Starting with 2014 general meetings, shareholders can expect to elect directors by cumulative voting in Korea. According to the recent announcement of the Ministry of Justice concerning the revisions of the Commercial Act, if a company’s asset size exceeds a minimum threshold, the company will be required to adopt a cumulative voting system. The applicable minimum threshold and other specific provisions will be determined in its related Enforcement Decree.
While a cumulative voting system was actually adopted in 1998, most Korean companies have avoided its implementation through an amendment to their articles of incorporation at shareholders’ general meetings. According to a recent study of 734 Korean listed companies, only 57 companies maintain the cumulative voting system. Among the top 100 Korean companies, there are only four.
If a company exceeds the soon-to-be determined asset size, this requirement will be mandatory and cannot be removed at a shareholder meeting. While it seems more applicable to large companies, cumulative voting would increase the power of minority shareholders to elect board members to represent their interests. It is anticipated to enhance the independence and oversight of the board of directors, especially at chaebol companies with problematic board members.
Perhaps unsurprisingly, this year Korean chaebol owners, such as Chey Tae Won and Chey Jae Won of SK, Kim Seung Youn of Hanwha, Lee Ho Jin of Taekwang, and Park Chan Koo of Kumho Petrochemical, are still regularly making major headlines with their criminal charges and/or scandals. It has been often found that convicted founding family members have continued to serve as the chair of the board of directors, even though their large companies should have at least more than 50% of board independence. The public has strongly criticized the roles of the independent directors since their actions have seemed heavily influenced by the founding family members or the management. Hopefully, this new change would encourage independent directors to perform their job more properly, as expected by shareholders, by providing checks and balances and establishing a stronger position of independent directors as part of proactive board members, rather than acting as a rubber stamp.
The full effect is still unknown. Some professionals are skeptical regarding the actual implementation and its potential success, given the number of exceptions and preconditions prescribed in the bill. Corporations, unsurprisingly, strongly oppose the bill. The National Assembly still needs to discuss the revised bill. Investors globally would undoubtedly be encouraged by the implementation of mandatory cumulative voting, as it would be a strong, positive signal of the nation’s continuing efforts to employ sound corporate governance practices.