RIETI Policy Symposium

Corporate Governance from an International Perspective: Diversity or Convergence

Presentation Summary #2

JANG Hasung Korea University

Although the IMF and other countries were often blamed, the recent crisis in Korea came largely from internal problems. Korea had to change its structure, which was, in fact, similar in some ways to the Japanese model. In the corporate sector, there was massive debt and declining profits. In the financial sector, there were many non-performing loans. Labor reform was being hindered by militarism. And the public sector was burdened by an embedded bureaucracy.

The most dramatic change in Korean corporate governance was the introduction of the outside director. Now, at least 25% of directors must be external. For companies with more than $1.7 billion in assets, half of the directors are to be external. Cross-share ownership is prohibited. An electronic disclosure system has been introduced. Equity holding of affiliated companies has been limited. Hostile takeovers and holding companies are now allowed. There is more responsibility for the controlling shareholder and there is liability for shadow directors. President elect Roh Moo Hyun will introduce the class action lawsuit, and he will separate the financial institutions and chaebols.

Good corporate governance dictates simply, "Do not steal someone else's money." I do not think any culture in the history of the world has allowed theft. But old habits die hard. In Korea, the mindset of the controlling families remains the same. There is persistent moral hazard.

Statistically, stronger corporate governance is associated with higher firm value. The conclusion is that the first best scenario would be for corporations to adopt good governance practices voluntarily. The second best would be for the market or institutional investors to take a proactive role. The third would be for the government to get involved.