The Revised Commercial Act Arrives... Eight Out of Ten Food Companies Unprepared [K-Food G Report] ⑧

'Director Fiduciary Duty' System in Place,
But Largely Ineffective
8 Out of 10 Boards Require Overhaul
"Potential for Corporate Policy Shifts
vs. Need to Prioritize Long-Term Interests"

Editor's NoteAlthough the global "K-Food" boom has elevated the status of Korean food companies, their outdated governance structures remain largely unchanged. While global brand credibility continues to rise, critics point out that management systems are still rooted in past practices, with insufficient efforts to restore investor trust. In line with the implementation of the revised Commercial Act, Asia Economy has assessed the governance structures of the top 20 listed food companies by market capitalization. Over the course of five articles, we will examine the results of quantitative and qualitative analyses across ten categories-including dividend policy, treasury stock policy, dual listings, and board composition-as well as identify areas for improvement.

#On August 1, Kim Hongkuk, chairman of Harim Group, faced a shareholder derivative lawsuit holding him liable for fines resulting from unfair support to the second-generation owner and collusion. The Economic Reform Solidarity argued that Chairman Kim should compensate for a total loss of 1.92 billion KRW, caused by the undervalued sale of his eldest son's private company and price collusion in the poultry industry. They emphasized his responsibility, stating that, having served as CEO for over 25 years, Kim either led these illegal acts or neglected his duty to supervise them.

#Last month, minority shareholders of Lotte Wellfood took action. On July 28, they filed a shareholder derivative lawsuit worth 27.3 billion KRW against 17 current and former directors, including Lotte Group Chairman Shin Dongbin. They claimed that the board neglected the risk of price collusion in the ice cream sector for several years, resulting in a 11.8 billion KRW fine, and that Chairman Shin unjustly received 15.4 billion KRW in compensation despite being unable to serve in a full-time capacity.

Food companies are now facing a wave of lawsuits from minority shareholders. The revised Commercial Act, which took effect on July 15, expanded the directors' duty of loyalty to cover not only the company but all shareholders. The law now mandates that boards strengthen procedural legitimacy and protect shareholder interests in key decisions such as mergers, splits, new share issuances, and management control defenses. While most food companies have systems in place to ensure board independence, their actual effectiveness remains lacking.

'Directors' Duty of Loyalty' Exists, But Remains Ineffective 

On August 14, Asia Economy evaluated the "efforts to comply with directors' duty of loyalty" among the top 20 listed food and beverage companies by market capitalization. Only three companies-KT&G, Orion, and Pulmuone-received full marks (2 points). The remaining 85% (17 companies) had relevant systems but operated them only superficially. The evaluation criteria awarded 2 points (majority independent directors + substantive committee operations), 1 point (partial independence or formal structure), and 0 points (owner-centered operation), based on the proportion of outside directors and the effectiveness of board committees.

The three top-scoring companies had a majority of outside directors, and key committees such as audit, compensation, and ESG (environmental, social, and governance) held multiple meetings annually to review and resolve agenda items, ensuring effective oversight.

Pulmuone, after introducing Korea's first lead outside director system in the food industry in 2018, strengthened its board by increasing the proportion of outside directors, operating independent meetings led by outside directors, and establishing a board secretariat. The lead outside director system allows an outside director to represent the outside directors when the board chair is not an outside director. Currently, Pulmuone holds at least three regular meetings of outside directors alone each year, and topics discussed in these meetings are reflected in board and committee agendas.

8 Out of 10 Companies Need Board Restructuring

Nine companies-including Lotte Wellfood, Dongwon Industries, Daesang, SPC Samlip, and Hite Jinro-scored only 1 point. Although they established committees, only some operated independently, and most held just one or two meetings per year, resulting in weak oversight. Daesang lacks procedures and standards for handling shareholder proposals and does not operate an ESG board. Lotte Wellfood included a "restriction on appointing executives who damage corporate value" clause in its charter, but made an exception for reappointing Chairman Shin, an owner with legal issues, as an inside director.

Eight companies-including Samyang Corporation (Vice Chairman Kim Won), Namyang Dairy Products (Chairman Yoon Yeoel), and Samyang Foods (Vice Chairman Kim Jeongsu)-received 0 points. Most of them had owner-centered structures and lacked even basic committees such as audit or outside director nomination committees. Namyang Dairy Products only has a management committee and a compensation committee under its board, both chaired by Yoon Yeoel, chairman of Hahn & Company and non-executive director. Neither an audit committee nor an outside director nomination committee has been established.

Among the amendments to the Commercial Act announced last month, the directors' duty of loyalty to shareholders took effect immediately. By the end of this year, a revised enforcement decree will require listed companies with assets under 2 trillion KRW to increase the proportion of outside directors from "at least one-fourth" to "at least one-third." Namyang Dairy Products, with only one outside director out of four board members, must increase this to at least two. Binggrae (two out of six) and Sunjin (three out of seven) meet the legal minimum but only just.

"Potential for Corporate Policy Change vs. Need to Consider Long-Term Interests"

The capital market views this not as a declarative norm, but as a catalyst that expands the legal responsibilities of management. It provides grounds to strengthen procedural legitimacy and protect shareholder interests in key decisions such as mergers, splits, new share issuances, and management control defenses.

As the directors' duty of loyalty now extends to all shareholders, not just the company as before, boards must comprehensively consider any disadvantages to all shareholders, including minority shareholders. The law imposes a legal obligation to protect minority shareholders' rights in board resolutions that may benefit controlling shareholders but infringe on minority interests.

As a result, if decisions that harm minority shareholder rights are made in the future, individual directors are likely to face greater personal accountability. In particular, when making decisions on transactions between major shareholders and related parties, directors will be required to actively demonstrate that such decisions benefit both the company and its shareholders. Practices such as providing excessive business opportunities to specific affiliates, misappropriating business opportunities, lending funds to insolvent affiliates, and circular shareholding structures may also be curbed. Han Yujeong, a researcher at Hanwha Investment & Securities, commented, "With the expansion of directors' duty of loyalty, the obligation to provide a legitimate explanation for shareholder returns has been strengthened, increasing the likelihood of policy changes. Not only short-term shareholder returns, but also the legitimacy and strategic validity of new businesses or mid- to long-term growth investments should be actively shared with shareholders."

However, there are concerns that the amended Commercial Act could significantly restrict corporate management activities, highlighting the need for further institutional improvements. Chun Kyunghoon, a professor at Seoul National University, stated in his research paper "Directors' Duty of Loyalty and Protection of Shareholder Interests," "To protect shareholders' legitimate interests and investor trust, improvements to directors' duties must be accompanied by reforms in areas such as mergers, splits, new share issuances, disposal of treasury shares, and management control defenses. Courts should also actively consider substantive factors such as the company's and shareholders' long-term interests, not just formal requirements like standing or legal procedures, when judging directors' actions." He added, "It is also necessary to prevent the excessive criminalization of corporate cases and to narrow the scope of criminal breach of trust charges related to business conduct."