Who Won with the Korean Compliance Law?

Appeared in the Korea Times on June 3, 2011.

The National Assembly of Korea has handed Korean companies a fantastic opportunity with the recent passing of amendments to law requiring the appointment of compliance officers to large listed companies.

Various pressure groups in Korea have expressed support and opposition to the new requirements that listed companies employ lawyers or law professors of five years experience to oversee the companies’ compliance obligations and to act proactively to head off legal issues before they escalate.

Some critics of the new law say it is just a way to find employment for some of the thousands of Korean lawyers who, now, qualify each year. Others, such as Ryu Kwang-choon, the manager of the Korean Listed Companies Association, was quoted as saying, “Large companies have a team of lawyers or a legal department and deal with related issues, but small- and medium-sized firms don’t have much need for legal help. Most listed companies are against the idea of having a compliance officer …”

The critics should look to the substantial benefits that will flow to their companies through embracing a board-driven compliance and corporate governance culture within their organizations.

Unfortunately, critics of the new compliance law and those who think that Korean companies do not need to embrace a compliance and corporate governance culture are in denial concerning the real lack of transparency currently displayed by listed companies, and where the country sits in the world on these issues.

Just look at some real facts. The Financial Standards Foundation, a not-for-profit foundation established in 2001 for the creation and maintenance of a global economic and financial system, compiles a country index assessing the financial transparency and governance against 12 Key Standards for Sound Financial Systems.

Korea, with an index number of 32.5 on a scale of 100, ranks 65th out of 93 ranked countries, behind countries such as El Salvador, Tunisia, Japan and Russia. Australia, by comparison, is ranked fourth with an index of 69.17, the U.K. fifth with 68.33 and the U.S. seventh with 65.

Australian companies and the Australian Securities Exchange (ASX) are finding little difficulty sourcing foreign funds and investors for large projects on the back of their financial transparency and good corporate governance systems. Like surveys have come to similar results.

Korean corporate opposition to instituting compliance and good governance programs is in stark contrast to other trading partners and competitors in the East Asian region.

A 2007 Chartered Financial Analysts Institute Center for Financial Market Integrity ― China Corporate Governance Survey noted observations by the International Financial Corporation that: “… a growing number of Chinese managers and entrepreneurs show willingness and desire to improve their corporate governance practices. They are becoming aware that a commitment to good corporate governance (i.e., well-defined shareholder rights, a solid control environment, high levels of transparency and disclosure, an empowered board of directors, etc.) makes a company more attractive to both investors and lenders and ultimately more profitable.”

The Chinese Securities Regulatory Commission in 2001 issued the Code of Corporate Governance for Listed Companies in China. Based on the “comply or explain” principle, this code has “strictly followed” the OECD Principles of Corporate Governance.

The Chinese Ministry of Finance, the China Securities Regulatory Commission, the National Audit Office, the China Banking Regulatory Commission and the China Insurance Regulatory Commission jointly published the Basic Standard for Enterprise Internal Control in 2008, to increase the effectiveness of internal controls in listed Chinese companies, thus reducing risks for companies and their stakeholders.

The standard requires listed companies to conduct self-evaluations of their internal controls, publish an evaluation report and hire qualified agencies to audit the effectiveness of their internal controls.

Korean companies should stop rowing against the tide of world corporate opinion. The sooner that Korean boards (large, medium and small) realize that embracing good compliance and corporate governance practices does not mean that they will lose control of their companies, but will in fact enhance their reputation, and that of their companies, the sooner those companies will show greater profit, and easier access to funds and investor support.


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