Policy Direction
Since its day one, the Moon Jae-in administration has reduced the number of cross-shareholding structures in large corporations from 93 to 12 while the number of holding companies increased by 31 to 193 from the third quarter of 2016 to the third quarter of 2017.
Still, the South Korean government’s effort for corporate governance structure reform focusing on cross-shareholding reduction and holding company structure adoption is somewhat against the global trend in that the other countries are concentrating on the protection of corporate management rights for stable growth and competitiveness enhancement based on freely chosen governance structures.
South Korean companies have had to spend trillions of won on governance structure reform instead of employment and investment, only to face very strict regulations. Each turned into a holding company can no longer make a joint investment in a subsidiary. Once a venture firm is turned into a subsidiary of a large corporation, it is bound by a number of regulations regarding internal transactions and so on. As a result, companies are becoming increasingly reluctant to acquire shares. This is evidenced by the fact that the number of combinations between large corporations with an asset of at least five trillion won (US$4.5 billion) and non-subsidiaries dropped from 93 to 67 between 2015 and last year, which implies that the local startup ecosystem is in danger.
What is even more worrisome is the government’s policy direction. For instance, it is currently focusing on multiple derivative suits but this system for granting a right to sue to a subsidiary executive who owns 0.01% or more of parent company shares is legal only in Japan. Besides, in Japan, the requirement is very strict unlike in South Korea and that type of suits is allowed for only 100% parent-daughter companies. In addition, cumulative voting is obligatory only in Russia, Mexico and Chile. In other words, South Korea is trying to adopt what the United States and Japan discarded in the 1940s and 1970s as tools of factions of shareholders and corporate raiders seeking hostile takeovers.
Another problem is that South Korean companies have no shield such as dual class shares for large shareholders and the poison pill for existing shareholders. Under the circumstances, hedge funds such as Elliott Management may come back at any time. Foreigners’ shareholding is already approximately 50% in major corporations like Samsung Electronics, Hyundai Motor Company, SK Hynix and POSCO. “South Korean companies should be allowed to protect their management rights in more diverse ways,” the Korea Economic Research Institute pointed out.