South Korea’s opposition-controlled parliament passed a revision to the Commercial Act on Thursday, expanding the fiduciary duty of board members to protect the interest of minority shareholders.
The amendment aims to address the so-called “Korea discount,” a term used to describe the undervaluation of Korean companies compared to their global peers due to poor corporate governance and lack of shareholder protections.
The bill’s fate remains uncertain, as the ruling conservative People Power Party has opposed the revision and called on acting President Choi Sang-mok to veto it. The government has been pushing for voluntary improvements in corporate governance, but the opposition argues that legislative changes are necessary to revitalize the stock market and attract foreign investment.
What You Should Know About the Changes in the Revised Commercial Act
The revised Commercial Act introduces several significant changes:
- i.Expanded Fiduciary Duty: Board members will now have a fiduciary duty to protect the interests of shareholders, not just the company.
- ii.Enhanced Board Independence: The amendment aims to address the lack of independence in boards at family-run conglomerates, known as chaebols, which often prioritize family interests over those of minority shareholders.
- iii.Virtual Shareholder Meetings: Publicly traded companies will be required to hold virtual shareholder meetings, making it easier for minority shareholders to participate in major decisions.
These changes are designed to improve corporate governance, increase transparency, and boost investor confidence in South Korea’s equity market.
Opposition and Business Community Pushback
The main opposition Democratic Party has championed the revision, arguing that it is essential to address the undervaluation of Korean companies and attract foreign capital. However, the business community, including major chaebols like Samsung and Hyundai, has expressed strong objections.
A South Korean business association warned that the amendment could expose companies to shareholder lawsuits and speculative attacks from overseas funds. The ruling People Power Party also criticized the bill for being overly broad, as it applies to over a million companies rather than focusing on publicly traded firms where governance issues are most pronounced.
Government Efforts to Improve Corporate Governance
The South Korean government has been encouraging listed companies to voluntarily improve shareholder returns and enhance board accountability. Analysts often cite poor corporate governance as a key factor behind the underperformance of the local equity market compared to global indexes.
The Financial Services Commission has proposed additional measures, including mandatory external valuations for mergers and acquisitions, to better protect minority shareholders’ rights. These efforts align with the broader goal of making South Korea’s corporate sector more attractive to domestic and international investors.
Implications for South Korea’s Economy
The revised Commercial Act represents a significant step toward addressing long-standing issues in South Korea’s corporate governance framework. By expanding the fiduciary duties of board members and enhancing shareholder protections, the amendment aims to reduce the “Korea discount” and improve the competitiveness of Korean companies in global markets.
However, the bill’s future remains uncertain, as acting President Choi Sang-mok has previously expressed reservations about the revision. His decision to sign or veto the bill will have far-reaching implications for South Korea’s economy and its reputation as a business-friendly destination.
