한국기업거버넌스포럼

We gather here today to declare that we will endeavor to accomplish our vision that corporate governance practices must be improved for Korea. To this end, we also proclaim that we shall establish better investor-corporate relationships, thus ensuring sustainable growth for this country and help Korea propel itself to a superlative economy.

Driving the economic growth from the ashes of the Korean War to an economic powerhouse with per capita income of over USD30,000 have been the heroic efforts by both Korean businesspeople and workers. During the era of an authoritarian economic development, the state used to interfere in corporate management as it pursued the policy of fostering exports and core industries through credit allocation. Over time, the corporate sector has grown significantly, and, as a result, the capital market has evolved to play a far more critical role than during the time of such a state-planned economic regime. This means that the state-driven economic planning and the state’s practical governance over the corporate sector have also almost vanished for Korea now. All these developments have led to a new paradigm where the role of corporate governance should work in a way that it takes care of both economic restructuring and capital allocation efficiency to ensure Korea’s long-term growth.

Korea's corporate groups have indeed led the nation's economic miracle during the past decades. Nevertheless, they have been reprimanded for serious moral hazard issues such as tunneling and expropriation, tyrannical management behaviors, and illegal successions for management control. Indeed, fingers are being pointed at Korea’s corporate groups and their top-executives as the ones who are primarily responsible for depressed economic growth and the economic inequalities. Provided that corporate activities, which should work to lead Korea’s stable and sustainable growth, fail to acquire social legitimacy and public support within the society, the future of Korea's economy inevitably has to be viewed pessimistically. Thus, the exemplary corporate governance standards, transcending transparency itself, will be all the more important going forward.

Corporate governance is a covenant whereby how a firm's major decisions are made and how stockholders, who finance the company, duly secure profits on their investments. Specifically, it addresses the essential items such as internal controls and procedures for corporate management and definitions for rights, roles, and responsibilities of various stakeholders, which encompass employees, management, the board of directors, controlling shareholders as well as general shareholders. Moreover, it provides an essential framework for proper check & balance, and incentives aimed at eliminating or minimizing conflicts of interests among stakeholders.

It also works to prevent a group of stockholders from engaging with illegal acquisition of cash flows and assets which belong to the entire stockholder class while providing security for the long-term sustainability of any corporate. The legitimacy crisis currently looming on the horizon of Korean companies is directly linked to the plight of corporate governance, meaning that the interests of general stockholders, the company's most important stakeholders, are not appropriately safeguarded in Korea at this juncture.

Who are the stockholders of Korean companies? Peter Drucker wrote a book in 1976, “The Unseen Revolution. How Pension Fund Socialism Came to America,” in which he declared that if the owners of the means of production are capitalists, the actual ownership of the United States belongs to American workers or the public people. Likewise, we proclaim that the actual owners of listed Korean companies in 2019 are Korean nationals: 22.3 million national pension fund members, 587 million retirement pension fund members, and 1.1 million public officials pension members. For example, the National Pension Fund, as established to finance the post-retirement life, invests KRW120 trillion in the Korean stock markets out of the total assets of KRW700 trillion won being accumulated by withholding 9% of all the monthly salaries of general employees in Korea. It has been a net buyer of Korean listed stocks by KRW10 trillion won this year to support the securities market.

Although much of the retirement funds paid by all payroll taxpayers in Korea have been invested in publicly listed companies, general stockholder rights are not adequately protected with relevant laws and provisions still flawed to a great extent. This reality leads to doubts about the legitimacy of corporate governance and, in turn, works to hinder economic growth.

Korean companies have globally unique corporate governance structures where the equity ownership of the controlling stockholder groups tends to be generally very fractional, but they control the whole company, taking advantage of equity ownerships through other affiliated companies. In this regard, general stockholders and institutional investors investing in many listed companies typically claim that such controlling stockholder groups often usurp their fair shares of profits from invested companies. This is because those controlling stockholders tend to capitalize on various transactions among controlling stockholders carrying conflicts of interests and large-scale capital transactions such as mergers, splits and spin-offs, voluntary delisting, and creations of holding companies. Indeed, it comes as such a painful realization that those controlling stockholder groups with only fractional equity ownerships technically shut out general stockholders, including the National Pension Service, on corporate governance matters.

The key reason for this problem is that general stockholders are non-controlling stockholders, although they own the majority of all outstanding stocks in listed companies in Korea. A drastic fluctuation in the structure of the industry tends to call for decisive corporate restructuring and management innovation, which swiftly redistribute business portfolios from the declining industry to the growing industry. And the corporate governance structure dominated by controlling stockholder groups with fractional equity ownerships is likely to impede innovation and growth by making decisions that put priorities on reinforcing their governance rather than securing the long-term growth of the companies.

As of the end of October 2019, the aggregate market capitalization of the Korea Exchange stood at around KRW1,600 trillion, ranking only 15th out of 69 markets worldwide. The ranking also dropped from 13th place at the end of 2017 and 14th place at the end of 2018. The aggregate market capitalization of Korean companies is less than their total net assets. The PBR(Price-to-book ratio) is under one, highlighting the so-called Korea Discount. The core reason for this Korea Discount phenomenon centers around corporate governance risk. The evidence of this is the embarrassing survey result that Korea's corporate governance profile came out as shameful, with its ranking as only 9th out of 12 countries in Asia and only slightly better than China, the Philippines, and Indonesia (CG Watch 2018).

The global investment community is now showing sentimental signs of even looking down on the Korean stock market as one of the peripheral markets on the global domain, with Korea’s corporate governance risk being rampant at the moment. For the sake of the National Pension Fund, which provides the most significant support of the Korean stock market, it must be imperative to pursue an essential policy objective that corporate governance issues must be resolved and thus remove the Korea Discount problem. This means that the market PBR should double to the global average of 1.5x, which works to offer better security for all those post-retirement funds and general investors' interests. Having stated all this, how can we improve corporate governance in Korea?

Academic research proves that "shareholder activism," which began in the U.S., has effectively contributed to enhancing corporate innovation, productivity, and stock yields of companies. However, we believe that it may not work as a practical solution for Korea, given the combination of several critical factors such as relatively high equity ownership portions of insiders, various means of protecting management control, and difficulties in engaging with proxy contests. Even the case of launching civil litigation against a company, may not work as an effective remedy for stockholders.

This is because the evidence-initiation procedures are poorly defined at the moment, not to mention many flawed aspects of commercial law, capital market law, fair trade law, and provisions for the Korea Stock Exchange. Above all, under the current legal systems which allow those controlling stockholder groups with fractional equity ownerships to systematically shut out those general stockholders with the majority equity ownerships for all corporate governance matters, shareholder activism and litigation-led campaigns would do nothing but provoking unnecessary political misunderstandings and social conflicts.

As such, Korean Corporate Governance Forum(KCGF) seeks to drive corporate transparency, ESG(Environmental, Social and Governance) performance improvement and sustainable progress in the capital market, by leading and spreading discussions on corporate governance practices from a global perspective on the back of the coexistence of investors and companies. We are different from the existing entities related to corporate governance and capital market stakeholders in the following:

First, we are not aligned at all with the government or government-controlled organizations. We intend to closely communicate with economic and monetary policy authorities and make efforts to provide alternatives. At the same time, we will connect with capital market participants, independent scholars and experts, and corporate entrepreneurs who are passionate about improving corporate governance.

Employing this strategy, we independently explore the best practices of corporate governance, whereby investors and businesses can align with each other well enough.

Second, we want to be the first forum firmly deploying the perspectives of responsible investors in the capital market. There are already many interest groups for companies, management, accounting firms, and financial companies. However, there is no entity, except for some minority shareholder associations, which considers the system and exerts efforts to improve it from the perspective of the public and general investors, the core of the capital market. The backbone of KCGF will consist of individuals, institutions, pension funds, private equity funds, new technology business finances, venture capital companies, and those financial institutions adopting the stewardship code. Moreover, we seek to invite participation from independent economists and business administration scholars as well as highly professional lawyers, accountants, and financial experts. Also, we intend to encourage participation from those corporates who wish to enhance their corporate values via improving corporate governance and gain access to the global capital markets. We trust that this kind of newly connected platform will prove highly effective in advancing corporate governance discussions from the standpoint of general investors.

Third, we pursue public righteousness while leading relentless efforts to safeguard the rights and interests of general stockholders. We look to establish the best corporate governance practices, and, to this end, we intend to institute a partnership between investors and corporates rather than a hostile relationship, aiming to promote ESG performance improvement for corporations and sustainable growth. We put our utmost priorities on the interests of general stockholders, and, still, we seek to overcome such traditional and mechanical viewpoints that focus on both share prices and dividends alone. Instead, we aspire to maximize the long-term well-being of general stockholders.

Fourth, we are mindful of those market participants who tend to be concerned about extreme shareholder activist stances and the so-called pension socialism. As such, we intend to maintain political neutrality in pursuing policy-oriented reforms that suit the realities of Korea. In connection with this objective, we look to advance programs in research and education as well as participation activities as follows:

Key Action Plans (1) Research: We will research institutional factors that currently work to restrict the exercise of the rights of general stockholders. Specifically, through collaborations with groups of experts, we will study institutional conflicting factors now embedded with commercial law, capital market law, stock exchange regulations, holding company law, and others

We will also engage with discussing with policymakers on how to utilize research outputs effectively. Also, we will look into development directions and policy effects of stewardship codes, responsible investments, and public pension fund management, and circulate these research results academically at home and abroad.

Key Action Plans (2) Education: We will develop education programs and execute them to foster the independence and professionalism of investors, non-executive directors, and auditors. Furthermore, given the objective that corporations should provide tools for pursuing public righteousness in dealing with a wide range of general people, the legitimacy of corporate activities must be secured. In this regard, we intend to pursue “outreach programs” to disseminate the premise that improving corporate governance practices will work as a new springboard for the economy of this country.

Key Action Plans (3) Participation: We will move forward from the past practices of directly challenging wrongful corporate behaviors, which used to be taken by many civil rights groups in the past. Concurrently, we will define the exemplary corporate governance practices for this country and do our utmost works to spread them. Besides, we will help present objective expert testimonies and perspectives when it comes to significant disputes related to corporate governance issues and related lawsuits. We also endeavor to help institutionalize those items for improving corporate governance practices, which are to be discovered by research activities.

In pursuing this goal, we intend to proactively suggest those newly found items to both the government and the legislative body. We will put out our best efforts possible to represent the voice of investors in the capital market on behalf of general investors and people whose views have never been given opportunities to be heard properly.

Today, we are deeply aware that improving corporate governance is an absolute mandate for our economy to take another leap forward. We will help avoid such exhausting confrontations between investors and corporations. We aspire to lead discussions and drive a paradigm change by pursuing the following: i) we will help corporations devote themselves to fulfill their social responsibilities by conducting policy-based research activities and related discussions. ii) We will help corporations accomplish public righteousness via sustainable progress. And iii) we will help corporations work to maximize the well-being of both general people and investors. We deeply understand the stringent aspect of this mission, and solemnly declare that we will continue to lead the discussions on how to improve overall corporate governance practices in the Republic of Korea. We hope you will join our campaign and look to all your support. Thank you.

Korea's corporate groups have indeed led the nation's economic miracle during the past decades. Nevertheless, they have been reprimanded for serious moral hazard issues such as tunneling and expropriation, tyrannical management behaviors, and illegal successions for management control.

Indeed, fingers are being pointed at Korea’s corporate groups and their top-executives as the ones who are primarily responsible for depressed economic growth and the economic inequalities.

Provided that corporate activities, which should work to lead Korea’s stable and sustainable growth, fail to acquire social legitimacy and public support within the society, the future of Korea's economy inevitably has to be viewed pessimistically. Thus, the exemplary corporate governance standards, transcending transparency itself, will be all the more important going forward.

Founding Declaration