Korea reviews heavier punishment on companies with ‘dispersed’ ownership

[Photo by Kim Ho-young]

The South Korean government is mulling imposing various sanctions against fatal incidents caused by companies with dispersed ownership to prevent their lack of internal control and moral hazard from adversely affecting the public interest.

Korean President Yoon Suk-yeol has ordered the Financial Services Commission (FSC) to improve the governance of corporations with dispersed ownership, or those with no single investor that owns a controlling stake in an entity, according to an unnamed senior government official on Tuesday.

The FSC plans to come up with a revised act on the corporate governance of financial companies in the first quarter and make chief executives take responsibility for serious financial accidents. The move is to allow shareholders to make their voice heard on management or governance structure issues that harm corporate value.

“Financial holding companies are given light punishment on financial accidents and shareholders find no reason to replace their chief executive officers,” said Chun Hong-min, a professor at Sungshin Women’s University.

Four major banks, for example, were fined a mere 14.5 billion won ($11.7 million) for their incomplete sales of Lime Asset Management funds. The four financial holding companies, however, paid shareholders 3.75 trillion won in dividends last year, suggesting minimal damage on shareholders despite the incident that harmed investor trust.

The government is internally viewing ideas to impose more penalties to regulate corporate governance of financial holding companies, according to an unnamed official from the financial authority.

Kim Hyung-seok, division director at the Korea Institute of Corporate Governance and Sustainability, said that credit rating firms and creditor banks while monitoring corporations should impose heavy penalty on corporate structure risk to boost external monitoring.