The Korea Exchange (the “KRX”) issued the amended Guidelines on Corporate Governance Report (the “Reporting Guidelines”) on March 31, 2020 to strengthen the existing requirements on corporate governance reporting.  Disclosure of corporate governance matters forms a part of the ESG (Environmental, Social and Governance) reporting, which has been garnering global significance of late.  As disclosure of environmental and social matters may become mandatory in the future, we advise companies to closely monitor such developments and prepare to respond appropriately.

1.   Overview of the Corporate Governance Disclosure System

The KRX first introduced the corporate governance disclosure system in March 2017, under which companies were encouraged to voluntarily report on their compliance status with the key principles of corporate governance.  However, the voluntary disclosure system had limitations in that it failed to ensure a sufficient level of disclosure of corporate governance information.  Since 2019, companies listed on the KOSPI market with total assets of at least KRW 2 trillion on its consolidated statement of financial position, officially classified as a “Large Listed Company,” are required to submit an annual corporate governance report to the KRX within two months after the deadline for submission of its annual business report.  Accordingly, in 2019, all 170 companies subject to the newly implemented disclosure requirement published their corporate governance reports, while nine other companies opted for voluntary publication.

2.   Key Changes in the Reporting Guidelines 

Following the inspection of all corporate governance reports submitted by 170 companies in 2019, the KRX found instances of (i) inconsistency between the summary of compliance and the main body, (ii) missing or insufficient explanation on institutional measures introduced to improve corporate governance, or (iii) ambiguous or repetitive narratives in the reports.  In response, the KRX updated the Reporting Guidelines on March 31, 2020, which increased the number of detailed principles of corporate governance from 23 to 27 and that of mandatory disclosure line-items from 30 to 60. 

Amendments that may be of particular importance to companies and investors are as follows: 

1. With respect to a company’s policy on CEO succession plan, in lieu of presenting a summary of legal requirements for succession planning in the event that the CEO is absent or unable to execute his/her duties, it must report, among others, (i) corporate bodies responsible for the establishment and operation of the succession policy, (ii) key details of the succession plan, and (iii) the status of personnel training relevant to the succession plan.

2. Engagement in unfair trade practices prohibited under the Financial Investment Services and Capital Markets Act, in addition to acts of embezzlement and breach of trust, now falls under the classification of infringement on shareholder rights and interests.  A company must disclose whether it has put clear standards or procedures in place against appointing persons who have previously infringed shareholder rights and interests as officers (including non-registered officers).  

3. A company must disclose all independent directors who have held office for a period exceeding six years (or nine years, taking into account a director’s position at the company’s affiliates), and the reasons for their continuous appointment.

4. A company must report on the level of independence secured for its internal audit department.  An internal audit department is deemed independent if “the management cannot unilaterally evaluate, demote, promote or transfer the department's personnel, unless the audit committee or the committee chair consents to such a decision.”  

5. In lieu of limited disclosure on dividend policy and dividend payment plans, a company is required to make expanded disclosure on its long/mid-term policies to promote shareholder returns (including dividend payments) and entire future plans regarding shareholder returns. 

3.   Growing Demand for ESG Disclosure 

Among ESG (Environmental, Social and Governance) matters, corporate governance reporting was the first to become mandatory, while mandating disclosure of environmental and social matters is currently under discussion.  The KRX established a dedicated task force on ESG reporting and is in the process of devising a plan to expand and promote ESG reporting.  In 2020, the Korea Corporate Governance Service (the “KCGS”) plans to overhaul the standards and codes of conduct on ESG reporting, including the “Corporate Governance (G) Code” of the KCGS, which formed the basis of the key principles of corporate governance during the introductory stage of the corporate governance disclosure system. 

The aforementioned developments reflect a growing significance of ESG disclosure and ESG factors in investment decisions of institutional investors worldwide (including their selection of potential investment targets) and their exercise of voting rights over investees.

Since 2018, the EU has required large companies to make non-financial disclosure, including certain ESG information.  In the US, while companies are not obligated to report on ESG matters, some publish annual sustainability reports on a voluntary basis; however, there has been a growing demand for enhanced ESG disclosure requirements from institutional investors and proxy advisory firms. 

A global asset manager, BlackRock, emphasized that a company should pursue the interests not only of its shareholders but also of all other stakeholders, including its employees, customers and members of the local community, and called on companies to report their ESG initiatives, including efforts to fight climate change, to promote diversity among employees and board members, and to forge sustainable relationships with vendors.  Another global asset manager, State Street Global Advisors, also urged the importance of ESG reporting and accurate evaluation thereof.  Meanwhile, Institutional Shareholder Services, a proxy advisory firm, recently published its Climate Proxy Voting Guidelines.

4.   Possibility of Enhanced Reporting Requirements for Listed Companies

Having expanded the disclosure line-items and the scope of mandatory disclosure in the Reporting Guidelines, the KRX will likely carefully scrutinize corporate governance reports to be submitted this year.  For non-compliance with the Reporting Guidelines, a Large Listed Company may be required to file a correction report or receive sanctions for its failure to make good faith reporting.  Thus, Large Listed Companies should pay close attention to the Reporting Guidelines in their preparation of corporate governance reports this year.

Meanwhile, when the mandatory corporate governance disclosure system was introduced, the Financial Services Commission announced that it may consider expanding the disclosure requirement to all companies listed on the KOSPI market starting in 2021 based on its review of the operation of the disclosure system.  Thus, even companies that are not currently subject to the mandatory disclosure requirement should also pay attention to future developments.

In addition, as the KCGS is expected to amend the Corporate Governance (G) Code this year, relevant regulations on corporate governance (G) disclosure may also be amended.  Lately, supervisory authorities and institutional investors in and outside of Korea have emphasized the importance of ESG policy and have called on companies for proper ESG disclosure.  Therefore, companies may be required to report not only corporate governance matters but also environmental and social matters in the future.  In view of the foregoing, we advise companies to closely monitor developments in ESG reporting regulations and make advance preparations such as establishing internal ESG policies.