In late 2021 and 2022, the Supreme Court rendered two decisions which related to the scope of directors’ duties in Korean companies.

2021 Case: Director’s Duties Continue After a System is Set Up

In November 2021, the Supreme Court reviewed the issue of a director’s duty to “monitor and supervise” the operations of the company, after an internal control system has been set up.  In its decision, the Supreme Court held that simply establishing an internal control system is insufficient and that the system must effectively operate through the directors’ “attention and support.”  In particular, the Supreme Court emphasized the need for internal control systems where the operations of the company were in fields with relatively high legal risks, based on a consideration of factors, including the purpose or size of the company, the nature of its business, and relevant regulatory requirements.

2022 Case: Objective Standard for Determining Breach of Duty

In May of 2022, the Supreme Court upheld a High Court’s decision that, irrespective of whether a director’s act was intentional or negligent, the director can be held liable if an overall internal control and compliance system was not in place.  In this case, the District Court had ruled, “the director shall be held liable for breach of his/her duty to monitor only when he/she neglected to take any measures if the director had reasons to believe that there was an illegal activity within the company.”  By affirming the High Court that overturned the District Court’s decision, the Supreme Court made it clear that directors, including outside directors, may be held liable for breach of his/her duty to monitor through the internal control system even if he/she was not aware of any unlawful conduct within the company and there was no reason to suspect such conduct.

Overall Strengthening of Director’s Duty to Monitor and Supervise

As suggested by the above cases, the key to determining whether a director breached his/her duty to monitor and supervise is shifting from a subjective standard (such as whether the director was aware of the illegality) to a more objective standard (such as “compliance with the reporting and internal control standards and preventive measures”).  The shift is in line with the broader global trend of ESG corporate standards, which seek to strengthen the roles and responsibilities of the board of directors.  The director’s duty to monitor and supervise is expected to become more stringent going forward, requiring additional diligence on the part of directors to fulfill their duties.  For example, to reduce the risk of director liability for failure to monitor, companies and directors are advised to (i) set up a reasonable information collection/reporting system and an internal control system that can identify and respond to potential risks, (ii) regularly review whether the system operation is effective and propose improvements, and (iii) document these efforts.