"If Separate Election and Cumulative Voting for Audit Committee Introduced, 8 Boards of Top 30 Companies at Risk"

Hankyung Association Analyzes Changes in Listed Companies' Board Composition Upon Legal Amendments
"4 of Top 10 Companies, 16 of Top 100 Companies at Risk"

Analysis suggests that if the National Assembly passes the bill revising laws centered on the separate election of audit committee members (Commercial Act) and the introduction of cumulative voting (Governance Act), the boards of directors of 8 out of the top 30 listed companies could fall under the control of a 'foreign institutional investor coalition.' The business community warned that if the bill is passed, risks such as national wealth outflow, weakened corporate competitiveness, and minority shareholder damage due to declining corporate value could increase.

The Korea Economic Association announced on the 14th a scenario analyzing changes in board composition for 196 listed companies with assets exceeding 2 trillion won as of the end of last year (excluding public enterprises, financial companies, and REITs). The separate election of audit committee members is a system where all audit committee directors are appointed separately from other directors. The cumulative voting system grants voting rights per share equal to the number of directors to be appointed.

The Korea Economic Association analyzed that if these two systems are introduced, a ‘foreign institutional coalition’ composed of foreign asset management companies, private equity funds, sovereign wealth funds, and pension funds could hold a majority on the boards of 8 (27%) of the top 30 companies. Narrowing the scope to the top 10 companies, 4 (40%) are at risk, and expanding to the top 100 companies, 16 (16%) are included in the risk group.

The total asset size of the 16 companies among the top 100 that could fall under the foreign institutional coalition is 596.2 trillion won, accounting for 35.3% of the total assets of the top 100 companies (1,690.4 trillion won) and 13.6% of the total assets of all listed companies (4,386.1 trillion won).

Considering cases where the proportion of foreign institutional coalition directors on the board is 40-50%, 6 (20%) of the top 30 companies, 2 (20%) of the top 10 companies, and 20 (20%) of the top 100 companies were identified. The ratio of foreign institutional coalition directors to domestic and related-party coalition directors was 4:5 for the top 30 companies, 4:4 for the top 10 companies, and 3:4 for the top 100 companies. This indicates a risk of falling under foreign institutional coalition control depending on changes in shareholding ratios.

Under strengthened governance regulations, the number of companies where the foreign institutional coalition could place even one director on the board reached 28 (93%) among the top 30 companies. Narrowing to the top 10 companies, all 10 (100%) were included. Even when expanded to the top 100 companies, 84 (84%) were included.

The Korea Economic Association predicted that the introduction of these two systems would lead to problems such as national wealth outflow, increased costs weakening corporate competitiveness, and minority shareholder damage due to declining corporate value. If the foreign institutional coalition dominates the board, demands for increased dividends and the sale of core assets could increase the risk of national wealth outflow.

For example, in 2003, the foreign activist fund Sovereign avoided the '3% rule' (limiting major shareholder voting rights to 3%) during the election of audit committee members, purchased SK shares, launched an attack, earned about 1 trillion won in short-term gains, and then withdrew from Korea.

If companies spend funds to defend management rights against the foreign institutional coalition after regulation introduction, corporate competitiveness may decline. Also, if the foreign institutional coalition dominates the board and exhausts R&D investment funds through increased dividends and share buybacks, corporate growth potential and value may decrease, ultimately harming minority shareholders.

Lee Sang-ho, head of the Economic and Industrial Headquarters at the Korea Economic Association, said, "Strengthening corporate governance regulations will cause serious side effects on the national economy due to national wealth outflow and corporate value deterioration caused by weakened corporate competitiveness. Since minority shareholders may also suffer damage, it is necessary to carefully examine the possibility of side effects before discussing regulatory strengthening."