The Dark Shadow of the Commercial Act Amendment

There is great concern about the side effects that the recently proposed amendment to the Commercial Act will bring. Regarding this amendment, which includes an expansion of directors’ fiduciary duties, the business community is urging the political sphere to reconsider through a statement issued by the presidents of major companies. The National Assembly’s position is that it is politically necessary even if there are side effects. However, if anti-market legislation continues to increase, the legal system will become distorted and our corporate economy will be left enfeebled.

The amendment is expected to cause significant harm because it forcibly distorts corporate governance. If the selection of directors is determined socially and their roles and authority are improperly assigned, companies lose their inherent functions and fall into confusion. It is wrong to open the door for outside forces wielding social power to enter companies and thereby socialize corporate management. This merely encourages companies to adopt social objectives as management goals, undermining their essential function.

Corporate governance evolves in ways that enhance a company’s competitiveness. It is undesirable for it to be changed by social pressure or political force. In particular, when it is mandated by law, it becomes detached from reality. The notion that outside forces understand management better, or that holders of social power can better define corporate goals, is arrogance. Rather, the only result is the harmful effect of forcing unrealistic methods on companies. If corporate governance regresses to backward practices, corporate competitiveness declines, corporate value is damaged, and shareholder interests are reduced.

The deterioration of corporate-related institutions has an adverse effect on the Korean economy as a whole. Our companies cannot be the exception in the global economy. The global market will not tolerate lagging firms burdened by governance structures that undermine competitiveness. Companies forced to maintain weakened governance structures because of flawed laws will face pressure to exit the market. In addition, because of the backwardness and uncertainty of corporate law, global capital will also hesitate to invest in Korea. In other words, foreign direct investment will decline. This will ultimately result in the side effect of driving companies and capital overseas.

The proposed amendment to the Commercial Act conceals an intention to restrict the management rights of controlling shareholders. If the composition and role of the board of directors come under social control, corporate vitality will decline. Rapid decision-making will become impossible, and the ability to respond to changes in the market will disappear, ultimately putting companies on a path of decline. It is clear that the distortion of corporate governance through flawed laws will weaken corporate competitiveness in the global market. The damage will fall on investors and consumers alike.

For companies, a good governance structure is one that enables strong management performance. This is possible only when it is achieved through autonomous decision-making within the company. A governance structure imposed by interventionist policies and excessive interference from politicians and the government cannot produce good results. Ensuring corporate autonomy is, in fact, the true modernization of the legal system. The political sphere must not commit the mistake of socializing companies. The law and institutions should be improved in a direction consistent with reality so that they can support the sustainable growth of the corporate economy.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 상법 개정안의 어두운 그림자

Author: Sung-no Choi

Date: 2024-12-05

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=27144