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Profile of Director: The Case of Korea. 3 rd Asian Roundtable on Corporate Governance OECD The Role of Boards and Stakeholders in Corporate Governance 4-6 April, 2001 Singapore Hasung Jang Korea University / PSPD Phone: 82-2-3290-1929 Fax:82-2-929-3405 Email: jangya@chollian.net.

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profile of director the case of korea

Profile of Director:The Case of Korea

3rd Asian Roundtable on Corporate Governance

OECD

The Role of Boards and Stakeholders in Corporate Governance

4-6 April, 2001

Singapore

Hasung Jang

Korea University / PSPD

Phone: 82-2-3290-1929 Fax:82-2-929-3405 Email: jangya@chollian.net

new regulation on board composition
New Regulation on Board Composition
  • Outside Director
    • All public company’s board should be comprised at least 25% outside directors
    • Financial Institutions & public companies with assets over 2 tr won, at least 50% outside director
  • Outside Director Nomination Committee
    • Mandatory for public companies with assets over 2 tr won and security brokerage companies.
new regulation on board composition3
New Regulation on Board Composition
  • Audit Committee
    • Public company with asset larger than 2 tr won ($1.7bil)
    • 2/3 of the committee should be outside directors
    • 3% voting right limit for election of committee member (2001)
  • Cumulative Voting System
    • Opt-out system
new regulation on director
New Regulation on Director
  • Fiduciary Duty of Directors
    • Explicitly Stated in Commercial Code
  • Shadow Director’s Liability
    • Controlling Shareholder’s Liability Acknowledged
  • Minority Shareholder Rights Strengthened

1997 1998 2001

Filing Derivative Suit 1 % 0.01% 0.005%

Requesting Termination 1% 0.5% 0.25%

of Directors and Auditors

qualification of outside director
Qualification of Outside Director
  • Security Exchange Code Defines Negative List
  • List is to Preclude Individuals Who have Direct Conflict of Interest.
    • Person who has a “special” relationship with the largest shareholder
    • Major shareholder of the company or that person’s spouse or lineal ascendant or descendant
qualification of outside director6
Qualification of Outside Director
  • Person who is an executive or full-time employee of the company or any of its affiliated companies or who was one for any of these companies within the preceding two years
  • Spouse or lineal ascendant or descendant of an officer or director of the company
  • Officer, director or full-time employee of a company that has an “important business relationship,” or who was one for any of these companies within the preceding two years
qualification of outside director7
Qualification of Outside Director
    • Officer, director or full-time employee of a company in which an officer, director or employee of the concerned company is a non-standing director
  • More challenging question is whether similar qualification should also be established for inside directors who has more of interest conflicts than outside directors
slide8

Composition of Board

1998 1999 2000

Number of Company (736) (701) (693)

Executive Directors 5,857 4,850 4,601

(88.6%) (75.2%) (69.2%)

Outside Directors 669 1,204 1,418

(11.4%) (24.8%) (30.8%)

Auditors 1,059 1,016 795

(89.7%) (87.9%) (90.3%)

Outside Auditors 109 123 77

(10.3%) (12.1%) (9.7%)

persistent problems with the board
Persistent Problems with the Board
  • Self Dealing of Directors
    • Fiduciary duty not enforced
    • More interest conflict than outside directors
  • Entrenchment of Management through Affiliates’ Ownership
    • Controlling shareholder own less than 4%
    • Equity investment into affiliates increased substantially
persistent problems with the board11
Persistent Problems with the Board
  • Cumulative Voting Opted Out
    • Top 30 Chaebols : 92% excluded
    • Non Chaebols: 76% excluded
  • Independence of Outside Director in Question
    • Majority are chosen by controlling shareholder & Mgt.
    • Rubber Stamping
    • Poor Attendance
persistent problems with the board12
Persistent Problems with the Board
  • Attendance Rate of Outside Directors

1st Half 1999 2nd Half 1999 1st Half 2000

43.9% 47.7% 53.5%

  • Who Selected Outside Director?

1999 2000

Controlling Shareholder 41.8% 39.9%

Management 46.4% 39.9%

Creditor Banks 5.1% 4.5%

Others 6.7% 15.7%

attendance of board meetings samsung electronics co
Attendance of Board MeetingsSamsung Electronics Co.

1998 1999 2000

Number of Meetings 11 13 11

KH Lee Chairman 0 0 0

HS Lee Chairman’s Secretary 0 0 8

IJ Kim Chairman’s Secretary - 2 10

JY Yoon CEO 9 12 11

DS Choi CFO 11 13 11

SH Lee Director - - 5

KT Lee Director - - 6

SR Lim Outside Director 5 10 9

F Hirlinger Outside Director 7 9 7

Iwasaki Outside Director - - 6

obstacle on independent board
Obstacle on Independent Board
  • Concentrated Ownership Structure
    • Circular Equity Ownership
    • Pyramidal Equity Ownership
  • Passive Local Institutional Shareholder
    • Investment Institutions are owned by chaebols
    • “Corporate Account” in Investment Institutions
  • Complex and Costly Proxy Procedure
    • Election of outside director is practically impossible
case election of outside director
Case: Election of Outside Director
  • Case 1: Samsung Electronics Co.
    • Minority shareholders propose outside director candidate, but failed in proxy contest
    • 16% of supports mostly from foreign institutions
    • Could have been successful if cumulative voting
  • Case 2: SK Telecom, Hyundai Heavy Ind.
    • Elected 2 outside director at SKT, 1 at HHI
    • Cooperation from management and major foreign shareholders
slide17

Circular Equity Ownership: Hyundai Group

Kia Motors

H Securities

H. Precision

Hyundai Co.

H Elevator

H. Motors

H. Heavy Ind

H Shipping

Mipo Shipyard

H Financing

Ulsan Merchant Bank

H Construction

H. Steel Pipe

Inchon Steel

H Electronics

pyramidal equity ownership samsung group
Pyramidal Equity Ownership: Samsung Group

Samsung Elec

Samsung Corp

Samsung Life

Cheil

Comm.

Samsung

Heavy Ind.

Samsung

Foudation

Samsung

Mech. Elec

Samsung SDI

Samsung

Security

Samsung

Everland

Hotel

Shilla

Samsung

Card

Samsung

F&M Ins

Samsung

Engineering

Samsung

Techwin

Samsung

Prec.Chem

Samsung

Capital

Cheil

Textile

case election of outside director19
Case: Election of Outside Director
  • Case 1: Samsung Electronics Co.
    • Minority shareholders propose outside director candidate, but failed in proxy contest
    • 16% of supports mostly from foreign institutions
    • Could have been successful if cumulative voting
  • Case 2: SK Telecom

Hyundai Heavy Ind.

    • Elected 2 outside directors at SKT, 1 at HHI
    • Cooperation from management and major foreign shareholders
independence of outside director in question
Independence of Outside Director in Question
  • Case 1: Samsung Electronics Co.
    • Board Approved Debt Guarantee of Chairman Lee’s Personal Liability
  • Case 2: Samsung SDI
    • Board Approved Purchase of Shares of a Private Company Owned by Chairman’s Son
  • Case 3: Hyundai Heavy Industry
    • Board Filed Law Suit against Affiliated Companied to Recover Loss
slide21

Case 1: Board Approve Debt Guarantee of Chairman's Liability

Creditor

Banks

Default Loan $2.5 BIl

Samsung

Motor

Samsung

Electronics

Collateral

Samsung

Life Ins.

Debt Guarantee

Loss $1.7 bil

at $200/Sh

Samsung

SDI

4 mil Shares

at $635/Sh

Samsung

Mech. Elec.

Penalty Interest

$487/year

Chairman

KH Lee

Samsung

etc.

case 2 board approve purchase of shares owned by chairman s son
Case 2: Board Approve Purchase of Shares Owned by Chairman's Son
  • Samsung SDI
    • Board Approved Unanimously
    • Purchase Amount: 3.6 bil won ($2.8 m)
    • 3 Days Share Value Loss: 444.1 bil won ($341.6m)
    • Market adjusted price change: -14.7%
  • Cheil Communication Co.
    • Purchase Amount: 20.8 bil won ($16.1m)
    • 3 Days Share Value Loss: 76.2 bil won ($58.6m)
    • Market adjusted price change: -16.3%
slide24

Case 3: Board Acting Independently from the Group Affiliation

Hyundai

Electronics

$200Mil

Hynudai

Securities

Debt Guarantee

CIBC

Law Suit!

$200Mil

Debt Guarantee

Debt Guarantee

Hyundai

Heavy Ind.

case 3 positive effect on share price board acting independently
Case 3: Positive Effect on Share PriceBoard Acting Independently
  • Hyundai Heavy Industry Board Acting Independently
  • Hyundai Motors Co. Separated from the Group

KOSPI HMC HHI HCE HEI

Jan 4: 100.0 100.0 100.0 100.0 100.0

Mar 14: Family Feud Started 79.9 83.2 62.6 76.5 65.5

May 31: HMC Revolt 69.1 48.5 58.5 68.4 54.9

July 28: HHI Law Suit 65.4 46.7 67.4 43.7 65.4

Aug 31: HMC Separated 65.0 50.6 81.2 78.8 47.8

Oct 31: 48.6 45.6 62.8 27.2 22.0

Jan 31: 58.4 60.7 74.2 22.7 42.2

Mar 16: 50.9 61.6 81.4 12.2 25.5

case 3 positive effect on share price
Case 3: Positive Effect on Share Price

Family Feud Started

HMC Separation

HHI Law Suit

possible solutions
Possible Solutions
  • Cumulative Voting
    • It should be mandatory for countries where ownership is concentrated
    • Only way to elect independent director of minority shareholders’ choice
  • Ownership Diversification
    • Stricter Listing Requirements on Ownership Diversification
possible solutions28
Possible Solutions
  • Increasing Liability of Directors
    • Derivative suit should be allowed for any shareholder
    • Security class action suit should be allowed
  • Independence of Executive Director
    • Independence qualification of executive director should be defined similar to one of outside director
    • Independence from controlling shareholders
possible solutions29
Possible Solutions
  • Director’s Term Should be Shortened
    • One/Two year term: Re-election every year
    • All Directors’ term should expire at the same time
  • Incentive Compensation
    • Stock option to directors
    • Compensation committee solely by outside directors
possible solutions30
Possible Solutions
  • Pro-Active Role of Institutional Shareholder
    • Independence of local institutions
    • Corporate finance section should be separated by “Chinese Wall” from equity investment section
    • Active involvement of public pension fund
    • Pro-active voice from foreign shareholders
    • Rule of “Sell it if you do not like management” does not work in emerging markets
possible solutions31
Possible Solutions
  • Market for Outside Directors
    • Education for Directors
    • Assignment system from the “certified pool”
  • Separation of

Ownership of “Financial Institution” from Ownership of “Industrial Company”