Corporate leadershipi Board structure and practices
Under Korean law, boards of directors shall have a single-tier structure. Except with regard to small companies, a board of directors may not be replaced, as it is an essential body that is required under the KCC.
However, the KCC adopts a committee within the board of directors system, whereby a committee established within the board of directors may be delegated with certain authorities of the board of directors and resolve on relevant matters. Under the KCC, the board of directors may decide whether to establish any committee at its own discretion pursuant to the company's articles of incorporation.
A listed company with total assets equal to or greater than 2 trillion won as of the end of the latest fiscal year (thus being a large listed company) must establish an audit committee and a committee to recommend outside director candidates.
Financial companies are obliged to establish:
- a committee in charge of recommending candidates for outside directors, representative directors and audit committee members;
- an audit committee;
- a remuneration committee; and
- a risk management committee.
The independence of the audit committee has been strengthened: at least two-thirds of the audit committee of a financial company or a large listed company is required to be composed of outside directors.
In addition to these legally required committees, listed companies are increasingly requiring the professional examination of a separate committee: for example, an internal transaction committee that examines the fairness of transactions between affiliates and specially related parties, or a remuneration committee that examines the remuneration system for directors and officers.Composition of the board
The board of directors shall be composed of at least three directors, and there is no limit on the maximum number of board members. However, a company whose paid-in capital is less than 1 billion won may elect not to establish a board of directors.
At least one-quarter of the total number of directors appointed in listed companies shall be outside directors, and a large listed company shall have at least three outside directors who will constitute a majority of the total number of directors.Company representatives
In principle, the representative director represents the company externally, and has the authority to undertake matters resolved by the board of directors, and to decide on and perform ordinary management activities internally. The board of directors has the authority to make material decisions regarding the company (e.g., the disposal or transfer of its material assets and the borrowing of large-scale property).
In addition, Korean courts consider that a resolution of the board of directors shall be required for important matters that have not been generally and specifically delegated to the representative director by the board of directors and that do not fall under ordinary day-to-day operations.
Directors participate in the decision-making processes of the board of directors, and exercise a supervisory role over the operations of the representative director or representative executive officer. However, in principle, a director may not represent a company without a delegation of the board of directors, the representative director, or both.Legal responsibilities of the board
Directors shall be jointly and severally liable for damage suffered by the company if they have violated any law or the articles of incorporation due to their wilful misconduct or negligence, or if they have neglected their duties. If the foregoing acts have been conducted in accordance with a resolution of the board of directors, the directors who have consented to such resolution shall assume the same liability against the company.
Directors may be exempt from the foregoing liabilities pursuant to unanimous shareholders' consent (this is highly unlikely for listed companies). The 2012 amendments to the KCC also provide that a director's liability that exceeds six times his or her annual salary (or three times, in the case of outside directors) may be exempt if the company has set forth relevant matters regarding this in the articles of incorporation in advance. However, such limits on liability shall not apply in certain cases, such as damage caused by a director's wilful misconduct or gross negligence, or by his or her violation of certain regulations regarding self-dealing (see below) provided under the KCC.
Directors may be liable under the Criminal Act for breach of fiduciary duty if they have breached their duty of care as bona fide managers or their fiduciary obligation to the company, and if the company has suffered damage due to such breach and such director or third party profited therefrom.Control of the board
In principle, meetings of the board of directors may be convened by any director. However, the articles of incorporation typically provide that the representative director is authorised to convene meetings of the board of directors. Any director may convene meetings of the board of directors if he or she is authorised to convene such meetings by a resolution of the board of directors.
Usually, the representative director concurrently holds the position as chair of the board of directors, and has the authority to convene board meetings. Accordingly, in most cases the representative director, who doubles as chief executive officer and chair of the board, also leads the board of directors and management.
In principle, a financial company shall appoint an outside director as the chair of the board of directors. If a financial company appoints a person who is not an outside director as chair, a representative of the outside directors shall be appointed separately.
Generally, although they are not legally obliged to do so, listed companies are increasingly appointing an outside director as the chair of the board of directors to ensure the objectiveness and independence of the board's examination procedures.Delegation of board responsibilities
As the representative director represents the company, the general practice is to affix the seal of the company and attach the certificate of the corporate seal impression issued by the court on him or her so that he or she can carry out the company's external activities (including the execution of agreements).
In principle, the board of directors has the authority to make material company decisions, and to delegate certain authorities to committees within the board of directors.
The board of directors may also delegate certain duties (except for matters requiring a resolution of the board of directors or any committee) to the representative director. Generally, a company's internal regulations stipulated by a resolution of the board of directors determine the matters on which the representative director is authorised to make decision at his or her own discretion without obtaining a resolution of the board of directors.Separation of the roles of CEO and chair
There is no express provision on the authority or responsibility of the chair of a board of directors under the KCC. However, it is usually provided in the articles of incorporation that the representative director shall concurrently hold the position of chair of the board of directors. The chair shall assume the same responsibilities as other directors.
The representative director has the authority to perform business on behalf of the company, and the chair has the authority to convene and proceed with meetings of the board of directors.Direct communication with shareholders
There is no law or regulation restricting the representative director or the chair from directly communicating with shareholders.
However, as the regulations on fair public disclosure apply to listed companies, and the FSCMA sets forth regulations on insider trading, a listed company's communications with its shareholders are subject to the limits set forth therein.Remuneration of directors and senior management
The general practice is to have a cap on remuneration for all directors resolved at the general shareholders' meeting, and the amount of remuneration for respective directors resolved by a resolution of the board of directors.
For financial companies, matters regarding the methods for the determination and payment of the remuneration of officers (excluding outside directors, non-standing directors, audit committee members, compliance officers and risk management officers) need to be resolved by the remuneration committee, which is a committee established within the board of directors.
There is no special provision on the amount of remuneration of non-registered officers (senior management). The general practice is to determine such amount at the representative director's own discretion or under regulations on officer remuneration resolved by the board of directors.Committees
As discussed above, the board of directors may establish internal committees under the board, such as an audit committee.
Large listed companies must establish an audit committee and a committee to recommend outside director candidates. Financial companies are also required to establish an officer candidate recommendation committee, audit committee, remuneration committee and risk management committee.
Matters resolved by the committees (excluding the audit committee) may be resolved again by the board of directors.Board and company practice in takeovers
In the case of a hostile takeover, it may be possible for a board of directors to use defence tactics such as the acquisition of treasury shares or the issuance of new shares to friendly third parties, including specific shareholders. To issue new shares to friendly third parties, however, express grounds should be given in the articles of incorporation, and other regulatory issues exist (e.g., the issuance price will be restricted under the FSCMA). Furthermore, in a dispute over management control, the issuance of new shares to friendly shareholders for the purpose of defending against such dispute is likely to be invalidated by court.
A listed company may acquire treasury shares by a resolution of the board of directors in an amount up to its distributable profits, and may use methods such as tender offers or purchases on exchange.
To defend against a hostile takeover, the articles of incorporation can stipulate the supermajority voting system for certain agendas of the general shareholders' meeting, including the dismissal of directors, or the golden parachute system, which requires the payment of a substantial amount of severance pay upon the dismissal of directors; however, it remains controversial whether these systems are permitted under the KCC.ii Directors
Under Korean law, there is no difference between outside directors and executive directors in terms of their authority, obligations and responsibilities.
Due to their independent status, there has been a lot of criticism about outside directors, with the contention being that they merely act as a rubber stamp without assuming actual roles in supervising the management of companies. However, outside directors have recently been expanding the scope of their actual participation in board of director decision-making processes by raising their opposition to specific agenda items or requesting additional examination.
In principle, notice shall be given to directors and statutory auditors no later than one week prior to a meeting of the board of directors in order to convene the meeting of the board of directors. This period may be shortened by the articles of incorporation, and the meeting may be held without convocation upon unanimous consent of all the directors and statutory auditors.
There is no express statutory provision on whether outside directors are allowed or obligated to directly visit a subsidiary of the relevant company or engage in direct communication with lower management or employees. However, it would be difficult for outside directors to force such visits or communication without the permission of the management of a subsidiary, since the independence of an entity cannot be denied even for subsidiaries.Legal duties and best practice
In terms of legal duties, there is no distinction between executive (inside) directors and outside directors. Both are obliged to perform their duties for the company in good faith in accordance with their duty of care as bona fide managers, and in accordance with the law and the articles of incorporation.Liability of directors
A director shall be liable for damage suffered by the company if he or she has violated any law or the articles of incorporation due to his or her wilful misconduct or negligence, or has neglected his or her duties. If the foregoing acts were performed in accordance with a resolution of the board of directors, the directors who have consented to such resolution shall assume joint and several liability against the company.
Directors may be exempted from the foregoing liabilities pursuant to unanimous shareholders' consent (which is highly unlikely for listed companies). As previously mentioned, if a director's liability exceeds six times his or her annual salary (three times, in the case of an outside director), it may be exempted if the company has set forth relevant matters in this regard in the articles of incorporation in advance.,
If a company fails to do so, shareholders may file a lawsuit against the directors on behalf of the company based on the directors' breach of their duties. Recently, there have been discussions about expanding the scope of derivative actions and introducing a multi-step derivative action system: that is, a system whereby the shareholders of a parent company may institute a derivative action against the directors of a subsidiary if those directors have caused damage to the subsidiary due to their negligence in the performing of their duties.
Directors may be liable under the Criminal Act for breach of fiduciary duty if they have breached their duty of care as a bona fide manager or a fiduciary obligation to the company, and the company has suffered damage due to such breach and such director or third party profited therefrom.
Directors are appointed by a resolution of the general shareholders' meeting. When appointing two or more directors, use of a cumulative voting system may be requested, although most companies restrict such system through their articles of incorporation.,
If a listed company convokes a general shareholders' meeting to appoint directors, it shall provide certain information about the candidates to the shareholders. Directors may be appointed only from the candidates notified as above.
Large listed companies shall appoint outside directors from those candidates recommended by the committee formed to recommend outside director candidates.
For financial companies, candidates for outside directors, representative directors and audit committee members are recommended by the committee to recommend officer director candidates.
The term of office of directors shall not exceed three years; however, such period may be extended by the articles of incorporation until the adjournment of an annual general shareholders' meeting convened with respect to the last fiscal year during a term of office.
Although there is no special qualification requirement for executive directors, outside directors should satisfy certain qualification requirements that are mainly related to their independence.
For large listed companies, at least one member of the audit committee should be an expert in accounting or finance. As for financial companies, certain qualification requirements are specified for the executive and outside directors.Conflicts of interest
To prevent a conflict of interest between a company and a director, when a director, or any of his or her relatives and entities he or she controls, intends to engage in a transaction with the company (self-dealing), the relevant party shall disclose the material facts regarding such self-dealing to the board of directors in advance, and obtain approval therefor by an affirmative vote of at least two-thirds of the total number of the directors. Any self-dealing shall be fair in terms of its conditions and procedures.
According to the 2012 amendment to the KCC, a director shall also obtain the approval of the board of directors by an affirmative vote of at least two-thirds of the total directors to exploit business opportunities that are likely to present current or future profits to the company for his or her own benefit or that of a third party.
Since outside directors cannot engage in the regular business of a company, they are not able to directly engage in the performance of a company's business. However, they shall monitor the management as members of the board of directors by, inter alia, reviewing and examining matters reserved to the board of directors, participating in the board of directors, engaging in discussions or exercising voting rights.