Corporate governance

Corporate governance (기업지배구조/企業支配構造) means various rules and principles on how to govern a corporation where conflicts of interests among large shareholders (대주주/大株主), top management, minority shareholders, creditors, employees, consumers, community and government. Those out of the investor group are called "stakeholders" (이해관계인/利害關係人). So the corporate governance deals with conflicts of interests between the large shareholder and minority shareholders; shareholders and stakeholders; providers of finance and management.

In a narrow sense, corporate governance means a system, legal or practical, to monitor and regulate the corporate management for the protection of interests of minority shareholders and stakeholders. In Korea, the corporate governance is realized in such a manner as separation of ownership and control, adoption of outside directors, ensurance of independence of the auditor, enhancement of shareholders' rights, advancement of the accounting system, enforcement of financial supervisory systems, etc.

Key words
corporate governance, large shareholder, minority shareholder, stakeholder, outside director, OECD Principles

Principles of Corporate Governance
Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002).

The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act (informally referred to as Sarbox or Sox) is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.
 * Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.
 * Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.
 * Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment
 * Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.
 * Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

OECD Principles
It has been globally believed that corporate governance is the source of corporate competitiveness and sustainable growth. In the course of international discussions, the Organization for Economic Cooperation and Development (OECD) member states reached a conclusion on the principles of corporate governance in 1996, 1999 and then 2004.

The OECD Principles of Corporate Governance consists of the following:
 * 1) Ensuring the Basis for an Effective Corporate Governance Framework;
 * 2) The Rights of Shareholders and Key Ownership Functions;
 * 3) The Equitable Treatment of Shareholders;
 * 4) The Role of Stakeholders in Corporate Governance;
 * 5) Disclosure and Transparency; and
 * 6) The Responsibilities of the Board.

Though OECD stresses the flexible principles in view of the specific situation of each country enough to satisfy the management transparency, accountability and fairness to shareholders. It is also true that OECD principles largely take the Anglo-Saxon perspective, which respects the minority sharehoders' rights based on market mechanisms. On the contrary, the main bank or the largest creditor bank in Germany and Japan plays the most important role in the management and fund-raising of corporations.

Corporate Governance in Korea
In order to overcome the IMF Crisis in late 1997, the Korean government was required by the International Monetary Fund to improve the conventional corporate governance regime which had granted controlling power of a corporation to its major shareholders and the creditor banks. With some financial assistance from the World Bank, the Commercial Act was amended from time to time to reflect the global standards such as corporate governance prevailing in the United States and other advanced countries.

Ever since the IMF Crisis, the amendments to the Commercial Act have reflected the following principles:
 * To enhance the minority shareholders' status by adopting cumulative voting (Article 382-2);
 * To require large-sized corporations to elect outside dirctors (Article 382(3));
 * To establish the Auditing Committee headed by the outside director rather than the Auditor (Article 415-2);
 * To allow a representative suit (Article 403)
 * To designate a corporate executive officer (newly inserted Article 408-2, effective on Apr. 15, 2012), etc.