercial Act stipulates that if the number of outside directors falls below the majority, the company must replenish outside directors at the next shareholders' meeting, but it does not specify a deadline for this.

Accordingly, if Samsung Electronics does not hold an extraordinary shareholders' meeting, the current board composition may remain until the regular shareholders' meeting in March next year.

Samsung Electronics is not the only company with a shortage of outside directors due to appointments to the new government. At S-Oil, outside director Han Deok-su resigned after being appointed as the inaugural Prime Minister in the new government, resulting in an equal number of outside and inside directors (5:5). LG Energy Solution also saw an equal ratio (3:3) after outside director Ahn Deok-geun resigned following his appointment as the head of the collective bargaining team.

Other outside directors who resigned due to joining the new government include Lee Chang-yang (Minister of Trade, Industry and Energy) from LG Display, Lee Sang-min (Minister of the Interior and Safety) from AK Holdings, Park Bo-gyun (Minister of Culture, Sports and Tourism) from Shinsegae International, Wang Yoon-jong (Economic Security Secretary at the Presidential Office) from Hyosung Chemical, and Joo Young-chang (Head of the Science and Technology Innovation Bureau at the Ministry of Science and ICT) from LG Innotek.

Meanwhile, there are concerns that a wave of resignations among outside directors of major conglomerates could recur after the local elections on June 1 next month. Experts particularly worry that the effectiveness of the outside director system, introduced to monitor and check boards, may decline due to failure to meet the 'majority outside director' requirement and successive resignations.

Professor Park Sang-in of Seoul National University Graduate School of Public Administration said, "In Korea, which has adopted the single-board system of Anglo-American countries, outside directors are required to be the majority to supervise and monitor inside directors. Considering this legal spirit, it is desirable for companies to voluntarily fill vacancies among outside directors."

A representative from the Commercial Law Division of the Ministry of Justice, which oversees the outside director system, emphasized, "The purpose of the law is to appoint new outside directors as soon as possible to restore monitoring functions when vacancies arise for unavoidable reasons. Although there is no statutory deadline, it is desirable to hold a shareholders' meeting as soon as possible to supplement the outside director ratio if it falls below the required majority."