High-profile scandals spark governance upgrade

Nov 27, 2008

Improvements boosting shareholder power in South Korea

The spate of corruption scandals that has rocked South Korea this year will spur improvements in corporate governance and lead to more power for shareholders, according to the country’s stock market chief.

Lee Jung-hwan, CEO and chairman of Korea Exchange (KRX), says recent high-profile court cases, including the conviction of former Samsung chairman Lee Kun-hee on tax-evasion charges, show South Korea is ‘on the right track’ and the country must maintain its ‘positive momentum’ on corporate governance.

Corporate corruption and poor governance are widely recognized problems in South Korea, where a small number of big conglomerates, known as chaebol, dominate the economy and have developed very close links to the world of politics.

A number of leading executives from chaebol such as Samsung, Hyundai and SK have been found guilty of fraud, embezzlement and tax evasion in recent years, but anti-corruption campaigners still believe the government and the courts are too lenient in their treatment of corporate malpractice.

However, in an editorial piece in the Wall Street Journal this week, Lee Jung-hwan says ‘the corporate world is now on notice that no individual, no matter how powerful or well known, will be exempt’.

He says power has been shifting from the chaebol bosses to shareholders over the last two decades as the pace of democratization has increased and more Koreans have begun to invest in the stock market.

‘The idea that the purpose of a company is to return shareholder wealth has at last started to replace the notion of the company as nation-builder,’ the KRX head explains. ‘The 1997 financial crisis kick-started this shift and led to measures to improve governance. Increasing domestic ownership of stocks has more recently become a factor.

‘In the past few years, we have seen massive investments by ordinary Koreans into stock market funds, with resulting pressure on companies to improve their performance.’

Corporate governance and anti-corruption activists believe South Korea still has a long way to go, however. ‘This is only the tip of the iceberg,’ explains Jisoo Lee, a senior analyst at the Center for Good Corporate Governance in Seoul.

‘There are many more problems embedded in Korean corporations that have not been revealed to the public yet. The government has a lot more to do and the courts need to be fairer – they have been too lenient on white-collar crimes.’

Jisoo Lee admits some progress is being made but is concerned that an extended financial and economic crisis could drive the government to sweep corruption under the carpet rather than confront it head on. ‘I think the government will try to minimize the damage, including covering up some of the minor corporate violations,’ he adds.

By Ben Bland