"Consider Disclosing Executives' Financial Crime Records"...Political Circles Agree on Strict Punishment for Embezzlement and Breach of Trust [Small Shareholders' Tears]⑦

Kim Namgeun and Cha Gyugeun Interview
"Only Minority Shareholders Bear the Burden of Listed Companies' Embezzlement and Breach of Trust"
"The Board Must Hold Management Accountable for Embezzlement and Breach of Trust"

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 in crimes occurring within companies. Even if the management commits embezzlement and breach of trust, causing stock trading to be suspended and delisting, minority shareholders cannot monitor this in advance nor hold them accountable. They have no choice but to bear the damage and wait. Ahead of the regular shareholders' 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.

"The anxiety of domestic minority shareholders is at its peak." (Kim Nam-geun, Democratic Party of Korea lawmaker)

As dissatisfaction among minority shareholders grows due to corporate spin-offs and management's embezzlement and breach of trust, the political sphere also agreed on the need to establish systems to resolve these issues. Lawmakers met at the National Assembly emphasized that, in addition to the recently passed amendment to the Commercial Act, disclosure of financial criminal records of corporate executives and tougher penalties for embezzlement and breach of trust crimes are necessary for minority shareholders.

Kim Nam-geun, a member of the Democratic Party of Korea, is being interviewed by Asia Economy in his office at the National Assembly Members' Office Building. Photo by Yoon Dong-joo

Kim, a member of the National Assembly's Political Affairs Committee, agreed in an interview held on the 28th at the National Assembly in Yeouido, Seoul, that the domestic market lacks systems to protect minority shareholders, making their anger inevitable. Kim said, "The stock market is sluggish, but companies are passive about shareholder return policies such as dividends," adding, "Minority shareholders must also endure contingent risks like corporate embezzlement and breach of trust."

Cha Gyu-geun, a member of the National Assembly's Strategy and Finance Committee from the Party for People's Innovation, also diagnosed in an interview on the same day that shareholder dissatisfaction has increased due to the so-called 'Korea Discount.' Cha said, "There is distrust that investors do not receive appropriate treatment from companies when investing in domestic stocks," and added, "If the political sphere actively resolves minority shareholders' dissatisfaction, trust will be built, and the stock market will become more vibrant."

Both lawmakers emphasized that the amendment to the Commercial Act, which expands directors' fiduciary duties to shareholders, will be a starting point to resolve minority shareholders' dissatisfaction. Cha, who proposed the amendment in June last year, explained, "Considering insufficient shareholder returns and poor shareholder meeting procedures, the amendment is not a matter of political camps," adding, "It is part of procedural improvements that allow shareholders to voice their opinions at shareholder meetings." Kim, who led the passage of the amendment in the plenary session, said, "The amendment resulted from increased shareholder dissatisfaction and awareness of rights," adding, "It can remedy issues such as undervalued paid-in capital increases, convertible bond issuance, and unilateral delisting."

They also proposed other measures besides the amendment to protect shareholders. Kim pointed out the need to strengthen stewardship code activities, which are guidelines for exercising voting rights by the National Pension Fund. Kim said, "South Korea should improve corporate governance issues of individual companies through the stewardship code, not just at a declarative level like Japan," adding, "Financial authorities need to supervise, and if the government does not take action, legislation should be pursued."

Cha argued that additional discussions are needed on items excluded from the current amendment, such as separate election of audit committee members in large listed companies and mandatory cumulative voting for large listed companies. Cha said, "This amendment is only a necessary condition for capital market advancement," adding, "To attract more people to the domestic stock market, mandatory cumulative voting and separate election of audit committee members in large listed companies should be introduced."

"Frequent embezzlement and breach of trust issues must be resolved"

Assemblyman Cha Gyu-geun of the Party for National Innovation is being interviewed by Asia Economy in his office at the National Assembly Members' Office Building. Photo by Yoon Dong-joo

Both lawmakers pointed out that frequent embezzlement and breach of trust issues in listed companies must also be resolved. Cha emphasized the need for strong punishment, stating that management's embezzlement and breach of trust constitute 'moral hazard.' He said, "No matter how much money is embezzled, first trials impose prison sentences, but second trials often suspend execution," adding, "In advanced capitalist societies, financial and property crimes are severely punished." Kim explained, "To solve embezzlement and breach of trust problems, the independence of the board of directors is necessary," adding, "The board must move away from being a rubber stamp and strictly hold management accountable for embezzlement and breach of trust crimes."

They also responded positively to the idea of disclosing financial criminal records of listed company executives. Kim said, "At least to become a responsible executive of a company, disclosure of embezzlement and breach of trust acts should be mandatory," adding, "(The business community) may express concerns about privacy invasion, but this is not a personal privacy issue. It is necessary to prevent significant risks to shareholders of listed companies." Cha said, "(Disclosure of executives' financial criminal records) is a matter worth thorough consideration," adding, "We will consider proposing legislation in the 22nd National Assembly."

Kim, a former human rights lawyer, proposed the amendment to the Commercial Act last September to expand directors' fiduciary duties to shareholders. He also introduced amendments to the Capital Markets Act regulating corporate mergers, spin-offs, and delisting. Cha, a former head of the Ministry of Justice under the Moon Jae-in administration, co-sponsored the Commercial Act amendment with Democratic Party lawmaker Oh Ki-hyung in August, following his initial proposal in June last year.