Failed Korean Corporate Compliance and the Role of Attorneys in Korea

The following article appeared in the Korea Times on May 6, 2011.

The National Assembly of Korea, recently, voted in favor of a bill that requires listed companies with large market capitalizations to establish independent compliance support offices. Business organizations strongly opposed the bill.

The details of the system are not yet known, since many key aspects of the bill have been delegated to the president through an enforcement ordinance.

The surface purpose of the bill is to improve companies compliance with Korean law, thus, upgrading the image of Korean companies domestically and abroad. Some scholars have noted that transparency and other corporate governance issues, within Korean companies, have led to the “Korea discount” and that the discount may be overcome with more active compliance departments.

Additionally, fear has spread that an Enron-type scandal may hit Korea in the future and that the implementation of this system may contribute to lessening the risk. An Enron-type scandal, in Korea, may have a more far-reaching affect, since the scandal may contribute to a market-wide sell-off by foreign shareholders.

The greatest risk, according to many foreigners, is the accuracy of corporate information and transparency and a large local scandal could lead to a spreading of fear and a collapse of the markets.

The effectiveness of implementation of the system has good support in the financial service sector in Korea. The structure of the bill is based on the successful implementation of a like compliance system for financial institutions.

After the 1997-98 Asian currency crisis, the International Monetary Fund (IMF) and others pushed for the implementation of the system to financial institutions in order to avoid the potential need for another IMF bailout. Many have considered the implementation of the system a success that may have contributed to Korean financial institutions survival during the recent financial crisis.

Critics, however, have noted that the purpose of the bill is, in reality, to accommodate attorneys who have recently found it difficult to secure decent employment. Of course, this is one of the motivations for the bill and as noted is not the only.

Many of the details will be in the pudding ― the presidential enforcement ordinance. For example, we are not yet certain, how the independence of the compliance support officer will be guaranteed, what the qualification will be to qualify as a compliance support officer, the effectiveness of the system on the respective company, and how the relationship between the officer and the in-house legal team will affect the effectiveness of the system.

These issues will be resolved in the near future, since the bill is set to be promulgated in April 2012.

The matter seems to be more of an issue of “who shall hang the bell on the cat’s neck.” If lawyers are not going to bring to light corporate compliance issues and shareholders are unable or unwilling, who will be able to correct these Korean corporate realities?

It seems rational to consider that those with legal training working in more broad areas of society will increase the capabilities of organizations to comply with law, thus, moving Korea closer to a most developed nation status.

Therefore, the system seems to have little chance of creating any downsides with a large potential for upsides. The opposition of the companies is on the surface based only on expense, but seems to be based on much more. Companies of the size needed to trigger the law will never see or feel their burden in their large corporate budgets. The expense will likely be less than the expense of the bonus of any C level employee.

Thus, the issue seems to be more about corporations not wanting another “mother-in-law” meddling around in their corporate moat protected castles.

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SeanHayes@ipglegal.com