Given the recent changes made to the regulations on corporate governance, we provide below an overview of the behavioral trends of market participants such as institutional investors and proxy advisory firms both domestic and international.  

Continuing from the previous year, public listed corporations with total assets of at least KRW 2 trillion are required to disclose their corporate governance reports by June this year (for those with account closing at the end of December).  As a result, the Korea Exchange recently amended its guidelines to strengthen its regulations by increasing the number of detailed principles from 23 to 27 and that of mandatory items from 30 to 60 (see link).   Amendments regarding the disclosure of compliance status with key indicators that may be of particular importance to companies and investors are as follows:  

1. A CEO succession policy will be deemed to be in place only when the standards for organizing or selecting (a group of) candidates, education, evaluation, periodic improvement or supplementation, etc. are actually in effect—the mere existence of a provision on the performance of duties by a proxy on behalf of a CEO when the CEO is absent is insufficient.

2. Companies must disclose whether they have established explicit standards or procedures for prohibiting the appointment of officer(s) who infringed shareholder rights, including non-registered officers, instead of just indicating whether such officer(s) are currently in office or not.

3. Companies must disclose the status of outside directors who are in office for over six years (or nine years for affiliates) and the reasons thereof.

4. Companies must disclose whether their internal audit department is independently performing its duties—such department is deemed independent when the management has limits in exercising its authority without the consent of the audit committee (head of the committee), etc. when evaluating or transferring the said department's employees, as this eventually ensures the position of employees of the internal audit department.

5. Disclosure of dividend policy expanded to cover the entire policy on shareholder returns.

Environment, Social and Governance ("ESG") metrics are becoming more important to institutional investors in selecting target companies, making investment decisions, exercising voting rights, etc.  BlackRock, as early as beginning of last year, announced that a company should pursue the interests of not only its shareholders but also stakeholders, including its employees, customers and local community, and emphasized the importance of setting internal policies concerning climate change (see link).  Furthermore, State Street Global Advisors adopted a new performance index for companies based on the ESG standards (see link), and Institutional Shareholder Services, a proxy advisory firm, has established its Climate Voting Guidelines (see link).  More emphasis is on board diversity having greater participation of women, etc. and the appropriateness of remuneration for directors including the CEO. 

On December 27, 2019, the National Pension Service established the "Guideline on Shareholder Activism," including matters related to ESG when selecting companies subject to shareholder engagement.  The so-called female director system was adopted with the amendment to the Financial Investment Services and Capital Markets Act, which requires publicly listed corporations with total assets of at least KRW 2 trillion to appoint at least one of its directors from the "other gender" (scheduled to take effect from August 5, 2022).  Moreover, the limitation on the term of office of internal directors, which was included in the disclosure for corporate governance reports (six years for the subject company, and nine years for affiliates) was adopted as a compulsory requirement per the amendment to the Enforcement Decree of the Korean Commercial Code.  Likewise, other matters related to corporate governance which are now only subject to disclosure may be regulated under compulsory provisions, the scope of companies obligated to disclose corporate governance reports may be expanded, and the contents of such reports may be expanded to include companies' policies on the environment and the society other than corporate governance.   

Please note that following this trend, Korean companies are also emphasizing the importance of communicating with a number of investors and shareholders and considering preparing internal policies related to ESG.