[Opinion] The “3% Rule” Threatening Korea’s Corporate Economy Must Be Repealed

Ignoring the basic principle of corporations, “one share, one vote” ... leaving corporate management rights vulnerable

Chasing only immediate profits makes the myth of success a thing of the distant past ... risk of leakage of core corporate information and technology through external audits

Controversy is intensifying ahead of the passage of the government and ruling party’s “three fair economy bills” at the regular National Assembly session in September. In particular, the “3% rule” in the Revised Commercial Act is at the center of the debate. The “3% rule” is a bill that requires audit committee members to be elected separately from other directors and limits the combined voting rights of the largest shareholder and specially related parties to 3% in the election. It was proposed with the intention of strengthening internal corporate controls and protecting the rights of minority shareholders by limiting the influence of major shareholders in the selection of auditors.

The business community has objected first. Their argument is that the bill does not reflect business realities. In fact, a governance structure in which ownership and management are not separated has served as a source of competitiveness that enabled Korean companies to survive in the global market. By securing management control through the holdings of major shareholders and friendly shareholders, companies were able to pursue consistent management strategies. The existing principle of “one share, one vote” was the minimum line of defense against hedge funds’ attacks on management control. Samsung’s decision to push ahead with semiconductor investment despite losses, and SK’s acquisition of Hynix and its transformation into a world-class semiconductor company, are often cited as successful examples of decisive owner leadership.

It is hard to avoid the criticism that the “3% rule” is an ivory-tower argument that fails to take into account the realities of Korean companies. If the “3% rule” is introduced, all shares held by major shareholders above 3% effectively become worthless, making companies more vulnerable in defending management control. At that point, if speculative forces split their holdings into 3% stakes and form an alliance, it could become difficult for major shareholders to secure voting rights.

The harmful effects of this regulation could shake the corporate economy. Outside figures could enter boards of directors and obstruct key management policies, or make the return of short-term profits to shareholders their top priority. Resources would then be used for dividends and share buybacks rather than investment for long-term growth, as companies become fixated only on immediate results. It is clear that the success stories created by Korea’s global companies would become a distant memory.

In addition, the possibility that external auditors could leak a company’s core information and technology cannot be ruled out. Audit committee members have the authority to supervise company operations and accounting, and companies must comply with their requests for data. In industries such as semiconductors and automobiles, which form the backbone of the Korean economy, technological superiority is a company’s core competitive strength. The “3% rule,” which creates vulnerabilities in technology security, could become a threat to the Korean economy in the future.

Moreover, an analysis has found that the “3% rule” would apply to most listed companies, heightening concerns that the entire Korean business community could be put at risk. The Korea Industry Alliance Forum (KIAF) confirmed that when the “3% rule” was applied to 15 major domestic conglomerates, as many as 13 companies would end up with foreign shareholders securing more than 25% of the voting rights. Based on all listed companies, 87% would be forced to appoint individuals recommended by hedge funds as audit committee members concurrently serving as directors.

Although various supplementary measures have been discussed regarding the “3% rule,” it should be scrapped. The “3% rule” ignores the basic corporate principle of “one share, one vote” and tramples on the formula behind the success of Korean companies. How can the Korean economy withstand this kind of “corporate bashing,” which forgets that companies are the foundation of the economy?

Chaewon Kim, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 한국 기업경제 위협하는 '3%룰' 폐기돼야

Author: Chae-won Kim

Date: 2020-10-21

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=13&idx=23184