Beginning this year, companies listed on the KOSPI market with total assets of at least KRW 2 trillion on their consolidated balance sheets (“Large Listed Companies”) are obligated to disclose their corporate governance reports, and the qualifying companies were required to submit their corporate governance reports to the Korea Exchange (“KRX”) by June 3, 2019.  The KRX announced that all 200 companies subject to the obligation have disclosed their reports by the deadline, and nine other companies without such obligation have also voluntarily disclosed their corporate governance reports. 

With the proliferation of shareholder activism, corporate governance reports are expected to become a major indicator in evaluating sound corporate governance and an effective source of key information on the company’s corporate governance for its shareholders.  Therefore, it is important to have a firm understanding of the updated disclosure system and its outlook. 

Summary of the Updated Disclosure System:

The corporate governance disclosure system requires companies to report their status of compliance with key principles concerning corporate governance to the KRX (among others).  

The system was first introduced in March 2017 targeting KOSPI-listed companies to improve transparency in corporate management and to reinforce the market’s vigilance upon companies.  While disclosing corporate governance reports had previously been voluntary, starting this year, Large Listed Companies are required to submit and disclose their corporate governance reports to the KRX within two months of submitting their business reports (e.g., for a company closing its accounts in December, by the end of May).  However, KOSPI-listed companies that are financial companies as defined under the Act on Corporate Governance of Financial Companies may disclose their “annual corporate governance reports” under the Regulation on Supervision of Corporate Governance of Financial Companies in lieu of corporate governance reports. 
 
More Detailed Drafting Instructions:

In addition to the above, the system now provides more detailed standards for preparing corporate governance reports.  

According to the Guideline on Corporate Governance Reports distributed by the KRX in April 2019, while the previous standards simply provided ten key principles on corporate governance and allowed companies to freely decide details to be included in their reports, the new standards provide which details should be included in the reports to show whether the companies are complying with the key principles.  

Therefore, a company should state in its corporate governance report whether it is in compliance with the following ten key principles on corporate governance on a “comply or explain” basis (i.e., if it is in compliance with a principle, it should provide supporting evidence, and if not, provide convincing explanation as to why). 
 

• Summary of key principles on corporate governance 

(1)    (Shareholders’ rights) A company shall timely provide its shareholders with sufficient information and ensure that the shareholders may exercise their rights. 
(2)    (Fair treatment of shareholders) A company shall grant fair voting rights to its shareholders in proportion to their shareholding ratio, and equally provide them with corporate information. 
(3)    (Functions of the board) The board of directors shall establish management goals and strategies for the benefit of the company and shareholders, and supervise the management. 
(4)    (Composition of the board) The board of directors shall be composed in a way to ensure effective decision-making and supervision, and shall establish a transparent director appointment process. 
(5)    (Responsibilities of outside directors) Outside directors shall remain independent from the company and shall supervise and support the management. 
(6)    (Assessment of outside directors) Activity of the outside directors shall be assessed fairly, and shall be entitled to compensation and/or reappointment based on the results. 
(7)    (Operation of the board) Operation of the board of directors shall be effective and reasonable.
(8)    (Committees within the board of directors) The board of directors shall establish committees for specific roles and responsibilities. 
(9)    (Internal audit functions) The audit committee and auditors shall independently perform their tasks and disclose the details thereof. 
(10)    (External auditors) External auditors shall perform audits independently.

If a corporate governance report is found to be incorrect or incomplete, the KRX may request the company to submit an amended report.  A Large Listed Company failing to submit its corporate governance report within the deadline or stating false information in its report will be designated as a “company making improper disclosures” and may become subject to sanctions, such as suspension of trading, imposition of penalties, and designation for specific monitoring, depending on the number of penalty points accrued by the company.   

Outlook:

With the enforcement of the obligatory corporate governance report disclosure system, institutional investors are expected to take full advantage of corporate governance reports as the main source of information in evaluating the state of corporate governance of companies and in performing their responsibilities as trustees.  Investors such as activist funds are likely to use corporate governance reports to expand their activities, such as sending letters to company management, propose shareholders’ meeting agendas and soliciting proxy.  For instance, BlackRock, a major global asset management company, announced that it is considering objecting to the reappointment of any inside directors if the composition of the board of directors is inconsistent with the Code of Best Practices for Corporate Governance (by Korea Corporate Governance Service) and the company fails to provide a convincing explanation.  Moreover, the Korea Corporate Governance Service and other corporate rating agencies are expected to rely primarily on corporate governance reports in rating companies’ state of corporate governance.

The Financial Services Commission announced that it would consider requiring all KOSPI-listed companies, regardless of their total assets, to disclose their corporate governance reports starting in 2021, and would examine when it would start applying the disclosure system to companies listed on KOSDAQ.  It is expected that the obligatory corporate governance disclosure system will gradually expand, and investors and rating agencies will make better use of this system. 

As shareholder activism is on the rise globally and institutional investors are increasingly adopting the stewardship code, corporate governance reports are becoming increasingly important.  Accordingly, Large Listed Companies required to disclose their corporate governance reports under the current provisions should faithfully prepare the reports to avoid any disadvantages arising from improper disclosures and allow the market and institutional investors to fairly assess the state of their corporate governance.  More fundamentally, companies should inspect their corporate governance status and proactively address any potential issues to improve their corporate governance.