"KOSPI 5000 Requires Introduction of Cumulative Voting System"

There has been a claim that the introduction of the cumulative voting system is essential to achieve the 'KOSPI 5000' target, which was one of President Lee Jaemyung's presidential campaign pledges. It is argued that only when three issues are resolved?amending the Commercial Act to introduce directors' duty of loyalty to shareholders, implementing the cumulative voting system, and retiring treasury shares?can the so-called 'Korea Discount' be eliminated.

Lee Changhwan, CEO of Align Partners, attended a seminar hosted by the Korea Corporate Governance Forum in Yeouido, Seoul on the morning of June 23 and stated, "For the KOSPI to reach 5,000 points within five years, the current price-to-book ratio (PBR) of around 1.0 must rise to between 1.3 and 1.7."

Regarding the introduction of directors' duty of loyalty to shareholders, which is the core of the proposed Commercial Act amendment, Lee assessed, "If the board is prevented from approving actions that harm the proportional interests of minority shareholders for the benefit of controlling shareholders, investor confidence will be enhanced. This can contribute to improving the PBR by lowering the cost of capital."

However, he emphasized that "simply preventing active harm is not enough to sufficiently raise the PBR," stressing the urgent need for the introduction of the cumulative voting system. He argued that only by introducing the cumulative voting system, which would encourage boards to work proactively for 'all' shareholders and enhance ROE, can the path to achieving KOSPI 5000 be opened.

The cumulative voting system allows shareholders to exercise as many votes as the number of directors to be elected per share they own, and all director candidates are voted on simultaneously, with those receiving the most votes being elected. Although it was introduced into the Commercial Act in 1998 to improve corporate governance, companies have been allowed to exclude it through their articles of incorporation, resulting in 97% of listed companies opting out. This has led to ongoing criticism of its ineffectiveness.

The Commercial Act amendment announced by the Lee Jaemyung administration includes the introduction of directors' duty of loyalty to shareholders, mandatory cumulative voting for large listed companies with total assets of 2 trillion won or more, and expanding the separate election of audit committee members. Lee commented, "At this point, the duty of loyalty to shareholders is highly likely to be legislated," but also expressed concern about the possibility that only this provision might be passed separately from the rest of the amendment.

He cautioned, "If that happens, there could be strong resistance to the other amendments, such as mandatory cumulative voting and expanding the separate election of audit committee members, which are more effective in practice, making legislation difficult." He further suggested that "the issue of board independence is significant not only in large listed companies but also in general listed companies," and recommended expanding the application of the existing 3% voting rights cap?previously applied only to large listed companies?to companies with total assets under 2 trillion won, which are excluded from the mandatory cumulative voting requirement.

From a global corporate governance perspective, the revitalization of the cumulative voting system in Korea was also evaluated as an essential measure. Stephanie Lin, Head of Korea Research at ACGA and the second presenter, highly praised the 'Value-Up Program' for advancing the capital market, but pointed out, "There are still serious structural problems in terms of board accountability and protection of minority shareholders."

Lin emphasized, "The cumulative voting system is one of the few tools that allows minority shareholders to counteract excessive influence and entrenchment by controlling shareholders. Strengthening the cumulative voting system is essential not only for protecting investor rights, but also for promoting long-term governance reform and aligning Korean corporate governance with global standards." She also added that, to ensure the effectiveness of the system, improvements to shareholder meeting administration in line with global standards?such as providing shareholder meeting materials in English and disclosing the number of shares voting for or against each agenda item?should be implemented in parallel.

During the subsequent panel discussion, participants also stressed the necessity of revitalizing the cumulative voting system to eliminate the Korea Discount. Jen Sison, CEO of the International Corporate Governance Network (ICGN), stated, "Strengthening corporate governance and ensuring that minority shareholders can exercise real shareholder rights are key means of increasing corporate value and defending against downside risks."

Choi Jooncheol, CEO of VIP Asset Management, also commented, "The current structure, where even with a 49% stake it is impossible to appoint a single director at the general meeting, is clearly abnormal. The cumulative voting system is the first step in transforming an imperial board dominated by the largest shareholder into a decision-making body with real checks and balances." Oh Seungjae, Co-CEO of Sustinvest, a leading domestic proxy advisory firm, expressed support for the introduction, saying, "In today's rapidly changing business environment, it is difficult for Korean companies to remain competitive without a capable board."

Koo Hyunjoo, an attorney at HANNURI Law, presented institutional improvements needed for the cumulative voting system to function effectively in practice. He pointed out, "Even if the cumulative voting system becomes mandatory, certain requirements such as shareholding ratios must be met for it to be applied at shareholder meetings, and attempts by companies to neutralize the system must also be overcome." He stressed that concrete procedural regulations, as well as legal provisions and guidelines, must be established in parallel.

Lee Namwoo, Chairman of the Governance Forum, stated, "Amending the Commercial Act alone is not enough," and emphasized that, in addition to introducing directors' duty of loyalty to shareholders through the Commercial Act amendment, the cumulative voting system and treasury share retirement must also be addressed. He said, "If all three are resolved simultaneously, the Korean stock market will be able to receive fair value recognition."