Only 49% of Companies Adding Business Objectives Meet Standards... 55% Have 'No Plans' Despite New Business Announcements

Financial Supervisory Service, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

As a result of reviewing the progress of new businesses that added corporate purpose clauses in their articles of incorporation in this year's semi-annual report, it was found that only 49% of the companies subject to inspection met the preparation standards. In particular, among companies that added seven major new businesses such as secondary batteries and artificial intelligence, 55% had no progress, indicating the need for caution when investing.

According to the Financial Supervisory Service on the 31st, among 1,047 listed companies that have added, deleted, or modified business purposes in their articles of incorporation over the past three years, only 516 companies (49%) fully complied with the 24 detailed inspection items regarding the obligation to disclose progress on new business promotion and compliance with disclosure form preparation standards. The remaining 531 companies (51%) were found to be deficient in at least one detailed inspection item.

By inspection item, the deficiency rates for 'business promotion status and reasons for non-promotion' and 'changes and reasons for business purpose' were high at 38% and 35%, respectively, while 'current business purposes'?which simply records the company's current business purposes?showed a low deficiency rate of 2%, indicating generally good compliance. The deficiency rates for KOSPI-listed and KOSDAQ-listed companies were 47% and 52%, respectively, showing little difference.

Over the past three years, a total of 285 companies added seven thematic industries related to issues such as secondary batteries, artificial intelligence, robotics, virtual assets, metaverse, non-fungible tokens (NFT), renewable energy, and COVID-19. Among them, companies that added business purposes related to secondary batteries and renewable energy were the most numerous, with 125 and 92 companies, respectively.

However, analyzing the business promotion status as of the end of June this year for 233 companies that added the seven major thematic industries as business purposes in 2021?2022, only 104 companies (45%) showed business promotion status, and only 83 companies (36%) had progress in all of the newly added businesses. The remaining 129 companies (55%) had no progress at all. The Financial Supervisory Service stated, "The more thematic industries a company adds, the more sharply the business promotion rate declines."

Furthermore, among the 104 companies with business promotion status, 47 companies (45%) generated sales related to the respective business, but only 4 companies (4%) generated significant sales to the extent that they managed them separately from other business divisions.

Most companies without progress had low financial and managerial stability, and problems such as internal control issues were continuously exposed. It was often difficult to promote new businesses due to poor financial conditions such as operating losses and capital erosion for three consecutive years, or companies added the business purpose during the process of changing the largest shareholder. Cases of designation as management companies and delisting due to embezzlement, breach of trust, failure to submit audit (review) reports, and audit opinion refusals were also frequent, along with many cases designated as unfaithful disclosure companies due to delayed or omitted disclosures.

Some companies were found to be suspected of unfair trading using false new businesses, such as when the largest shareholder-related parties sold shares after converting convertible bonds (CB) following a sharp rise in stock price immediately after announcing new businesses, and then withdrew the business promotion.

The Financial Supervisory Service explained, "Investors should comprehensively consider whether the company has the financial and managerial stability and internal control capabilities to promote new businesses through related disclosures when deciding whether to invest," and added, "It is necessary to regularly check the actual business promotion status and progress through future submitted regular reports."

It also stated, "We plan to notify the 531 companies with deficiencies in preparation standards of the results of focused inspections and exemplary disclosure cases to guide them to make improvements when preparing the next regular report," emphasizing, "We will conduct thorough investigations on stocks suspected of unfair trading related to false new business promotion and take strict measures if any violations are detected."