Commercial law revision Lee seeks could hinder corporate restructuring
Lee Jae-myung, former leader of the Democratic Party of Korea, vowed Monday to push again to revise the Commercial Act. He also pledged to usher in "an era of Kospi 5000" through economic recovery and growth.
The front-runner in the party's presidential primary said he would introduce cumulative voting and make the "separate election method" mandatory in a new amendment bill his party will push.
The two provisions were missing from the previous amendment bill, which acting President Han Duck-soo vetoed on April 1.
The previous bill contained a clause to expand corporate directors' fiduciary duties to include shareholders. That clause mandated directors to act in the best interests of not only the company but also shareholders.
Business leaders strongly opposed the provision out of concerns that it could stall decision making by causing a flood of litigation from shareholder activists over important decisions such as mergers and facility investments. Yet he seeks to add new clauses that the business community is concerned about.
If the separate election method is adopted, directors who serve on the audit committee should be separately elected from other directors.
This method limits the voting rights of a major shareholder unconditionally to 3 percent in the election of auditing directors. Minority shareholders each holding less than 3 percent could appoint directors they favor, if they unite to cast all their votes for the directors.
Likewise, cumulative voting strengthens the ability of minority shareholders to elect a director. This system awards a shareholder as many voting rights as the number of directors to be appointed. For example, when three directors are elected, a holder of a single share has three votes and can cast all of them for a certain candidate.
If the method becomes mandatory, the likelihood of small shareholders appointing directors they favor would rise. This raises concerns that speculative foreign capital may interfere in the management of Korean companies to their advantage.
The party says it seeks again to revise the Commercial Act to advance the interest of South Korea's 14 million stock investors, but the clauses it looks to add undermine the stability of corporate management, which will adversely affect business performance.
If the Democratic Party piles up regulations that businesses want to avoid, economic growth and the Kospi 5000 era would take longer to realize.
The global management environment is changing rapidly amid the US-China tariff war. Business reshuffle is getting brisk. In their bid to skirt tariff barriers, Hyundai Motor Group and Posco Group recently agreed to cooperate in the production of steel and key battery materials. In September, Hyundai Motor signed an agreement with GM to explore collaboration on vehicles, supply chains and clean energy technologies.
Timely business reorganization becomes possible when the board of directors can make active and free decisions. In the process of reorganization, cooperation with competitors, mergers, spinoffs and business transfers could happen.
When the board has to decide on such matters, it is practically impossible to make decisions that can meet the diverse interests of all of the shareholders. Long-term investors might want decisions to be made from a long-term perspective, while short-term investors and shareholder activists would demand decisions that could raise stock prices in a short period.
Of course, it is important to protect the interests of small investors, but the root cause of Korean stocks being undervalued lies in sagging growth momentum.
Impacted by a tariff war, Korea's exports from April 1 to 20 plunged 14 percent from the same period last year. Companies are in crisis and need to reorganize their business more than ever. The Commercial Act amendments that the Democratic Party seeks could cause ill effects of excessive shareholder litigations and activist investors' deeper interference in corporate management. Legislators should consider whether it is right to revise the law that way at a time when agile and bold business restructurings are needed.
