Introducing Transparency in
Corporate Groups : Korean Context
OECD/KDI Conference
Corporate Governance in Asia

Introducing Transparency in
Corporate Groups : Korean Context
Background
Thirty largest business groups (called “Chaebol” or “Group”) occupy 13% of GNP in 1997
- Combined Revenue : : 401 trillion (U.S.$321 billion)
- Combined Assets : 421 “ ( “ 337 “ )
- Combined Net Loss : 3 “ ( “ 3 “ )
- Combined Value Added : 54 “ ( “ 43 “ )
Chairman of the Group traditionally dominated management, board of directors and shareholders’ meeting
Growing criticism over excessive concentration of economic and management power by the Group chairman
Corporate governance issue first raised in 1995 by Committee on Globalization Policy, followed by policy measures on

Introducing Transparency in
Corporate Groups : Korean Context
Background
, Continued
Commitments by Korean government with IMF and World Bank to improve corporate governance
- Reduction of guarantees of payment between member companies of the Groups
- Upgrading financial accounting standards and disclosure requirements to be consistent with international accounting standards
- Release of combined financial statements of the Groups
- Outside directors mandatory for public companies
- External auditor selection committee mandatory for public and the Group companies
- Only internationally recognized accounting firms may audit large financial institutions
- Mark-to-market accounting for all financial institutions
D. J. Kim’s government reform agenda of the large Groups
- Accelerated implementation of combined financial statements
- Prohibition of cross guarantees of payment
- Accelerated business restructuring
- Improvement of corporate governance and transparency in management
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Introducing Transparency in
Corporate Groups : Korean Context
Criticism Over Governance
Practice of the Groups
Expropriations by controlling shareholders
Lack of creditors’ and minority shareholders’ influence over corporate governance
Misappropriation of funds
Lack of legal liability by Group chairman and his/her staff
Lack of transparency in management and external monitoring function
Lack of external discipline over mismanagement
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Introducing Transparency in
Corporate Groups : Korean Context
Transparency Issues in Korea
No genuine demand for transparency under Korean social and business environment, and current ownership and management structure
External auditors are frequently under influence of controlling shareholder
Financial accounting standards lack rigorous interpretation
Supervisory authorities often revised accounting rules for benefit of financial service industry
Korean accounting standards deviated from internationally accepted accounting standards
Lack of reliance on financial statements by financial institutions who based lending decisions more on collateral and guarantee of payment than analysis of financial information
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Introducing Transparency in
Corporate Groups : Korean Context
Recent Development
Minority shareholders with more than 0.01% ownership are allowed to file derivative suit
Minority shareholders are entitled to propose items on the agenda at the general shareholders’ meetings
Beginning in 1999, public companies are requested to fill at least one quarter of the board of directors with outside directors
Public companies with assets of 100 billion Won or more are required to appoint at least one full time statutory auditor
Korea’s financial accounting standards have been amended to be substantially consistent with international accounting standards, effective January 1, 1999
Thirty largest business Groups are to file the audited combined financial statements from the fiscal year ending
December 31, 1999
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Introducing Transparency in
Corporate Groups : Korean Context
Recent Development
, Continued
Financial accounting standards for financial service industry have been fully upgraded to be consistent with international best practices, effective January 1, 1999
Poor performance of audit is to be subject to increased review and heavier sanctions
MOFE/World Bank funded studies are underway
- Improvement of auditing profession
- Strengthening regulation and discipline over audit market
- Enhancing the role of the Korean Institute of CPAs
- Introduction of audit committee
- Establishment of independent standards-setting organization
(KASB)
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Introducing Transparency in
Corporate Groups : Korean Context
Combined Financial Statements
Required of 30 largest Groups
Pro forma financial statements
Based on management control as defined under the
Monopoly Regulation and Fair Trade Act
Eliminate inter-company transactions and substantially identical to consolidated financial statements, except that minority interest is not identified
Disclosure of inter-company transactions, financial information of individual companies and segment information
Will lose ground when guarantees between member companies are eliminated
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Introducing Transparency in
Corporate Groups : Korean Context
Suggestions
Anti-corruption legislation should be strengthened
Transactions with related parties should be strictly regulated, monitored and disclosed
Internal control structure, internal monitoring system and risk management system should be strengthened for public companies and Group companies
Independence and professionalism of statutory auditors should be secured.
Institutional investors should be more active at the shareholders’ meeting
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Introducing Transparency in
Corporate Groups : Korean Context
Suggestions
, Continued
Role and independence of external auditors should be improved
- Auditor change should be closely monitored and disclosed
- Review of the audit quality should be reinforced
- Heavier sanction on audit failure
- Higher audit fee should be allowed
- Ethical standards and enforcement thereof should be strengthened
- Reform of self-regulating organization
- Introduction of audit committee should be considered
Private independent standards-setting organization, e.g. Korean Accounting Standards Board, should be established
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Introducing Transparency in
Corporate Groups : Korean Context
Challenges Ahead
Role and power of outside directors
Attitude of government and political circle
Social culture respecting relationship
Enforcement of ethical rules
Discipline of capital and financial market
Protection of whistle blowers
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Self-regulating ability of auditing profession