[One Year After the Commercial Act Amendment]② "No Real Changes to Boards as Companies Attempt to Undermine Reform Intent"

70% of Experts Identify "Lack of Board Independence" as the Biggest Problem
Average Implementation Score: 54.1 Points—A "Partial Success"
Bypassing Amendments Approved at Shareholders’ Meetings... "Follow-up Legislation and Case Law Needed"

Editor's Note
With the implementation of the Commercial Act amendment focused on strengthening shareholder rights a year ago, the Korean capital market took its first step toward resolving the so-called "Korea Discount" (the undervaluation of Korean stocks). Over the past year, a series of institutional reforms have followed—including the expansion of directors' fiduciary duties, the strengthening of shareholder rights, and continuous corporate governance improvements. However, there remain a considerable number of tasks to enhance the effectiveness of these systems. On the first anniversary of the amended Commercial Act, The Asia Business Daily is conducting a four-part special report drawing on surveys and interviews with experts from financial investment, academia, the business sector, and legal circles to examine the impact of the amendment on the capital market and to discuss what is needed to usher in a "Korea Premium" era.

"The law has changed, but companies' decision-making structures themselves have not yet changed sufficiently."

Experts who have observed the domestic capital market over the past year since the amended Commercial Act was enforced broadly evaluate its outcome as a "half success." While they acknowledge that companies have expanded shareholder returns and that shareholder rights have been institutionally strengthened, they also point out that boards of directors—the core of corporate governance—are still not fulfilling their role. On-site, people complain that there is a severe lack of authoritative interpretations necessary for practical application, and that the burden on companies has increased sharply in a short period.

On July 22, The Asia Business Daily conducted a survey of 20 capital market experts on the one-year anniversary of the Commercial Act amendment. Seventy percent of respondents cited "boards lacking independence" (multiple responses allowed) as the most prominent problem in the current corporate governance system. This was followed by "decision-making concentrated around controlling shareholders" (60%), and "insufficient protection of minority shareholders" (50%). Namwoo Lee, President of the Korea Corporate Governance Forum, remarked, "Qualitative improvement of the board of directors is a long-term task," adding, "The biggest concern is boards degenerating into mere formalities."

An expert who requested anonymity said, "It is a clear change that many listed companies have started to seriously consider the board's role, communication with shareholders, and capital allocation policies, compared to before." However, the expert expressed concern about the "formalization of the system." The expert explained that if companies focus more on avoiding legal liability rather than enhancing corporate value, or if investors only push for short-term shareholder returns, the fundamental objectives of the amended Commercial Act will inevitably be diluted.

In this survey, experts rated the initial on-site settlement of the amended Commercial Act with an average score of 54.1 out of 100. While the highest grade awarded was 85 and the lowest was 5, with differing opinions, as many as 8 respondents gave scores above 70, suggesting a broadly positive perception of the reform's direction. However, one expert who gave the minimum score of 5 criticized, "Because the amendment was hastily enacted as a result of political considerations rather than legal principles of the Commercial Act, there is a severe lack of authoritative interpretations for practical application," further pointing out, "Only some portions of the previous legal system have been changed, resulting in low consistency with disclosure regulations."

A significant number of experts commonly pointed out that there are already moves among companies seeking to circumvent the intent of the system. Woochan Kim, Professor at Korea University Business School, who gave a score of 50, mentioned that during the most recent shareholder meeting season, many companies proposed amending their articles of incorporation to lower or newly set a maximum number of directors. He remarked, "What I was most concerned about—attempts to neutralize the amended Commercial Act—has become a reality." Attorney Kwangjoong Kim of Klass Hangyeol Law Firm (score 30) similarly pointed out that "amendments to articles of incorporation intended to avoid the spirit of the reform have been carried out."

This year, the passage rate for agenda items at regular shareholders' meetings that do not align with the original intent of the amended Commercial Act surpassed 90%. According to analysis by Align Partners Capital Management of KOSPI200 listed companies' general meeting agendas, the "flexible director term system" was approved in 20 out of 21 cases (95%), and items to "reduce or set the upper limit of board size" were approved in 23 out of 25 cases (92%). Agenda items for "management-purpose use of treasury shares" had a 100% approval rate (26 out of 26 cases). These items are classified as ways to neutralize the cumulative voting system, which becomes mandatory from September under the Commercial Act amendment and to restrict the entry of outside directors, thereby potentially strengthening the control of dominant shareholders.

Previously, The Asia Business Daily conducted a complete survey of the in-favor and opposed positions of outside directors on board agenda items at 100 top listed companies and their affiliates among the largest business groups subject to disclosure. Of a total of 2,929 board agenda items, only 8 items were actually rejected or postponed following negative or reserved opinions—accounting for less than 0.3% of the total. This result suggests that while the amended Commercial Act has increased boards' responsibilities, their monitoring and checking function remain severely limited.

Sangmok Lee, CEO of ACT, a minority shareholder activism platform, stated, "Things are moving in the right direction, but companies' mindsets remain stuck in the past," stressing that "it is essential to resolve the issues stemming from a lack of operational detail that can drive real changes in corporate behavior." Minguk Kim, CEO of VIP Asset Management, commented, "Directors are clearly more conscious of litigation risks and have adopted a more open attitude toward communication with shareholders, which is a clear sign of progress." However, he also pointed out, "There are still no clear guidelines or case law defining exactly what constitutes a breach of fiduciary duty to shareholders." He added, "Circumventive maneuvers for strengthening control—such as treasury share swaps—continue behind the pretext of 'strategic partnerships,' and in many instances, boards act as rubber-stamp bodies."

Some voices emphasize the need to consider companies' capacity to adapt and to urgently enhance legal predictability for stable management. An anonymous respondent said, “When amending the Commercial Act, practical restrictions and problems to be resolved at each stage of implementation should have been addressed proactively while taking into account companies’ ability to adapt,” and cited as the most urgent needed reforms the independence of company law within the Commercial Act and the enactment of a Law on Listed Companies. A business community official similarly argued, “Companies need greater legal predictability for stable management,” and added, “Supplementary legislation—such as codifying the management judgment rule—is needed for already amended provisions.”

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