South Korea embraces stakeholder supremacy approach to corporate governance
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South Korea embraces stakeholder supremacy approach to corporate governance

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Ji-Pyoung Kim of Kim & Chang discusses how the emergence of ESG and the importance of sustainability have shifted traditional patterns of corporate decision-making in South Korea

Many corporations and investors in South Korea have recently turned their attention to ESG management, which is a term for a corporate management approach that actively considers and improves environmental, social and governance concerns.

Institutional investors, including major pension funds such as the National Pension Services, and asset management companies, such as SSG and Blackrock, are prioritising ESG as an important standard for corporate investment and for the exercise of shareholder rights in portfolio companies. Many corporations have also been introducing policies to establish ESG committees and reinforce activities that recognise ESG values. Even stakeholders that are not directly involved in corporate investment and management, such as consumers, non-government organisations (NGOs), and governmental and regulatory agencies, have been recognising ESG to be an important value that should be prioritised in business management of corporations.

The emergence of ESG is related to the paradigm shift away from the ‘shareholder supremacy’ approach of corporate management and towards the ‘stakeholder supremacy’ approach. This is because the core of ESG lies in the interests of companies’ stakeholders such as the consumers, employees, local communities and the environment. These interests are emphasised by the stakeholder supremacy approach of corporate decision-making.

Shifting models

The shareholder supremacy approach of corporate management and governance, where companies make decisions pursuing the benefit of shareholders, has traditionally dominated the governance and business management of companies in the US. This approach became popular when Milton Friedman, a Nobel laureate in economics, argued that shareholders are the owners of the company in an essay for the New York Times titled ‘The Social Responsibility of Business’ from 1970.

According to this shareholder supremacy approach, the definition of management’s standard of fiduciary duties as the clear maximisation of profits for shareholders, is an efficient way of controlling management’s pursuit of self-interest. This approach also places the responsibilities of protecting the interests of stakeholders, such as consumers, employees, suppliers and the environment on the government rather than corporations through labour laws, fair trade laws and environmental laws, among other mechanisms.

“environmental preservation and protection are being recognised as the most representative factors for long-term survival”

However, there has been constant criticism as well that there is no guarantee that the maximisation of shareholder profit emphasised by this shareholder supremacy approach will actually lead to long-term profits for all shareholders and the company, nor the maximisation of social profits from the perspective of the diverse stakeholders surrounding the company. Due to this criticism, the stakeholder supremacy approach, which recognises corporations to be social entities that must consider the interests of not only the shareholders but also the general ‘stakeholders’ surrounding the company, has increasingly received attention.

The stakeholder supremacy approach has emerged as a fundamental idea of corporate governance and management together by taking an integrated theoretical approach that embraces the strengths of both the stakeholder supremacy and shareholder supremacy approach. The stakeholder supremacy approach exists to promote the overall interests of stakeholders surrounding the company, such as employees, consumers, suppliers, local communities and the environment, in addition to the long term benefit of shareholders who invest in the company.

The stakeholder supremacy approach and ESG theory are becoming the dominant paradigm of corporate governance and management through an integrative attempt to include the advantages of the shareholder supremacy approach as well. If a company does not make an effort to promote the interests of stakeholders surrounding the company, the company will be socially neglected from its employees, consumers and suppliers, among other parties. Thus, it must deal with intangible losses due to its unfavourable position with regulators and government agencies as well. In the end, the sustainable growth of the company and the long-term profits of shareholders will also be undermined.

Growing trend of corporate responsibility

In 2019, the Business Roundtable, which is a group of representative executives in the US, decided to accept the stakeholder supremacy approach by revising the charters of corporate governance and management through approval from most of CEOs of major American companies. This event received recognition as one that displays the paradigm shift in modern corporate governance and management. Some experts have stated that in a modern economy, in which the size of private enterprises exceeds the size of the government among large-scale economic entities excluding households who are consumers, it is natural to see such a change in perspective on the role of companies in traditional economic theory.

Within this new trend, the environment, social and governance are becoming prioritised as important standards for corporate governance and management. Environmental preservation and protection are being recognised as the most representative factors for long-term survival and preservation of interests of the community, and major institutional investors have already been demanding companies to have a greater role in environmental protection.

In addition, corporate responsibility to social improvement is being prioritised. The idea that companies must be responsible for the interests of the whole community and members of society beyond just the shareholders have become prioritised. These responsibilities include labour relations, occupational safety and improvement of measures against discrimination and marginalisation against women, minorities and individuals with disabilities.

The final core value of ESG is the role of corporate governance. It is important for a company to establish a fair and transparent corporate governance and decision-making system, and to ensure that fair decision-making can be made, especially in matters of conflict of interest between the controlling shareholders and the minority shareholders or the company. This includes solutions in scenarios such as tunnelling transactions with affiliates of the controlling shareholders, and the executive compensation to be paid to the management including the controlling shareholder.

To allow this to happen, the independence and diversity of directors, active participation with reinforced powers and authorities of outside directors, improvement of procedures for general shareholders’ meetings and the guarantee of the minority shareholders rights are indispensable. Some argue that environmental and social values should be increased through corporate governance by linking the fulfilment of corporate environmental and social responsibilities with the compensation standards for directors. This was why the British Church Pension Fund requested that the Royal Dutch Shell link carbon reduction targets with executive compensation recently.

Corporate governance code

The Korea Exchange has set corporate governance codes for the 15 key factors below. It requires large size listed companies to disclose whether it complied with the codes below and, if not, explain the reason why it does not satisfy the code on a ‘comply or explain’ basis.

  1. Shareholders

    1. Notice of the convocation of a general meeting of shareholders at least four weeks prior thereto;

    2. Implementation of electronic voting systems;

    3. Shareholders’ general meeting is not to be held on the day when most of other companies’ shareholders’ meeting is concentrated; and

    4. Notification to shareholders of the dividend policy and enforcement of distribution of dividends at least once a year.

  2. Board of directors

    1. Establishment and fulfilment of a proper CEO succession policy (including an emergency appointment policy);

    2. Establishment and operation of an appropriate internal control policy;

    3. Separation of the chairman of the board of directors and the CEO;

    4. Adoption of a cumulative voting system for the appointment of the director;

    5. Establishment of policies to prevent the appointment of executives of those responsible for loss to corporate value or infringement of shareholder rights; and

    6. Elimination of outside directors with tenures exceeding six years.

  3. Internal audit structure

    1. Provision of training for internal audit department at least once a year;

    2. Establishment of an independent internal audit department (internal audit support structure);

    3. Appointment of accounting and finance experts within the internal audit department;

    4. Meetings between the internal audit department and external auditors without management participation at least once a quarter; and

    5. Provision of access for the internal audit department to the important management information.

Improving corporate structure

Sound corporate governance can also play a role to contribute to the reduction of responsibility risk of the corporate executives and the controlling shareholder related with the breach of fiduciary duty in the following ways together with increasing overall corporate value as well. Especially the breach of fiduciary duty may result in the criminal liability as well as the civil damages claim in South Korea so that the management of the corporate executive responsibility risk is of value to the controlling shareholders. It is worth noting that the improvement of corporate governance can also be helpful in protecting the independent interests of the company’s major shareholders and management through reducing risks of their responsibility.

Embracing perspectives

Firstly, through sound corporate governance, the opinions and views of shareholders and stakeholders can transparently be reflected in corporate decision-making, thereby contributing to the value of stakeholder interests and corporate value.

As various stakeholders related to the company may have different perspectives on the company’s policies and activities, as well as different expectations for the company’s roles and obligations, it is important to integrate the opinions of various stakeholders in the corporate decision-making process through a fair and efficient governance structure.

A company can open collections of opinions from stakeholders through improved governance structures, such as independence and diversity of the board of directors and improvement of procedures for general shareholders’ meetings, in order to reflect the stakeholders’ perspectives in corporate policies to ensure sustainable growth with support from the society, thereby increasing shareholder value and minimising the risk of the corporate executive responsibility. This is the reason why many companies have been focusing on the appointments of various outside directors and corporate decision-making through ESG committees in South Korea.

Establishing control

Secondly, through an improved corporate governance structure permitting checks and balances through participation and monitoring by outside directors and minority shareholders, a company is able to reduce the risk of corporate executive liability based on the breach of the fiduciary duties from illegal acts such as violations of regulations or disputes with external stakeholders.

“through sound corporate governance, the opinions and views of shareholders and stakeholders can transparently be reflected in corporate decision-making”

In particular, an established internal control and compliance management system preventing conflicts of interest related with controlling shareholders including the affiliate transactions may be helpful in order to reduce the risk of management’s responsibility. The Korean Supreme Court decision, of which the case number is 2007da31518 as of September 11 2008, stated, “Even if representative directors and other directors handle their respective areas of expertise in accordance with the internal division of duties within a highly divided and specialised company, they must still monitor the performance of other directors. It is the responsibility of the individual directors of the board of directors to establish a reasonable information and reporting system, as well as an internal control system, to ensure proper operation.”

This clarified that the establishment of a fair governance structure and internal control system can help guarantee that the duties of the directors will be fulfilled and alleviate the problems regarding the responsibilities of the directors.

ESG management

The shift in the corporate governance paradigm from the shareholder supremacy approach to the stakeholder supremacy approach, along with the emphasis on ESG management represent a demand for change in the existing corporate governance and management systems and are becoming a new challenge for many companies in South Korea as well. However, this does not impose a one-sided burden on just the companies, controlling shareholders and management.

Rather, as mentioned above, through the improvement of corporate governance, sustainable growth and improvement of long-term profits of the entire shareholders including controlling shareholders will be reachable, and the risks of management’s liability for corporate issues based on the breach of the fiduciary duty can be reduced. These are the reasons why many companies have been scrambling to introduce ESG and improved governance in South Korea.

This article is the author’s personal opinion and has no relation in any way to the views of the law firm that the author is associated with.


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Ji-Pyoung Kim


Kim & Chang

T: +82 2 3703 1410


Ji-Pyoung Kim is an attorney at Kim & Chang, whose primary areas of focus include corporate governance, ESG and M&A.

Ji-Pyoung has advised numerous companies around the world – including industrial companies and financial institutions – in a wide variety of M&A transactions, ranging from transaction structuring to due diligence and definitive agreement negotiation. He has also advised these companies on corporate governance, general corporate matters and capital market issues. Many of his clients include market leaders in their respective industries.

Furthermore, Ji-Pyoung represents numerous private equity funds in fund formation matters, M&A transactions and restructuring issues of portfolio companies. As a member of the banking and securities practice at the firm, he advises a number of large publicly held banks and financial holding companies on their establishment, M&A, and financial regulatory matters, and also advises securities companies and investment banks.

Ji-Pyoung hold a doctorate of law degree from Seoul National University, and has also completed a LLM from Harvard Law School. He is admitted to practice in the Korean and the New York bar. He passed the AICPA exam and has been entitled as CFA, as well being accustomed to corporate finance. In addition to his experience practicing law in South Korea, he was a visiting attorney at Slaughter and May’s London office in 2013.