BUSINESS

[Management in Korea] Reforming chaebol boards is a big job. Here’s how it can happen

By Korea Herald
  • Published : Feb 13, 2018 - 17:43
  • Updated : Feb 13, 2018 - 17:43
Management in Korea is a regular column written by the members of Egon Zehnder Seoul touching on various aspects of Korean enterprises and business leaders and offering management tips. -- Ed.

The role of the board of directors is rapidly evolving in Western countries. No longer rubber stamps hand-picked by CEOs, Western boards are now expected to provide true oversight of management, not just in terms of maximizing shareholder value, but in grappling with broader issues like innovation and globalization. In forming the board, nominating committees are expected to look outside their own circle of contacts to build a team with the appropriate range of experiences, perspectives and networks to be a true strategic asset to the CEO and the company.

This is, of course, pretty much the opposite of the typical Korean board, where the chongsu (head of conglomerate) chooses board members primarily based on their reputation for not asking questions. 

Eugene Kim
Kim Ah-jeong
While Western boards are adapting to the demands of a more complex world, Korean boards are so far content to remain structured for a simpler time. 

As advisors to numerous Korean companies, we are genuinely worried that this approach will affect Korea’s long-term ability to compete.

One recent research report ranked corporate governance effectiveness in 33 countries in the Organization for Economic Cooperation and Development; Korea sat in last place. This does not bode well for the country’s economic future.

How can Korean boards chart a path forward?

In the best case, chaebol leaders will begin to understand that it is in their own best interest to establish more empowered boards.

But in looking at the West’s corporate governance transformation, it is important to note that the companies did not improve their corporate governance in a vacuum.

Instead, that transformation has been the result of a quarter century of spirited discussion between different stakeholder groups, including investors, corporate governance associations and government.

Investors

Over the last two decades, Western investors have become more organized, more demanding and more inclined to act in response to perceived company shortcomings.

Critically, investors are scrutinizing not just a company’s stock performance but corporate governance factors such as board composition.

Investors who feel a company’s board has become too cozy with management or whose directors do not have the required level of competency and experience will withhold their vote for the recommended director slate—and may even run an opposition slate.

More than anything, investor pressure has kept corporate governance top of mind for Western CEOs.

In Korea, chaebol families often actually own only small fractions of the companies they control. This discrepancy makes it possible for institutional investors and others to take a more vocal stance on corporate governance expectations.

Corporate governance associations and observers

In the West, a fertile mix of business schools, professional associations like the National Association of Corporate Directors and “good governance” groups like Catalyst (which promotes the election of female directors) have played an important role in bringing attention to governance issues by compiling statistics and suggesting standards and best practices.

The objective data, commentary and recommendations of these institutions provide new ideas and fodder for ongoing public dialogue.

Government and regulators

Western countries differ in the extent to which they rely on government and bodies like stock exchanges to shape corporate governance standards. For example, several European countries have established laws setting minimum representation of women in the boardroom.

The United States, by contrast, has steered clear of gender quotas—but it has established regulations making it easier for investors to run opposing slates of directors.

As a result, those European countries have established strong records on boardroom gender diversity and the United States has empowered investors to pursue governance improvements.

Holistic approach for Korea

Kora has a regulatory framework for corporate governance, but it lacks the adequate rulemaking and enforcement necessary for real impact. For example, there is a three-year term limit for outside directors.

On its face, that seems to be a powerful deterrent to the pervasive corporate governance problem of outside directors who effectively become insiders through long tenure. However, chaebol skirt this rule by simply shuffling directors from the board of one related company to the board of another.

Historically, chaebol have been so powerful that it has not been politically feasible for the government to take a hard line on their governance. But that may be changing in light of recent events.

Enlightened self-interested helped Western companies see the benefits of corporate governance reform.

But they were helped along considerably by other constituencies who also had an interest in moving past the status quo.

With the same holistic approach here in Korea, we can begin to take real steps toward change—and a stronger economic future. 

(Herald DB)
By Eugene Kim and Kim Ah-jeong

Eugene Kim is the managing partner of advisory firm Egon Zehnder Seoul. He can be reached at Eugene.Kim@egonzehnder.com

Kim Ah-jeong is the head of research at Egon Zehnder Seoul. She can be reached at AJ.Kim@egonzehnder.com

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