In our January newsletter (link), we informed you of the scheduled enforcement of the draft Partial Amendment to the Act on the Management of Public Institutions (the “Act”), which passed the National Assembly on January 11, 2022. The proposed Amendment was intended to introduce the so-called “board-level employee representation” in major listed public corporations and quasi-governmental institutions. The proposed Amendment to the Act came into force and effect on August 4, 2022, six months after the promulgation. Accordingly, 36 public corporations and 94 quasi-governmental institutions (“public corporations, etc.”) designated pursuant to Articles 5 and 6 of the Act and Article 7 of the Enforcement Decree of the Act are required to appoint employee representatives to their boards in the event of vacancies thereon. More specifically, major listed corporations such as Korea Electric Power Corporation, KEPCO Plant Service & Engineering, KEPCO Engineering & Construction Company, Korea Gas Corporation, Korea District Heating Corporation, Kangwon Land, and Grand Korea Leisure are subject to the new system under the Amendment. Furthermore, major institutional investors including public pension funds such as National Pension Service, Teachers’ Pension, and Government Employees Pension Service are also required to implement the system. As a result, it is expected to cause a significant impact on corporate governance and capital markets.
For the implementation of the new system, the Enforcement Decree of the Act was amended on August 2, 2022, setting forth the detailed procedure for appointing employee representative directors, and took effect on August 4, 2022. The Enforcement Decree of the Act stipulates that public corporations, etc. must designate two candidates for employee representative directors in the following manner: (i) where there is a labor union with a majority of employees as its members, the employee representative (i.e., the leader of such labor union) recommends two employees among the employees who have worked for three or more years for the relevant corporation and are, in the opinion of the employee representative, qualified to be non-standing directors; or (ii) where there is no labor union with a majority of employees as its members, two employees, among the candidates having worked for three or more years for the relevant corporation and recommended by at least 5% of the total number of employees, are elected by the consent of a majority of all the employees through a direct, secret and anonymous vote (pursuant to Articles 21(2) and 22(3) of the Enforcement Decree of the Act). Subsequently, the director recommendation committee of each of public corporations, etc. recommends director candidates, including one of the employee representative director candidates selected by the foregoing methods, to the Public Institution Steering Committee under the Ministry of Economy and Finance. Once the Public Institution Steering Committee deliberates and decides on the candidates, the public corporations will undergo the appointment procedures such as a resolution by the general meeting of shareholders.
In the connection therewith, the Guidelines on Management of Public Corporations and Quasi-Governmental Institutions (the “Guidelines”) were also amended and enforced to implement the new system pursuant to Article 50 of the Act. According to Article 47-2 of the Guidelines that sets forth matters concerning employee representative directors, if a person appointed as an employee representative director holds a position representing the interests of employees, such as (i) a labor union member or (ii) an employee member or grievance handling committee member, he/she must withdraw or resign from such position or qualification. An employee representative director has the authority as a non-standing director under the Commercial Code and other applicable laws, and thus has obligations and responsibilities as a non-standing director under the Act and the Commercial Code. No remuneration is paid to an employee representative director for his/her performance of duties in such capacity, except the expenses actually incurred in the course of performing such duties.
Considering that “support for the successful implementation of the board-level employee representation system” has been selected as one of the government’s top 120 national agendas, this new system may be taken up by private companies going forward. In addition, this system may cause changes in business transactions and the exercise of minority shareholders’ rights, not only for the public corporations, etc. falling under the scope of direct application of the Act, but also for the companies doing business with these public corporations, etc. and for the companies whose major shareholders are the above pension funds, such as the National Pension Service. Therefore, it is necessary to keep abreast of the developments and ramifications of this new system, including potential expansion of the system further into private sector, legal status of board-level employee representatives, and implications on the corporate management resulting from the application of the system and participation by board-level employee representatives in the board of directors.
