[Exclusive] Financial Authorities Discuss Bonus Points for Exemption from Designated Audit When Electing Two or More Audit Committee Members Separately

Enhancing Management Transparency and Auditor Independence
Improvement Effects on 'Governance' of Korea Discount
Current Mandatory Separate Election of One Audit Committee Member
Expecting Expanded Audit Competence with Separate Election of Two Members

Financial authorities are internally discussing a plan to award extra points in the designated audit exemption review to companies with excellent governance if they elect two or more audit committee members separately. This is based on the judgment that having two or more separately elected audit committee members strengthens audit independence and improves governance by monitoring management.

According to the Financial Services Commission (FSC) and the financial investment industry on the 24th, the FSC is internally discussing the option of awarding extra points for designated audit exemption as one of the incentives in the 'Corporate Value-Up Program' for companies that separately elect two or more audit committee members.

When announcing the value-up plan, the FSC stated that it would grant extra points during the designated auditor exemption review as an incentive for companies with excellent governance. The designated audit system requires listed companies to autonomously appoint an external audit firm for six years and receive audits from a government-designated audit firm for three years. Since designated audits cost more than freely appointed audits, listed companies tend to find it burdensome.

Currently, according to the Commercial Act (Article 542-11, Paragraph 1), listed companies with total assets of 2 trillion won or more are required to establish an audit committee. The audit committee must consist of three or more directors, and among the directors who become audit committee members, at least one must be elected separately at the shareholders' meeting in accordance with the '3% rule' (Commercial Act Article 542-12).

The FSC plans to award extra points for governance excellence to listed companies that elect at least two directors as audit committee members separately. Since the audit committee consists of three or more members, having two or more separately elected audit committee members at the shareholders' meeting means they can effectively monitor management.

The separate election of audit committee members was mandated when the Commercial Act was amended in 2020. Previously, audit committee candidates were selected from directors appointed by major shareholders. Because audit committee members, who are supposed to monitor management, were elected by major shareholders, concerns about conflicts of interest arose, leading to the introduction of the separate election system. However, in some listed companies, the '3% rule' is sometimes exploited to nullify the separate election of audit committee members.

A representative of a shareholder coalition in Company A said, "Major shareholders transfer over 3% of their shares to affiliates and exercise voting rights at the shareholders' meeting," adding, "Recently, even though audit committee candidates not influenced by management received support from many individual shareholders, they narrowly lost in vote battles."

The National Pension Service is also known to actively agree with strengthening the separate election system for audit committee members as part of governance improvement (value-up). However, corporate opposition is considerable. The FSC plans to closely consult with listed companies, the accounting industry, and others and aims to finalize the detailed criteria for companies with excellent governance as early as September.