"Expansion of Fiduciary Duty of Directors Damages Corporate Value... Accelerating Korea Discount"

Hankyung Association 'Expanding Directors' Duty of Loyalty, What Is the Problem?' Roundtable
"Undermining the Company Law System... Legalization of Management Rights Defense Measures Needed"

There are claims that if the amendment to the Commercial Act, which includes shareholders as subjects of directors' fiduciary duties, is passed, corporate value will be damaged, exacerbating the Korea discount (undervaluation of the Korean stock market). Concerns have also been raised that it could shake the foundation of Korean company law.

Ryu Jin, Chairman of the Korea Economic Association.
[Photo by Hankyung Association]

The Korea Economic Association announced on the 15th that it held a roundtable discussion titled "Expansion of Directors' Fiduciary Duties, What Is the Problem?" at the FKI Tower Conference Center in Yeouido, Yeongdeungpo-gu, Seoul. Company law experts attending the discussion predicted that if the amendment is enacted, the value of the domestic stock market will be further undervalued.

Ryu Jin, chairman of the Korea Economic Association, said in his opening remarks, "Some argue that amending the Commercial Act will improve corporate governance and resolve the Korea discount," but he expressed concern that "excessive judicial risks will cause businesspeople to hesitate in investing in new industries or mergers and acquisitions, damaging corporate value and deepening the Korea discount."

Kang Won, a professor of Business Administration at Sejong University, argued that the Korea discount arises from investors' choices influenced by uniquely Korean legal systems such as high inheritance and corporate taxes. He predicted that expanding directors' fiduciary duties in this context would accelerate the Korea discount.

Professor Kang said, "Because the market knows that shareholders cannot take the profits earned by companies due to high inheritance and corporate taxes, a significant discount occurs in future stock price predictions," adding, "Investors aware that anti-business sentiment and various regulations make it difficult for companies to invest in promising future businesses tend to undervalue the growth potential of Korean companies."

There was an opinion that the foundation of Korean company law, which applies the mandate contract relationship between the company and directors, could be shaken. Kwak Kwan-hoon, president of the Korean Economic Law Association, said, "Under Korean company law, fiduciary duties arise only between the company and directors," and added, "Expanding the scope of directors' fiduciary duties to shareholders would contradict the basic legal principles of mandate contracts and undermine the foundation of the Commercial Act."

President Kwak further explained that controversy over setting limits on liability could follow. He cited the Japanese case as an example. In the 1970s, Japan discussed introducing "corporate social responsibility" as a general provision in the Commercial Act. In 2014, it considered codifying "parent company directors' supervisory duties over subsidiaries." However, both proposals were abandoned due to issues with setting limits on directors' liability. Kwak said, "If the Commercial Act is changed to significantly expand directors' fiduciary duties, the standards of conduct could become even more unclear."

There were also calls to raise the level of legislation related to corporate governance defense measures to meet global standards. Kim Ji-pyeong, a lawyer at Kim & Chang Law Office, explained that although issues with minority shareholders can arise in the US and Japan, they have introduced systems such as poison pills and dual-class voting rights. This is because judicial review can appropriately ensure transparency and efficiency.

A poison pill is a system that grants existing shareholders the right to purchase shares at a price much lower than market value when hostile mergers and acquisitions (M&A) or attempts to infringe on management rights occur. Dual-class voting rights grant more voting power to shares held by major shareholders who control management than ordinary shares. Lawyer Kim said, "If management defense measures are not introduced, indirect management defense such as share buybacks will occur, inevitably incurring costs," adding, "If management defense measures are legislated, funds spent on share buybacks can be effectively used for facility and research and development (R&D) investments, employee compensation, and enhancing stakeholder benefits."

Concerns were also raised about the current legal system, which could impose heavier penalties on directors than for crimes. Professor Kwon Jong-ho of Konkuk University Law School said that under current law, if a director is found to have performed illegal duties, criminal embezzlement under the Criminal Act is applied rather than special breach of trust under the Commercial Act. This is because if the illegal gain exceeds 500 million won, aggravated punishment under the Act on the Aggravated Punishment of Specific Economic Crimes can be applied. Professor Kwon said applying the Criminal Act, which is designed for ordinary people, makes it difficult to consider the special nature of directors' management activities and leads to excessive punishment.

Professor Kwon stated, "It is necessary to refrain from punishing directors under the Criminal Act for breach of trust regardless of whether the Commercial Act is amended."