Stagnation in Strengthening Embezzlement Punishments... "Urgent Need to Solve Information Asymmetry Issues" [Small Shareholders' Tears]⑤

Shareholders Demand Disclosure of Executives' Economic and Financial Criminal Records
Experts Say "Minority Shareholders' Voices Bound to Grow Louder"
Debate Over Commercial Act: "Changing Perceptions" vs "Undermining Legal System"

Editor's Note402.5 billion KRW. This is the amount of embezzlement and breach of trust disclosed by 29 listed companies last year, during which the government's value-up project was underway to enhance corporate value. Minority shareholders are neither protected nor included when crimes occur within companies. Even if executives commit embezzlement and breach of trust, leading to suspension of stock trading and delisting, minority shareholders cannot monitor these actions in advance nor hold anyone accountable. They have no choice but to bear the losses and wait. Ahead of the regular shareholder meeting season in March for listed companies, we focus on the tears of minority shareholders excluded from the domestic stock market, which continuously calls for corporate value enhancement.

"Simply implementing value-up policies does not increase corporate value or protect shareholders. The current precedent is that there is no need to protect shareholders when companies siphon off profits in various ways. We need to fundamentally change the perception of whom companies exist for." Kim Woo-jin, Professor at Seoul National University Graduate School of Business

Minority shareholders and experts advise that to protect shareholders amid the ongoing embezzlement and breach of trust crimes within companies and the difficulty of strengthening punishments, the minimum requirement is to resolve the information asymmetry problem in the domestic capital market. Under current laws and systems, minority shareholders must decide on investments without knowing the financial crime records of listed company executives, and even when specific delisting reasons arise, they cannot know the details until the orderly liquidation trading is completed.

Minority shareholders opposing the delisting simplification policy held a rally on the 10th in front of the Korea Exchange in Yeouido, Seoul. They called for clearer delisting review criteria, the introduction of differentiated delisting procedures for embezzlement and breach of trust, enhanced transparency of companies and related institutions, and social public discussion to protect shareholder rights. 2025.02.10 Photo by Yoon Dong-joo

From this year, listed companies with assets exceeding 100 billion KRW must include a report on the operation status of their internal accounting control systems in their business and audit reports. This follows the Financial Supervisory Service's announcement in November last year to implement 'fund fraud control' disclosures from this year to prevent embezzlement and related crimes. However, the mandatory disclosure timing will start with the 2025 business year reports, so full-scale fund fraud control disclosures are expected next year. The mandatory disclosure of fund fraud control was introduced to resolve the issue of 'blind' management in companies. The Financial Supervisory Service expects that "if companies disclose specific activities related to fund fraud control, the sense of responsibility among executives and those performing control and inspection will increase."

So far, measures to prevent embezzlement incidents within companies have not functioned properly. Although the 'Act on External Audit of Stock Companies, etc.' mandating audits of internal accounting control systems for KOSPI and KOSDAQ listed companies has been in effect since November 2018, embezzlement and breach of trust crimes have not decreased. ▲In 2022, the 221.5 billion KRW embezzlement case at Osstem Implant ▲In 2023, the 308.9 billion KRW embezzlement case at BNK Kyongnam Bank ▲Last year's 10 billion KRW-level embezzlement case at Woori Bank, among other major embezzlement incidents, have continued to occur. In June last year, Financial Supervisory Service Governor Lee Bok-hyun criticized the Woori Bank embezzlement case, stating, "There is a growing voice condemning the moral insensitivity and lax internal controls of financial sector employees due to embezzlement and other financial accidents."

Legislation to strongly punish embezzlement and breach of trust continues to be proposed, but it is a long way from enactment. In the 20th National Assembly, Democratic Party lawmakers Park Joo-min and Kim Young-jin, along with former Democratic Party lawmakers Oh Je-se, Kim Cheol-min, Park Kwang-on, and Won Hye-young, proposed amendments to the Act on the Aggravated Punishment of Specific Economic Crimes to increase sentencing standards for embezzlement or breach of trust crimes. For example, former lawmaker Park proposed a bill imposing life imprisonment or at least 10 years in prison if the amount acquired through embezzlement or breach of trust exceeds 10 billion KRW. However, at the time, the Ministry of Justice opposed it on the grounds that excessive punishment should not be imposed on property crimes. At the September 26, 2017 meeting of the National Assembly Legislation and Judiciary Committee's first subcommittee, former Deputy Minister of Justice Lee Geum-ro argued, "Imposing life imprisonment or at least 7 years in prison for amounts over 10 billion KRW is, in some ways, a heavier punishment than for murder," and called for further review. Ultimately, these bills expired with the end of the legislative term.

Since the 21st National Assembly, no bills revising sentencing standards for embezzlement and breach of trust crimes have emerged. However, attempts to indirectly punish such crimes through heavier penalties, employment restrictions, and disclosure of personal information when crimes target ordinary citizens have continued. In the 21st National Assembly, People Power Party lawmaker Yoo Sang-beom proposed a bill to increase penalties for large-scale property crimes involving embezzlement and breach of trust targeting many ordinary citizens, and Democratic Party lawmaker Seo Young-kyo proposed a bill to disclose personal information for embezzlement and breach of trust crimes exceeding 5 billion KRW. However, these too were not enacted. In the 22nd National Assembly, Basic Income Party lawmaker Yong Hye-in proposed a bill to expand employment restrictions for those convicted of embezzlement under the Act on the Aggravated Punishment of Specific Economic Crimes, which is currently pending in the Legislation and Judiciary Committee.

Financial Supervisory Service Implements Fund Fraud Control Disclosure... Shareholders Demand "Additional Protection Measures"

Minority shareholders appeal for more protective measures to prevent corporate embezzlement and breach of trust crimes. They argue that the government should at least address the information asymmetry problem. If financial crime records of listed company executives were disclosed and restrictions on their employment in companies were imposed, it could somewhat prevent investors from suffering losses by investing in companies with potential embezzlement and breach of trust risks.

Choi Jae-young, head of the Daeyu Minority Shareholders Alliance, called the case of former Daeyu CEO Kim Woo-dong, who was fined in 2018 for stock price manipulation allegations but immediately returned to management, "ridiculous." Choi said, "It's as if the country released a criminal to exploit more," emphasizing, "Those who invested without knowing Kim's criminal record and only looked at sales suffered significant losses." Democratic Party lawmaker Lee Hak-young proposed an amendment to the Capital Markets and Financial Investment Business Act in 2018 to require disclosure of executives' economic and financial criminal records in business reports, but it expired due to privacy concerns and other issues.

Shareholders also expressed dissatisfaction that specific delisting reasons are not disclosed until orderly liquidation trading is completed. The Korea Exchange decided this year to disclose key contents of improvement plans submitted by companies facing delisting, but minority shareholders criticize the lack of information. Park Soo-bon, vice head of the Celivery Minority Shareholders Alliance, said, "I don't understand why the final deliberation minutes on delisting can only be viewed on the Korea Exchange website after orderly liquidation trading is completed," adding, "If delisting reasons were disclosed in detail when delisting is decided before orderly liquidation, investors would quickly understand."

Calls for amendments to the Commercial Act are also growing. The logic is that if mechanisms to expand shareholder rights, such as extending directors' fiduciary duties to ordinary shareholders, exist, embezzlement and breach of trust would decrease. Kim Hyun, head of the Ewha Group Minority Shareholders Alliance, said, "Embezzlement and breach of trust are committed by major shareholders or the board of directors, but minority shareholders bear the losses," emphasizing, "I have consistently supported amendments to the Commercial Act that include shareholder interests in directors' fiduciary duties to protect property rights."

Strengthened Shareholder Ownership... "Interest in Corporate Profit Return"

On the 20th, the KOSPI index, which had been rising consecutively, started to decline. The status board in the dealing room of Hana Bank in Jung-gu, Seoul, displayed the KOSPI index and the KRW/USD exchange rate. On that day, the KOSPI opened at 2661.72, down 0.37% from the previous session, and the KRW/USD exchange rate in the Seoul foreign exchange market rose by more than 2 won, starting strong. 2025.2.20 Photo by Jo Yongjun

Experts agree on the need to create protective measures for minority shareholders. They point out the necessity of additional mechanisms to monitor companies, such as disclosure of executives' economic and financial criminal records, to reduce damage from crimes like embezzlement. Cheon Jun-beom, vice chairman of the Korea Corporate Governance Forum, said, "Preventing embezzlement requires proactive monitoring, but many companies' boards of directors do not function properly," adding, "Legal and institutional improvements are needed to give minority shareholders opportunities to correct corporate mismanagement." He also emphasized, "Although an executive's criminal record may not relate to management ability, economic and financial crime records are a minimum ethical standard and should be disclosed."

However, opinions differ regarding amendments to the Commercial Act. Some argue that amendments are necessary to change the perception that sidelines minority shareholders, but concerns about infringing on corporate autonomy and dampening investment and other business activities are strong. There are also worries that amendments could undermine the legal system and cause greater side effects.

The voice of minority shareholders is bound to grow louder in the future. Kwon Jae-yeol, professor at Kyung Hee University Law School, explained, "Last year, the government promised corporate value enhancement (value-up), but compared to the U.S. stock market, stock prices did not rise significantly," adding, "Due to sluggish stock prices and the government's value-up policy, minority shareholders' sense of ownership has strengthened." Kim Woo-jin, professor at Seoul National University Graduate School of Business, also said, "Shareholders previously thought stock prices did not rise due to geopolitical risks, but recently realized there are problems within companies," and "Interest in how to receive returns on corporate profits has increased."

Series on 'Tears of Minority Shareholders'

"Korean Capital Market Killed My Younger Sibling"
①Trading Suspended Due to Executive Embezzlement... A Family Broken by the Capital Market

Over 1 trillion KRW Embezzlement Crimes in Listed Companies Over 3 Years... 402.5 Billion KRW Last Year Alone
②Trading Suspensions and Delistings Continue... Embezzlement and Breach of Trust Punishments Are 'Lenient'

Only 7 of 78 Cases of Embezzlement Over 500 Million KRW Received Enhanced Punishment... Despite Shareholders' Calls for Severe Punishment, Lenient Sentences Persist
③Comprehensive Survey of First Trial Verdicts on Embezzlement under the Act on the Aggravated Punishment of Specific Economic Crimes... Difficult to Punish High-Value Embezzlement Crimes

Shareholder Meetings Excluding Minority Shareholders... Worries over 'One-Way Traffic'
④Voices of Shareholders Ignored at the 'Flower' of Stock Companies, the Shareholder Meeting

▶Embezzlement Punishment Strengthening Stalled... "Urgent Need to Solve Information Asymmetry"
⑤Laws to Protect Minority Shareholders According to Minority Shareholders and Experts