Commercial Act Revisions Leave Key CEO Issues Unresolved

South Korea has recently revised its Commercial Act three times, introducing changes like including shareholders in the director's duty of loyalty, mandating concentrated voting for large listed companies, and requiring the disposal of treasury stock. While these reforms have reshaped corporate governance, a critical gap remains: the appointment, compensation, and retention of CEOs, the ultimate decision-makers in corporate resource allocation.

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The result is a distortion of incentives. When the interests of the controlling shareholder, who sets their own term and compensation, diverge from the interests of all shareholders that the law is meant to protect, it is obvious which side the management will choose.

Currently, directors' compensation is typically approved only up to a limit by shareholders, without public disclosure of performance metrics, pay structures, or retirement benefits. The selection of CEOs is even more opaque. Globally, boards lead succession planning, but in Korea, group organizations controlled by majority shareholders often dictate CEO appointments, reappointments, and dismissals. These organizations, despite making crucial company decisions, bear no director's duties, disclosure obligations, or legal responsibilities.

This disconnect creates a misalignment of incentives. When a controlling shareholder's interests diverge from those of all shareholders, executives are likely to favor the former. Strengthening the duty of loyalty alone is insufficient if incentives point in the opposite direction. While mandatory compensation committees are suggested, they may become mere rubber stamps if shareholder influence over director appointments persists. The key lies not in creating new bodies but in enforcing existing laws more effectively.

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If the duty of loyalty is to be more than a declaration, incentives must change. So, is mandating a compensation committee the answer? No.

Proposed solutions include requiring compensation policy reports attached to compensation limit proposals, similar to the UK's three-year shareholder approval cycle. Additionally, business reports should disclose the CEO succession process, detailing the decision-makers and procedures, without compromising personnel confidentiality. This disclosed information can then be used to enforce executive director liability, a provision enacted in 1998 but underutilized. Such enforcement would bring informal decision-making bodies into the board's purview, fundamentally altering executive incentives. The focus should be on substance over form, ensuring that reforms are implemented with a long-term perspective, allowing structures to follow genuine change rather than precede it.

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The solution is not to introduce new bodies but to supplement the enforcement decree to properly apply the law.