Korean companies struggle to up their governance scores

Environment, social and governance (ESG) is a buzzword for companies all over the world. Korean companies seem to be doing quite well with the environmental and social sectors, but the country still has a long way to go in the governance sector.

Environmental, social and governance (ESG) is a buzzword for companies all over the world. Korean companies seem to be doing quite well with the environmental and social sectors, but the country still has a long way to go in the governance sector.

ESG management refers to a company’s commitment to do more than just make a profit, such as actively putting forth effort to contribute positively to the environment or social causes and to conduct themselves responsibly.

Heads of many Korean companies including SK Group, Hanwha and Posco emphasized the importance of implementing ESG management during their New Year’s address. Not only that, SK, Hyundai and LG are expressing interest in issuing ESG funds.

But Korean companies are putting most emphasis on environmental and social causes, not on improving governance.

According to an analysis by Standard & Poor's, a global rating agency, Samsung’s ESG score is 43 out of 100.

The higher the score, the better the company is doing in that particular sector.

The scores for the environmental and social sectors were relatively high compared to other companies in the same industry, with 68 and 48, respectively. Apple scored 47 in the environmental sector and 7 in the social sector.

However, in terms of governance, Samsung scored 23 while Apple scored 30.

The situation is no different in automaking.

Hyundai Motor’s ESG score was far higher than its rival Toyota in all three sectors. Kia, a subsidiary of Hyundai Motor, fell behind Toyota in the governance sector.

SK hynix's scores were lower than its Taiwan rival TSMC in all three sectors, but the difference was most significant in the governance sector.

Global companies tend to push as hard for governance as they do for environmental and social issues. The World Economic Forum presented four big pillars of ESG — governance, planet, people and prosperity — and considers governance to be the most critical issue.

Some experts claim Korean companies’ focus on reducing carbon emission is one of the biggest reasons behind their poor performance toward improving their corporate governance system.

“Since being eco-friendly has become the key issue among companies due to the Covid-19 outbreak, Korean companies are largely affected by it,” Kim Nok-young, from the Korea Chamber of Commerce and Industry, said. “Through that trend, it can be seen that Korean companies are showing less interest in governance.”

Some argue that Korean companies’ management style where a CEO holds absolute power in decision making is the main reason they are not able to make quick changes in their corporate governance system.

“It’s problematic that domestic companies are only concentrating on environmental and social issues,” said Jung Moo-kwon, business professor at Kookmin University. “Unless Korean companies try harder to improve their transparency in appointing the board of directors and auditors, it will be nearly impossible for them to get a good score in the governance sector.”

SK Holdings in just two years ago separated the positions of CEO and chairman of the board of directors. Before, both were held by SK Group Chairman Chey Tae-won.

LG Group in the same year also divided the same two positions to prevent the CEO from taking the role of chairman.

In the case of Hyundai Motor, however, Euisun Chung has been serving as both the company's CEO and board chairman.

Conditions for evaluating a company’s corporate governance system have been increasing recently, and experts say Korean companies are not adapting well to the trend. For foreign companies, factors such as the ratio of women serving as board members and specific processes deciding the salary of CEOs have also became key issues in improving the corporate governance system.

Of 47 executives in Korea’s five major companies — Samsung Electronics, Hyundai Motor, SK Group, LG Group and Lotte — only two are women.

Unilever, a British-based multinational consumer goods company, is a good example of a business doing well in the governance sector. Unilever reveals its Code of Business Conduct and Ethics for Members of the Board of Directors to the public, which is intended to inform members in the areas of ethical risk, provide guidance to the directors to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct and help foster a culture of honesty and accountability. It specifies that each director must comply with the letter and spirit of the code.

Unilever's ESG score is 91 out of 100, and its governance score is 89.

“Global companies now consider not only the ratio of women but also racial diversity in the board of directors [when scoring for governance],” Rhee Jay-hyuk, a business professor at Korea University, said. “When a domestic company grows to become a global company, they unavoidably feel pressure to improve their governance system.”

BY KANG KI-HEON, CHEA SARAH [chea.sarah@joongang.co.kr]