Korea Institute of Corporate Governance and Sustainability (KCGS) rated domestic companies*’ environmental (E), social (S), and governance (G) performance and published their ratings for 2023.2023.10.27 Read the notice
- Under the Commercial Act, companies over a certain threshold in asset size are required to establish an outside director nomination committee (ODNC) and fill a majority of the seats with outside directors so that the boards are composed of outside directors well-suited for the company.
- The ESG Codes of Best Practices published by KCGS and KCGS Proxy Voting Guidelines recommend that an ODNC comprise outside directors entirely and manage an outside director candidate pool on a regular basis.
- According to an analysis of ODNCs in all KOSPI-listed firms and KOSDAQ 150 companies as of FY2020 through FY2022, ODNCs had room for improvement in many aspects for them to secure independence.
- If an ODNC operates limitedly, it subsequently weakens the board’s role in overseeing management. Institutional investors are advised to ensure that the ODNC of the company they invest in functions properly and considers the competency and diversity factors of the board members adequately when recommending potential outside director candidates.
- Real estate investment trusts (REITs) were introduced to Korea in 2021 with the enactment of the Real Estate Investment Company Act (“REIT Act” hereafter). Due to the requirements under the relevant laws and regulations and other practical issues, entrusted management-type REITs have been more active in the country.
- Due to the structural characteristics of an entrusted management REIT, however, conflict of interest issues are highly likely to arise between the shareholders of the REIT and its external asset management company (AMC).
- Overseas markets have adopted various regulations to minimize such conflicts of interest. In some cases, heightened tension has led to shareholder proposals demanding the removal of the AMC and internalization of asset management activities.
- Korea is also taking action to address conflict of interest issues of domestic entrusted management REITs, such as by revising the REIT Act. Due to the local market conditions, structural limitations, etc., however, conflict of interest issues are still around. Investors should be aware of such issues and take necessary caution.
- In line with the international trend of mandating the appointment of women directors, Korea also made it mandatory by revising the Financial Investment Services and Capital Markets Act (FSCMA) for listed firms with KRW2 trillion or more in total assets to appoint at least one woman director and the grace period of the new requirement ended recently.
- Also, there is a growing demand for the appointment of women directors from capital markets as evidenced by new guidelines published by global institutional investors, local and global proxy advisors, etc. to consider gender diversity on boards when exercising voting rights.
- Against this backdrop, KCGS intends to look at the trend of women director appointments at domestic listed firms over the past five years and examine the circumstances related to women directors in detail, focusing on the firms subject to the revised FSCMA.
- During the analysis period, there was a steady increase in the appointment of women directors at domestic listed firms in general, and the firms subject to the revised FSCMA showed an even larger increase.
- By the end of the 2023 annual general meetings, ten companies out of those subject to the FSCMA did not appoint any woman director. Investors need to continuously monitor whether or not the companies appoint women directors in the future.
Korea Institute of Corporate Governance and Sustainability (KCGS) rated domestic companies*’ environmental (E), social (S), and governance (G) performance and published their ratings for 2023.2023.10.27
- It is desirable that an audit committee reviews quarterly financial statements as well as annual financial statements, a statutory requirement under the Commercial Act, for increased reliability and integrity of disclosed financial information.
- KCGS ESG Code of Best Practices recommends that the audit committee review the quarterly reporting process. Regulators of some countries recommend or mandate audit committees’ review of quarterly financial statements.
- Research into FY2022 activities of the audit committees of KOSPI 100 firms, however, shows that about half of the firms did not go through the review process of quarterly financial statements.
- Audit committees are advised to be more active in reviewing quarterly financial statements. Institutional investors should monitor whether audit committees actively perform auditing activities, including quarterly reviews.
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