Proposed Legislation
In September 2007, Korean lawmakers also proposed a series of revisions to Korea’s Commercial Act. Among them is a provision that would allow shareholders to file suits against subsidiaries of larger companies. Under the proposed amendment, investors holding 1 percent or more in a parent or holding company, which retains more than 50 percent of shares in a subsidiary, may bring an action against directors of the subsidiary company.

Another proposed reform would require the board of directors to get approval from shareholders before beginning a business relationship with a third party when the relationship may affect the company’s probability. The measure was drafted as a safeguard against directors diverting corporate resources into private benefit schemes. Another provision that would put a limit on outside benefit-seeking by directors would require board approval for any directors or director affiliates who enter into additional business relationships with the company.

Echoing calls for independent boards in the U.S., Korea’s Parliament proposed an additional amendment that would allow companies to adopt a voluntary separation between the board and management. Under the provision, companies choosing to adopt this reform would no longer have “representative directors” (executive directors) and would instead employ an “officer-based” system in which the CEO and other top executives would have separate responsibilities from the board.

If the new amendments are approved, director liability will be capped to encourage active governance involvement by board members, and to lessen the fear of lawsuits, especially in light of the new SCA Act amendments. Non-independent directors (inside directors) would have immunity from loss and damages from lawsuits in the amount of up to six times their annual pay. Independent directors (outside directors) would have losses covered up to three times their annual pay. Additional possible reforms include allowing companies to use legal reserves for dividend payouts, introducing electronic proxy voting, and allowing firms to incorporate under the designations “Limited Liability Company” (LLC) or “Limited Partnership” (LP).

Whether these amendments are actually implemented depends on the government of new South Korean President Lee Myung-bak, who took office on Feb. 25. Lee, a former CEO of Hyundai Construction and Engineering as well as a former mayor of Seoul, has pro-Western and pro-business views.

Economic revival of the Korean peninsula, Lee said in his inaugural speech, “is [the] most urgent task,” the Associated Press reported. Showcasing his pro-business stance, Lee said in December that he plans to abolish the equity investment “ceiling rule,” China’s Xinhua news service reported. The “ceiling rule” is an amendment to Korea’s Fair Trading Act that caps the total amount of equity that family-owned business groups, or chaebols, can invest in new companies and affiliates at 40 percent of net company assets. The cap was raised in 2007; the investment restriction for these chaebols had been 25 percent of net assets. Criticizing the excessive regulatory measures undertaken by the previous government, Lee’s presidential transition committee said that the new government will stop unduly discriminatory treatment of domestic companies. A member of the transition committee’s panel on economy, Kang Man-Soo, said Lee’s landslide December victory suggested that Koreans were unhappy with present policies, Korea.net reported.

Possible Contentious Meetings
Korea’s 2008 proxy season will likely see more shareholder proposals than previous years as more activist investors and minority shareholders become aware of the benefits of good corporate governance.

At least half a dozen companies this year are expected to face proxy contests in directors elections--many of the nominees proposed by minority shareholders. Firms may also face opposition to management's auditor choice, analysts say. Hankuk Electric Glass, a glass manufacturer for the electronics sector, could face a contested election at its March 17 annual meeting, though official meeting documents have not been released yet. Other companies facing possible proxy contests include video game developer Actoz Soft, Byucksan Engineering & Construction, SFA Engineering, and Sungjee Construction. According to RiskMetrics data, Daehan Flour Mills, Hansol Paper, and Dongwon Development are in discussion with minority shareholders to avert proxy contests at their upcoming meetings.

At Hyundai Motor’s March 14 meeting, Chairman and CEO Chung Mong-koo likely will face opposition to his re-election as an affiliated director. Shareholders are angry because Chung was convicted in February 2007 of creating a slush fund to pay lobbyists for government favors, according to news reports.

An even larger slush-fund investigation is ongoing at Samsung Group, whose various affiliates will also hold meetings in March. Samsung is Korea’s largest conglomerate; its flagship enterprise is global electronics manufacturer Samsung Electronics. Special prosecutors, led by independent counsel Choo Joon-woong, are probing allegations that the conglomerate put together a slush fund established in 2002 to bribe candidates in that year’s political elections, and to purchase artwork, according to the Associated Press. The fund, estimated at KRW 43.3 billion (about $46 million), disappeared after the 2002 elections.

According to Choo, Samsung Group collected about KRW 83 billion in 2002 by purchasing bonds from the private money market for bribery purposes. Special investigators raided Samsung Electronics’ corporate headquarters on Feb. 14, searching for documents related to the slush fund, the country’s Yonhap news agency reported. With a few months left until the completion of the Samsung bribery probe, the fate of company executives remains uncertain. The prosecutors’ first investigation report is due March 10. Whether directly or indirectly involved with the scandal, major Samsung affiliates Samsung Securities and Samsung Marine & Fire Insurance may also see fallout from the ongoing investigation. Samsung Electronics has attempted to distance itself from its parent company in the wake of the slush fund investigation.

The investigation stretches beyond Samsung, as well. Former Samsung lead counsel Kim Yong-cheol told the FSC in November that the company was running a vast bribery network encompassing the government, the judiciary, and the news media, and that Kim himself had bribed prosecutors on behalf of Samsung Group and its chairman, Lee Kun-hee. In December, the FSC announced that it believed the nation’s second-largest lender, Woori Financial, and brokerage Goodmorning Shinhan Securities, set up accounts under Kim’s name without his knowledge, Asia Pulse reported.

Staff Writer L. Reed Walton contributed to this story.