[Editorial] Business Leaders Walking the Prison Wall

The inevitable has finally arrived. The Democratic Party of Korea, now the ruling party, is once again pushing forward with amendments to the Commercial Act. The core of the amendment is to expand the duty of loyalty for directors from the current "company" to "company and shareholders." Despite strong opposition from the business community, the amendment to the Commercial Act is set to become a reality. Above all, President Lee Jaemyung's determination is unwavering. During his presidential campaign, President Lee stated, "We need to reinforce the existing proposal and make it stronger," and "It won't even take a month after taking office." In fact, the amendment now includes the 3% rule?which was not in the original proposal?limiting the voting rights of the largest shareholder and related parties to 3% when electing audit committee members. The process is expected to move quickly, with the National Assembly possibly passing the bill as early as June 12, and immediate enforcement after presidential promulgation without any grace period.

Immediately, the urgency has reached all companies?since the Commercial Act applies to both listed and unlisted firms. Companies are concerned because the concept of "shareholder" is ambiguous, and the obligations toward them are only stated in broad, principled terms such as "loyalty," "protection," and "fairness," making the scope excessively wide. As a result, management is becoming more cautious, companies are embroiled in lawsuits, and activist funds are increasingly threatening corporate control.

In such an environment, talking about "entrepreneurship" is meaningless. When directors' management decisions are subject to excessive criminal scrutiny, who would take risks and pursue aggressive management? Who would unleash their animal spirit and drive creative destruction?

The amendment to the Commercial Act is now a constant; it cannot be reversed. Supplementary measures are needed. First, detailed procedures must be established quickly to minimize initial confusion arising from the ambiguity and declarative nature of the regulations. The recent proposal by the five major business organizations to codify the "business judgment rule" should be actively considered. This would exempt directors from liability if they have fulfilled their duty of care as a prudent manager, even if the company suffers a loss.

In this context, it is also worth considering abolishing the crime of breach of trust under the Criminal Act and the special breach of trust under the Commercial Act. Businesspeople are deeply anxious about breach of trust charges because the standards are vague and the scope is too broad. It is telling that people say, "If you want to charge someone, you can always find a way," "It can be interpreted any way you want," and "Anything and everything can be punished." Some business leaders say they "always feel like they're walking along the prison wall" because of breach of trust laws. The amendment to the Commercial Act is likely to push them even closer to prison. This is why even Lee Bokhyun, the former head of the Financial Supervisory Service who strongly advocated for the amendment, has suggested abolishing breach of trust as a kind of "barter." President Lee Jaemyung is also known to have mentioned the possibility of abolishing breach of trust when he met with Sohn Kyungshik, chairman of the Korea Employers Federation, during his tenure as party leader.

It is also necessary to consider providing companies exposed to threats to management control with defensive measures such as poison pills (the right of the largest shareholder to purchase new shares at a discount), dual-class voting rights, and golden shares (shares with veto rights). Flexible policy responses from President Lee and the ruling party are anticipated.

Companies are also urged to change. Outdated practices such as splitting and listing through spin-offs, and tunneling?diverting profits from listed companies to controlling shareholders?must stop. Repeating these practices, which triggered the amendment to the Commercial Act in the first place, while calling for the elimination of the Korea Discount (undervaluation of the Korean stock market) and discussing KOSPI level-up (value-up), is also meaningless.