Progress in Corporate Governance
This article investigates the progress in corporate governance reform in Korea since 1997 as well as current corporate governance challenges. It focuses on corporate governance issues and, as such, does not analyze other aspects—overall reform and competitiveness of the corporate sector, macroeconomic policies, and financial sector reforms—these have also been crucial to Korea’s recovery to date and will remain essential to sustain growth going forward. It concludes that much progress has been achieved in corporate governance reform, with many of the main corporate governance deficiencies contributing to the crisis having been eliminated. Corporate sector performance has improved, with corporate sector profi tability generally restored and investment becoming more rational. Financial vulnerabilities have declined, as leverage has fallen and maturity and currency mismatches have been reduced.
Improvements to corporate governance in Korea can be attributed to a combination of multiple factors, most importantly ownership changes, including greater outside (foreign) ownership, and deep institutional reforms including strengthening of minority rights and requiring greater representation of outside directors.
Buttressing these changes have been government-led initiatives, especially measures aimed at large and distressed corporations, and a tight framework for corporate inancial restructuring; a broad set of other institutional reforms covering, among other procedures, accounting and auditing, including increased liability for proper financial reporting, improved bankruptcy restructuring, and other forms of financial restructuring procedures; financial sector reform, including banking system recapitalization and restructuring; and changes in ownership structures in the financial sector.
The question is whether corporate governance needs to be further enhanced or modified in light of past experiences, global lessons, or changing circumstances. Some of the corporate governance problems preceding the crisis still remain today. In spite of many reforms, the corporate governance practices of Korean corporations are still perceived to be below those of fi rms in many comparator countries. Ownership structures remain characterized by high wedges between cash-flow rights and control rights, with adverse consequences for minority shareholders and resource allocation. Barriers to entry for small- and medium-size enterprises (SMEs), such as the time and cost to open up a business, are still large, and they hinder effi cient growth.
More generally, Korea’s relatively low level of investment coupled with generally unimpressive profi tability and low productivity growth raise some doubts about the quality of corporate governance. And the advent of more knowledge-intensive production, with less need for investment in fixed assets, puts a greater emphasis on high-quality corporate governance. Further corporate governance reforms will be necessary to assure the right level and type of investments, with a proper risk-return balance.