Reforms Are Taking Root In Korea

Shareholder rights activist Jang Ha Sung gets a lot of phone calls from aggrieved investors complaining about the latest outrage by one of South Korea's notoriously secretive and self-dealing conglomerates, known as chaebol. But Jang, a Korea University business professor, wasn't ready for the call he got last September from Chey Tae Won, chairman of SK Corp. Chey had just been released on bail after seven months in jail on charges of accounting fraud and manipulating shares of SK Group companies. Jang's own group, People's Solidarity for Participatory Democracy (PSPD), had played a role in Chey's arrest. And what did Chey want of Jang? Advice on how to improve corporate governance at SK Corp. "It was a request I could not have dreamed of," recalls Jang, with a laugh.

Jang happily offered advice, though he still isn't sure whether Chey is serious about corporate reform. However, he considers the phone call further proof that Korea's movement for corporate responsibility has come of age. Indeed, after Chey's arrest, reform activists scored their biggest win ever. In December, Parliament passed a bill allowing class actions by shareholders for the first time. "This is probably the most important victory we have achieved," says Hansung University economist Kim Sang Jo, another leader of PSPD. The class-action strategy dramatically lowers costs for lawsuits. And the bill shifts the burden of proof to management in cases where companies are charged with abusing shareholder rights. A recent revision of another law makes it mandatory for listed companies with assets of $1.7 billion or more to fill more than half their boards with outside directors.

Beyond the chaebol, privatized former state enterprises are way ahead on corporate reform. Among the role models: Kookmin Bank, telecom company KT, and steelmaker POSCO. POSCO, which was privatized in October, 2000, set an example in March of this year by forming a committee of lawyers, economists, and bankers to recommend names of independent board members. Independents, including a shareholder rights activist, a banker, and two foreigners, now make up 60% of POSCO's board.

The chaebol are even learning to use corporate governance reform to their advantage. Last June, Sovereign Asset Management, a Monaco-based private equity investor that had earlier bought a 14.99% stake in SK Corp. to become its largest shareholder, announced that it planned to shake up management. At SK's annual shareholders' meeting in March, Chey beat Sovereign in a proxy battle. He did it by ceding to Jang's demands that the SK board be reconstituted. It is now dominated by outside directors, and an independent committee has been formed to oversee transactions between SK, which is Korea's largest oil refinery, and affiliated companies.

Yet SK Group can still disappoint the activists. In a move that stunned outside investors, in February, Chey demanded and got the resignation of his cousin, SK Telecom President Pyo Moon Soo, though Pyo was credited with leading the company to 29% profit growth last year. Chey got his way because SK Corp. is the largest shareholder in SK Telecom. An SK spokesman says Chey wanted to limit family control of the telecom company, but Jang dismisses the move as a ploy to tighten his grip. When it happened, says Jang, "I felt as if he was stabbing me in the back."

In a land where family dynasties ruled unchallenged for decades, it will take time for the concept of allegiance to shareholders to sink in. And the laws need even more tightening. Under the new class-action legislation, for example, a Korean law firm can pursue only three class actions in three years, making it hard to build up class-action expertise. And there's still no legislation banning the still common control of chaebol companies through proxy shareholdings. A Korea Fair Trade Commission report shows that the top 10 chaebol own an average of only 4.63% of group companies, but they wield an average of 49% of the share voting rights. A proposal is now being discussed to unwind the cross-shareholdings and board seats that make this possible. Samsung Electronics recently opposed the change on the ground that it would allow foreigners, who own 60% of its stock, to seize the company.

Notwithstanding such fights, Korea Inc. has come a long way. "Corporate governance is a long-term process," says Francois Roy, a corporate lawyer and a senior adviser at the Hong Kong-based Asian Corporate Governance Assn. "Compared to where Korea was seven years ago and compared to other markets in Asia today, I'm optimistic." Maybe Jang will be getting a few more calls from those chaebol scions.

By Moon Ihlwan in Seoul

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