[Independent Directors Under Scrutiny]②Stuck in Place for 30 Years: "Return Authority and Impose 'Bankruptcy-Level' Accountability"

Independent Directors Still Used as "Rubber Stamp Shields"...Expert Recommendations
"Compensation Should Reflect Reality, but Directors Must Be Personally Liable for Wrong Decisions"
Urgent Need to Shift Burden of Proof So Directors Must Prove Fairness

Editor's NoteWith the revision of the Commercial Act, outside directors are now called "independent directors." Companies are transferring the position of board chair, previously held by owners, to outside directors, and financial holding companies are also emphasizing stronger board independence. However, a change in name and form does not guarantee that oversight functions will work effectively right away. At major corporations, dissenting opinions from outside directors remain rare, and boards at financial holding companies are still criticized as "rubber stamps" that merely endorse the CEO's decisions. For outside directors to achieve true independence, structural changes are needed, including diversifying nomination channels, granting real authority, improving evaluation and disclosure systems, and strengthening legal accountability. This series examines how boards in industry and finance are operated and explores what must be done for the outside director system to become a substantive oversight mechanism, not just a formality.

Although the revision of the Commercial Act has introduced a fiduciary duty to shareholders and changed the title of outside directors to "independent directors," making boards appear more advanced, experts commonly agree that substantive change remains distant. They emphasize that a system in which outside directors are given both authority and fair compensation, while also being held strictly accountable for poor decisions, is essential to match global standards.

Breaking the Tradition of Companies Holding on to Power

An expert in corporate governance, who requested anonymity, told The Asia Business Daily on June 14, "Even though it has been 30 years since the outside director system was introduced after the Asian financial crisis, Korean boards have failed to progress not because of a lack of individual director competence, but because companies refuse to relinquish board authority."

The expert continued, "Core authorities—such as nominating and appointing outside director candidates (the Outside Director Nomination Committee), appointing external auditors (the Audit Committee), and establishing executive compensation systems (the Compensation Committee)—must be fully returned to the board." Most importantly, the outdated practice of large company owners clinging to control out of fear of losing power due to small ownership stakes must end, and a "great awakening" is needed to completely transfer authority to the board.

Experts advise that along with decentralizing authority, compensation for independent activity must be made more realistic. They explain that as the revised Commercial Act has increased directors' responsibilities, excessively low compensation could discourage active board oversight. Currently, outside directors at major Korean companies are paid about one-fifth of the compensation their U.S. counterparts receive. The expert said, "We need to dramatically increase compensation, but also greatly expand the time committees are active and communication efforts to establish a culture of 'fair work, fair pay.'"

Along with improving board authority and compensation structures, some point out that the composition of board members also needs to be reformed. Rather than relying on the usual appointments of former government officials or professors of law and accounting, companies should bring in industry experts who understand real business mechanisms and can candidly challenge management. Park Jongchul, president of the Woori Management Research Institute, said, "Since there are still many cases where outside directors do not fully understand their essential role, it is also necessary to establish a continuous education system."

"If it was fair, the director must prove it"

As authority and compensation increase, many argue that legal liability must also become more serious. Directors who side with owners and approve agenda items that harm general shareholders should face strict legal penalties. President Park said, "There should be a culture in which 'shareholder derivative lawsuits' are routinely filed to directly hold directors accountable when they uncritically approve unfair management decisions or conflict-of-interest transactions."

He particularly emphasized, "The market must be made widely aware that damages and substantial legal costs arising from shareholder derivative lawsuits are not covered by Directors and Officers (D&O) insurance and must be paid out of pocket, which is a fatal risk." He added, "This is the only way to foster a culture in which directors carefully consider proper decision-making."

However, experts note that the current litigation structure limits the effectiveness of shareholder derivative lawsuits. When minority shareholders, who lack access to information, must directly prove directors' conflicts of interest, even a widespread litigation culture cannot provide meaningful oversight due to a lack of tools.

As a solution, experts suggest shifting the burden of proof. Rather than demanding that shareholders uncover wrongdoing, directors themselves should have to prove the fairness of contested transactions. Kim Woochan, professor of business administration at Korea University, said, "In the United States, case law already requires directors to directly prove fairness in breach of fiduciary duty cases," adding, "If decisions are honest and fair, there is no reason to fear a shift in the burden of proof."

To address concerns that shifting the burden of proof could excessively constrain boards, Professor Kim also proposed safeguards. "If the board's agenda is reviewed and approved by an independent committee composed solely of outside directors and receives approval from disinterested minority shareholders (MOM), then the transaction should be recognized as fair through institutional linkage," he explained. This is the approach developed in Delaware case law in the U.S.: decisions made through proper procedures are subject to less judicial scrutiny, but those that are not are held to strict accountability.

Professor Kim concluded, "Instead of the time-consuming and ill-fitting American-style discovery process, we should adopt a system in which, for breaches of fiduciary duty, directors are required to prove their own fairness. Only then will the Commercial Act revision truly have an impact."

This content was produced with the assistance of AI translation services.