Called the Fair Economy Act, Read as an Economic Destruction Act

Stripping away private property to dismantle the chaebol

Undermining financially sound firms and pushing them into distress

On August 25, the proposed amendment to the Commercial Act, the proposed amendment to the Monopoly Regulation and Fair Trade Act (Fair Trade Act), and the proposed enactment of the Financial Group Supervision Act—the so-called “three fair economy bills”—passed the State Council. The government says their purpose is to improve corporate governance, eradicate unfair abuses by large business groups, and secure the institutional foundation for a fair economy through the financial soundness of financial groups. If these bills pass the regular National Assembly session in September, they will take effect immediately upon presidential promulgation. Let us first look at their main contents.

First, the proposed amendment to the Commercial Act would tighten the current rule under which shareholders may exercise voting rights up to a 3% ceiling in the separate election of audit committee members, so that in the case of the largest shareholder, voting rights would be limited to 3% in total including the shares of specially related parties. It would also introduce a multiple derivative suit system allowing shareholders of a parent company to file damages suits against directors of a subsidiary. In addition, minority shareholders of listed companies currently must hold shares for at least six months to exercise rights such as demanding the removal of directors, requesting the convening of an extraordinary general meeting, and seeking inspection of accounting books. The bill would change that six-month requirement to three days.

Second, the proposed amendment to the Fair Trade Act would abolish the Fair Trade Commission’s exclusive right to file criminal complaints, strengthen regulations on the internal allocation of business, and raise the mandatory equity ownership ratios for subsidiaries of holding companies (listed companies: 20%→30%, unlisted companies: 30%→50%). It would also raise the upper limit on surcharges for abuse by market-dominant firms from 3% to 6% of sales, and for unfair concerted acts (cartels) from 10% to 20% of sales.

Third, the Financial Group Supervision Act would designate as supervised financial groups those business groups that are not financial holding companies but engage in two or more financial businesses and whose affiliated financial companies have total assets of KRW 5 trillion or more. Such groups would then be subject to financial authorities’ supervision, including disclosure of the group’s major risk factors. This would apply to Samsung, Hyundai Motor, Hanwha, Mirae Asset, Kyobo Life Insurance, and DB Group, among others.

In addition, under current law, bonds and stocks issued by subsidiaries and held by an insurer may not exceed 3% of total assets. An amendment to the Insurance Business Act is also under discussion that would change this 3% standard from acquisition cost to market price.

The irrationality and harmful effects of such regulations on large business groups have been pointed out countless times. Nevertheless, the rush toward ever-stronger regulation reflects anti-market and anti-business sentiment in Korean society, and this stems from a misunderstanding of the market, business, and capitalists-entrepreneurs. Let us now examine what these legislative proposals mean for Korean society and what effects they will have on the Korean economy.

First, these enactments and amendments infringe on private property, the foundation of a free democratic society. They are schemes to eliminate the owners of private enterprises and turn them into quasi-public enterprises. Freedom, equality, morality, and justice (fairness) all originate in the scarcity of resources and human self-interest. Human self-interest over scarce resources gives rise to conflict, and through experience people learn that such conflict ultimately lowers not only others’ interests but also their own gains and chances of survival. On that basis, they establish morality and law, and social order is formed. At the center of that order lies tangible and intangible property that can be plundered. Accordingly, moral rules and legal order exist to protect individual life, liberty, and property, and such a society is just and fair. If, for whatever reason, violations of private property cause individuals to lose their sense of justice, morality and law degenerate, and society collapses.

Second, although these laws claim to promote a fair economy, their true purpose is to dismantle the chaebol. At the center of this is corporate governance reform. Corporate governance refers to the degree to which capitalists-entrepreneurs intervene in the management of the managers who operate and administer their capital, or the mechanisms for regulating that relationship. Unless one person owns and manages the entire firm, corporate governance problems arise everywhere and at all times. In other words, the principal-agent problem arises. Therefore, there must be someone who both monitors managers and provides incentives for them to devote themselves to corporate management. In most countries, including Korea, that party is the capitalist-entrepreneur, who is both the owner and the largest shareholder. He is the founder of the business or the person who inherited it. The principal-agent problem is minimized when the largest shareholder and the manager are one and the same. But these laws strip the largest shareholder—the de facto owner of the business group—of rights and functions by restricting voting rights, increasing the likelihood of lawsuits on one ground or another, and imposing heavier surcharges for violations(?). They shake up corporate governance and reduce the influence of the largest shareholder, enabling speculative capital to threaten control of large business groups. It does not take much explanation to imagine what will happen if the owner of a company now earning money well is removed.

Third, business groups that must survive and grow in international markets through technological innovation and efficient management will lose competitiveness as they are burdened with unproductive matters, and as a result the Korean economy will lose its growth engine. For example, there is no sound rationale for it, yet converting governance structures to a holding company system and adjusting mandatory ownership ratios requires enormous funds; this is wasteful. The Federation of Korean Industries (FKI) estimates that this regulation would require Samsung Group to spend KRW 25 trillion, POSCO KRW 2 trillion, KT&G KRW 1.37 trillion, and KT KRW 720 billion, and that if all of this money were invested, it could create employment for about 230,000 people. Regulations on the internal allocation of business must also be discussed together with the abolition or adjustment of the inheritance tax. Bad laws push human behavior in directions unintended by the law itself.

Fourth, these laws cannot be called laws in the rule-of-law sense. Law must not pursue a special purpose and must apply equally to everyone, but these laws contain the specific purpose of regulating large business groups. If the legislature passes such measures as law, it plainly reveals that lawmakers do not understand what law is. It is an intellectual disgrace for the National Assembly of the Republic of Korea.

In the end, these laws are nothing more than corporate regulation laws that tighten the screws on large business groups under the guise of a fair economy, and laws that will lead Korean society toward immorality and poverty. They would blow apart the governance structure of privately owned business groups with clear ownership, destabilize financial companies with sound financial structures and push them into distress, and turn acts of abuse—which the impartial market is best at preventing and punishing—over to human beings who are prone to partiality. These are bad laws that should never be enacted. They should, of course, be withdrawn.

Youngyong Kim

Professor Emeritus, Chonnam National University · Economics

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Original title: 공정경제법이라 쓰고 경제파괴법으로 읽다

Author: Young-yong Kim

Date: 2020-09-23

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=19&idx=23107