On October 12, 2023, the Financial Services Commission (the “FSC”) and the Korea Exchange (the “KRX”) issued a press release (Link) announcing an amendment (the “Amendment”) to the Guidelines on Corporate Governance Disclosure for Listed Companies (the “Guidelines”).
Corporate governance disclosure was introduced to encourage listed companies to voluntarily enhance their transparency. Companies are required to disclose their compliance with the core principles of corporate governance and if they fail to comply with such principles, to provide an explanation addressing the reasons therefor (the “comply or explain” approach). When the corporate governance disclosure system was first introduced in Korea by the KRX in 2017, it was a voluntary disclosure system. In 2019, it became mandatory for KOSPI-listed companies with total assets of KRW 2 trillion or more. As we informed you in our prior newsletter, the scope of companies subject to mandatory filing was expanded to KOSPI-listed companies with total assets of KRW 1 trillion or more since 2022 (Link).
Currently, the indicators for disclosure consist of ten core principles and 28 detailed principles. According to a review conducted at the end of 2022, the average compliance rate for key indicators among companies with total assets of KRW 2 trillion or more significantly improved to 66.7%, from the previous year’s 63.5%. The scope of companies subject to mandatory disclosure will be expanded to companies listed on the KOSPI market with total assets of KRW 500 billion or more in 2024, and subsequently, to all companies listed on the KOSPI market in 2026.
The Amendment incorporates feedback received during the implementation of the system, in line with the upcoming expansion of the scope of companies subject to mandatory disclosure which is slated to take place in 2024. Key details of the Amendment are summarized below. The Amendment will take effect with respect to corporate governance reports submitted in 2024 (deadline for submission: May 31, 2024). The KRX announced that for companies that are requested to make a corrective disclosure for making substandard disclosures of corporate governance reports, it will issue a recommendation for these companies to participate in supplementary instruction, and starting from 2025, pursue measures to disclose the names and specific details of companies that repeatedly file inadequate disclosures despite the KRX’s continuous demand for improvement.
|
1. |
Detailed Principles |
|
① |
As a follow-up measure to the FSC’s plans to improve dividend distribution procedures of listed companies (January 2023) previously noted in our newsletter (Link), the amended Guidelines require a company to disclose whether it has improved dividend procedures by ways such as designating the dividend record date to fall after the date on which the decisions on dividend distribution are made at the ordinary general meeting of shareholders so that investors know the dividend amount before making investment decisions. |
|
② |
With the recent emphasis on the need to actively engage with minority shareholders/foreign investors, the amended Guidelines require a company to disclose (i) the records of communication between the management and minority shareholders/foreign investors, (ii) whether communication channels for foreign shareholders are in place, and (iii) the percentage of disclosures in English. |
|
③ |
In consideration of the cases where the stock value of existing shareholders was diluted in the process of capital raising [such as bonds linked with equity (CB, BW, EB, etc.) and contingent capital securities], the amended Guidelines require a company to describe the status of capital raising which may result in a conflict of interest between shareholders, and disclose whether the board of directors considered the interests of minority shareholders when making the decisions on capital raising. |
|
④ |
As for the standards for disclosure of diversity of the composition of the board of directors, the standards for diversity are expanded to include not only gender, but also age and experience. In addition, a company is required to state whether the board of directors is composed entirely of a single gender, and, in case of any non-compliance with the diversity requirements, the reasons therefor. |
|
⑤ |
With respect to the adequacy of directors’ remuneration, a company is required to disclose (i) whether it has established remuneration policies that are linked to individual evaluation of directors, (ii) whether it has disclosed remuneration-related policies, and (iii) whether it has subscribed to directors and officers liability insurance, as well as the policies to prevent abuse thereof. |
|
⑥ |
In order to prevent the appointment of persons who have damaged corporate value as executives, the scope of disclosure of executives’ violations of laws is expanded to include undue benefits/unfair assistance, and violation of accounting standards (previously, the scope of disclosure had been limited to embezzlement/malpractice and unfair transaction). However, the period of disclosure has been adjusted to a limited time frame, starting from the Government’s judgment (including indictment and administrative dispositions), to “five years from the end of the execution (or exemption) of a sentence” (previously, the duration of the disclosure had been indefinite from the point of final ruling). |
|
2. |
Key Indicators |
|
New Items |
Deleted Items |
|
The company provides predictability regarding cash dividends. |
There is no outside director who has served for more than six years. |
|
The board of directors is not composed entirely of members of single gender. |
The company provides training to the internal audit organization at least once a year. |
※ Deleted items that no longer hold significant meaning or have less effect due to amendments to relevant laws and regulations and revised some of the key indicators to reflect policy reforms and global trends.
|
3. |
Reform of the Report Format |
The format of the report is amended from the previous format in which a company provides a simple description for the items presented in the Guidelines to a format in which a company discloses whether it is in “compliance” (by way of providing a brief description) and whether the company has implemented relevant policies (by way of marking O/X) as separate items.
Starting from 2024, the above amended Guidelines will take effect, and the scope of companies subject to mandatory disclosure of corporate governance will be expanded as well. In many cases, the status of compliance with the detailed principles and key indicators affects the evaluation of the company’s corporate governance, the exercise of voting rights by institutional investors, and support for the company’s management policies. Although the disclosure deadline is set for the end of May 2024, in order to ensure compliance with each item of the indicators for disclosure, it would be advisable to prepare for the matters that need to be reviewed by the company in advance, such as proposal of the agenda before the ordinary general meeting of shareholders in 2024 (e.g., securing diversity within the board of directors, amendment to the articles of incorporation in relation to change of the dividend record date to ensure predictability of dividend payouts, etc.). Furthermore, the adequacy of directors’ remuneration or the question of whether the interests of minority shareholders were taken into consideration at the time of making decisions on capital raising is related to directors’ obligations and responsibilities, which may pose a risk of dispute. Therefore, we advise caution in preparing for disclosures in this regard.
