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MARIELA M. VARGOVA, PH.D.
Senior Vice President,
Senior Sustainability
and Impact Analyst
212.549.5236
mvargova@rockco.com

The Promise of Governance
Reform — South Korea

In his inauguration speech on May 10th, the newly elected
South Korean President Moon Jae-In vowed to put chaebol
reform at the forefront of his political and economic agenda.
“Under the Moon Jae-In administration,” he asserted, “the
collusive link between politics and business will completely
disappear.”1 The promise of meaningful governance reform
comes in the wake of the biggest political corruption scandal in
Korea that saw the impeachment and the arrest of democratically
elected President Park Geun-Hye on charges of “collecting or
demanding $52 million in bribes”2 from Samsung, one of
Korea’s largest family-owned conglomerates, known as chaebol.

The presidential scandal in Korea also led to the latest high-
profile corporate arrest in the country. In February, Jay Y. Lee,
vice chairman and acting leader of Samsung’s conglomerate
empire, was arrested on accusations of bribery to former
President Park and her inner circle in exchange for securing a
controversial merger of Samsung Construction and Trading
Corporation and Cheil Industries. While the image of a
handcuffed Lee sent shockwaves across the business world, his
arrest was not unprecedented. In the past, his father Lee Kun-
Hee, current chairman of Samsung, was convicted twice of
corruption and pardoned. Similarly, in 2007, Hyundai’s
Chairman Chung Mon-Koo was found guilty of fraud and
pardoned. And in 2013, SK’s Chairman Chey Tae-Won was
convicted of embezzlement and later pardoned.3 The family-
owned conglomerates have long dominated the economic life
of modern Korean society, accounting for roughly 50% of the
total share of the Korean stock market. Their close ties with the
government and state bureaucracy have fueled growing public
distrust and frustration with the nation’s leadership and has led
to increased shareholder discontent.

Korea’s Governance Practices
The collusion of politics and business in Korea highlights the
poor practices of corporate governance and business ethics.
Corporate governance studies on Asia consistently rate Korea as
lagging in governance behind leaders in the region.4 Korea
underperforms its peers in the areas of board independence,
ethics and transparency in corporate governance.

Korea, however, has not always been viewed as the laggard in
Asia’s governance landscape. Right after the Asian Financial
Crisis of 1997-1998, the country underwent important
governance reforms that sought to quickly and significantly
increase corporate board independence and the overall
governance of publicly-traded Korean companies. For instance,
the proportion of listed firms with at least one outside director
grew from 34% in 1999, to 62.3% in 2000, to reach 94% in 2007.5
In 2001 and 2003, the country’s Security Exchange Acts required
large listed companies (those with about $2 billion in market
capitalization) on the Korea Exchange and KOSDAQ to have at
least three outside directors and for one half of their boards to
be independent. In 2004, the board independence requirements
were further strengthened with the stipulation that there be a
majority of independent board directors for large companies.
This is on par with leading international best practices in
corporate governance. The Korean Commercial Code also
stipulates that outside or independent directors must not be
related to management while acting as fiduciaries.6 This
resonated with the impetus towards greater board independence
to mitigate the role of corporate insiders and create new
independent auditing structures within Korean corporations.
In 2012, the Korean Commercial Code was revised to further
enhance the board’s fiduciary duties. It required the approval of
two-thirds of directors for all internal transactions and for new
business dealings with third parties. If transactions or deals
benefit founding families or management at the expense of
minority shareholders, the approving directors will be personally
liable for the losses.7

Notwithstanding these developments towards good governance,
ethics controversies involving Korean chaebols surged over the
past several years. A prime example is the notorious Hyundai
Motor land bid in 2014 for which the company paid the excessive
price of $10 billion, three times the land’s market value of $3
billion, angering investors and hurting shareholder value.
According to reports, while the boards of directors of Hyundai
consortium companies voted to unanimously approve the deal,
the company’s outside directors were kept in the dark about the
price as it was considered by management to be a confidential
matter. All these instances point to a serious lapse in the

14 GLOBAL FORESIGHT THIRD QUARTER 2017
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