[Op-Ed] Revising Directors’ Duty of Loyalty Will Only Increase Corporate Burdens

Proposed Revision to Expand the Scope of Directors’ Duty of Loyalty to All Shareholders Adds to Confusion in Corporate Management

Current law alone can protect shareholders and ensure corporate transparency

A proposed amendment to the Commercial Act that would expand the scope of directors’ duty of loyalty to all shareholders has been introduced in the National Assembly. The amendment adds the phrase, “shall faithfully perform their duties for the proportional interests of shareholders,” and is said to be intended to improve corporate governance in Korea and protect shareholders’ rights and interests.

In the meantime, Korean companies have continuously worked to raise corporate value and competitiveness in domestic and global markets. However, stronger regulation has instead undermined corporate competitiveness and only deepened the “Korea discount.” Regulations like this amendment, which expand directors’ duty of loyalty to all shareholders, further highlight the problem of eroding corporate value. This change is placing a new burden on corporate management and adding unnecessary complexity to directors’ decision-making processes.

Expanding the duty of loyalty to shareholders discourages directors from managing companies proactively. Directors make various decisions for the company, including legitimate mergers and acquisitions and listings, that may affect shareholders and capital. Under a duty of loyalty to shareholders, even such decisions could be challenged in the name of protecting the interests of individual shareholders, and there is considerable room for abuse as a tool for foreign hedge funds seeking to attack management control. It would also make corporate fundraising more difficult, including the issuance of new shares and convertible bonds, whenever such actions could affect the number of shares even slightly.

The amendment would only add to confusion in corporate management. A company’s shareholders include controlling shareholders, institutional investors, activist funds, and minority shareholders, among others. They have differing interests, and conflicts among them are common. Reconciling every individual interest is nearly impossible. Even if it were possible, the many factors that would have to be considered would significantly delay corporate decision-making.

Under the current legal framework alone, shareholders can already be protected and sufficient corporate transparency can also be ensured. Existing law already contains various statutes and regulations governing directors’ duty of loyalty, while the Monopoly Regulation and Fair Trade Act provides for rules on holding company equity ratios, disclosure of important corporate matters, and disclosure of internal transactions. The Capital Markets Act and the Commercial Act already include provisions to prevent infringement of ordinary shareholders’ rights and interests and to prevent harm to shareholder value, and the Criminal Act also provides penalties for directors’ occupational breach of trust. Therefore, current law alone is sufficient to protect shareholders, and additional regulations such as this amendment can only suffer from weak effectiveness.

Because the proposed amendment concerning directors’ duty of loyalty would cause substantial disruption to corporate operations and adversely affect corporate value, it should be reconsidered from the ground up. The problem of declining corporate value cannot be solved by continuously layering more regulations on businesses. Instead, unnecessary regulations should be removed, and the approach should shift toward practically enhancing corporate value from the standpoint of business management.

Hyunggu Lee, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 이사 충실의무 개정안, 기업 부담만 키운다

Author: Hyeong-gu Lee

Date: 2024-08-07

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=26787