Introducing Transparency in Corporate Groups : Korean Context Introducing Transparency in Corporate Groups : Korean Context Introducing Transparency in

Introducing Transparency in Corporate Groups : Korean Context



Panel Discussion by Il-Sup Kim

OECD/KDI ConferenceCorporate Governance in Asia


BackgroundBackground

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 governance practice of the Group in 19962


BackgroundBackground

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

, Continued

3


Criticism Over Governance Practice of the Groups

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

Succession of management rights

4


Transparency Issues in KoreaTransparency 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

Lack of interest in internal control structure and risk management

5


Recent DevelopmentRecent 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

6


Recent DevelopmentRecent Development

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)

, Continued

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Combined Financial StatementsCombined 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

8


SuggestionsSuggestions

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 9


SuggestionsSuggestions

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

, Continued

10


Challenges AheadChallenges 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

Self-regulating ability of auditing profession11

Documents

Introducing Transparency in Corporate Groups : Korean Context Introducing Transparency in Corporate Groups : Korean Context Introducing Transparency in