The “female board directorship system”, which aims to ensure the diversity of boards of directors, will be applied to large listed companies beginning in August 2022.  A special provision (Article 165-20) that had been added to the Financial Investment Services and Capital Markets Act (the “FSCMA”) in August 2020 prohibits a listed company whose total assets as of the end of the recent fiscal year (i.e., the greater of the total equity or capital of a company engaging in a financial or insurance business) is KRW 2 trillion or more from having a board of directors composed entirely of one gender.  This provision will begin to be applied on August 5, 2022, coinciding with the expiration of a two-year grace period.  

While Article 165-20 (Special Provisions on the Composition of Gender of the Board of Directors) of the FSCMA is a mandatory provision, the FSCMA does not include a separate provision on sanctions for violation of such provision.  

A violation of the new provision may, however, also constitute a violation of institutional investors’ internal voting standards and the company’s corporate governance guidelines regarding the promotion of diversity on the board of directors.  Shareholders may therefore react to such a violation by exercising shareholder rights such as raising objections and making proposals to appoint female directors.  

On December 3, 2021, the National Pension Service, a leading institutional investor, issued to companies in which it is invested an “Explanatory Statement on the Direction of Responsible Investment by the National Pension Service relating to the Composition and Operation of the Board of Directors” (the “Statement”).  In the Statement, the National Pension Service shared its views regarding certain major investment activities for the purpose of enhancing consistency and reducing risk at the companies in which it is invested.  According to the Statement, efforts should be made to comply with gender diversity requirements in order to fulfill the board’s roles and responsibilities (Key Principles 4, Detailed Principles 4-2).  

ISS and Glass Lewis, international advisory bodies specializing in voting rights, have taken the same view.  ISS recommends that, if a company does not comply with the regulations on gender diversity of the board of directors, it should vote against the appointment of the chairman of the Nomination Committee or other members of the Nomination Committee.  Glass Lewis also recommends that, if the board of directors of a large company consists solely of one gender, it should vote against the appointment of the chairman of the Nomination Committee (or the chairman of the board of directors, if there is no Nomination Committee).  The Korea Corporate Governance Service, a Korean voting advisory body, also recommends approval of a proposal to enhance diversity in the composition of the board of directors, including in respect of gender, social and cultural background, professional experience and expertise.  

Given the growing interest of institutional investors in the promotion of diversity on the board of directors in order to improve corporate governance and promote better ESG profiles, it is therefore advisable to ensure that the composition of the board of directors complies with the new provision on female directorship, even though the FSCMA does not currently include any direct statutory sanction for violations.  

Large listed companies subject to the new provision in the FSCMA should therefore take steps to ensure they will be in compliance when appointing directors at the general meeting of shareholders to be held in 2022. 

[Korean version]