Corporate Governance Corporate Governance Reform in KoreaReform in Korea

September 26, 2002Seoul Finance Forum

Hasung Jang

Korea University

New RegulationNew Regulationss to Improve to Improve Corporate GovernanceCorporate Governance

• Outside Director– 25% / 50% of the board– Outside director candidate nomination committee

• Improved Disclosure– Combined financial statement: Top 30 chaebols– Electronic disclosure system introduced– Mandatory disclosure for institutional shareholders

• Audit Committee – For listed company with asset larger than 2 tr won ($1.7bil)– 2/3 of the committee should be outside directors

New RegulationNew Regulationssto Improve to Improve Corporate GovernanceCorporate Governance

• More Regulation on Related Party Transactions– Stricter regulation on capital & asset transactions – Cross debt guarantee prohibited

• Limit on Foreign Equity Ownership Removed

• Hostile Takeover Barriers Removed– 50%+1 shareholding rule removed– M&A specialized fund allowed

• Minority Shareholder Rights Strengthened

New RegulationNew Regulationssto Improve to Improve Corporate GovernanceCorporate Governance

• Increased Liability of Controlling Shareholder – Fiduciary duty of directors– Responsibility of shadow director

• Mandatory Compliance Officer– Investment Trust Co. & Mutual Fund

• Integrated Supervision Agency Established– “Financial Supervisory Commission”– Integrated supervision: Bank, Securities, Insurance

• Corporate Governance Guideline

Positive Changes in Positive Changes in Corporate GovernanceCorporate Governance

• Increased awareness on corporate governance• Disclosures are more reliable• Related party transactions decreased • Investor relation is active• Shareholder activism brings practical changes

– Minority shareholder’s rights are exercised

• New court rulings sets the standard– Derivative lawsuit: Korea First Bank, Samsung Electronics– Court Ruling against “lack of business judgment”

Derivative Lawsuit Derivative Lawsuit Directors of Samsung ElectronicsDirectors of Samsung Electronics

Court Ruling against Directors: $72.4 mil (97.7 bil won) – District court ruled on December 27, 2001

1. Illegal political contribution• Chairman KH Lee: $5.6 mil (7.5 billion won)

2. Related party transaction at transferring price• 6 directors: $46.4 mil (62.7 billion won)• purchased at 10,000 won/share sold at 2,600 won/shar

e

3. Investment “without business judgments”• 8 directors: $20.4 mil (27.6 billion won)• Debt guarantee to failed company

Positive Changes in Positive Changes in Corporate GovernanceCorporate Governance

• Emergence of good guys in corporate governance– Kookmin Bank, POSCO, KT

• Emergence of active institutional investors– Only few, but a positive direction : National Pension Fund– ‘Korea Corporate Governance Fund’ : IFC & Zurich-Scudder

• Positive steps by controlling family– CJ Group chairman JH Lee gives up warrants of CJ Entertai

nment worth of 110 billion won. April 26, 2002– Hyundai Motor chairman’s son, ES Chung cancelled merge

r of Bontec with Hyundai Mobis. June 12, 2002

Persistent Problems inPersistent Problems inCorporate GovernanceCorporate Governance

• Old habits are hardly changing– Persistent moral hazard problems in chaebol – Mindset of controlling family is the same

“The family should be allowed to serve outside director”

Court’s ruling against directors of Samsung Electronics is the “covert anti-market revolution”

• Resistance from chaebols is getting stronger– Political uncertainty

• Enforcement of regulation is not effective

Persistent Problems in Persistent Problems in Corporate GovernanceCorporate Governance

• Independence of outside director in question• Capital subsidy through financial institutions• Expropriation of minority shareholders using equity

related securities– Convertible Bond, Bond with Warrant

• Management control descended to 3rd Generation• Entrenched ownership structure

– Control via ownership by affiliated companies– Pyramidal and circuitous ownership – Control with no ownership

CLSA Corporate Governance ScoreCLSA Corporate Governance Score2002 / 20012002 / 2001

1 Singapore 7.4 7.4 12Korea 4.7 3.82 Hong Kong 7.2 6.8 13Malaysia 4.7 3.73 Mexico 6.1 6.1 14Venezuela 4.6 4.84 South Africa 5.9 5.5 15Columbia 4.6 4.85 India 5.9 5.4 16China 4.4 3.46 Taiwan 5.8 5.3 17Hungary 4.2 4.27 Chile 5.7 6.4 18Thailand 3.8 3.78 Peru 5.4 5.4 19Philippine 3.6 3.39 Argentina 5.2 5.2 20Russia 3.6 2.110 Brazil 5.1 4.7 21Poland 3.5 3.311 Turkey 4.7 4.4 22Czech Rep. 3.1 2.8

23Indonesia 2.9 3.2

Opacity Index by PWC Jan.2001

Country O-Factor Tax-Equivalent (%) Opacity Risk Premium(Basis Points)

Singapore 29 0* 0* Lithuania 58 23 584 Ecuador 68 31 826USA 36 5 0* South Africa 60 24 612Kenya 69 32 848Chile 36 5 3 Japan 60 25 629 Czech Rep 71 33 899UK 38 7 63 Colombia 60 25 632 Romania 71 34 915Hong Kong 45 12 233 Argentina 61 25 639 South Korea 73 35 967Italy 48 15 312 Taiwan 61 25 640 Turkey 74 36 982Mexico 48 15 308 Brazil 61 25 645 Indonesia 75 37 1,010Hungary 50 17 370 Pakistan 62 26 674 Russia 84 43 1,225 Israel 53 19 438 Venezuela 63 27 712 China 87 46 1,316Uruguay 53 19 452 India 64 28 719Greece 57 22 557 Poland 64 28 724Peru 58 23 563 Guatemala 65 28 749Egypt 58 23 572 Thailand 67 30 801

CG Rating: Asian Emerging MarketEconomist, April 5, 2001

Korea 48위

Rights & Rights & Responsibilities Responsibilities of Shareholdersof Shareholdersby IMD, 2001

Korea 43위

Insider TradingInsider Tradingby IMD, 2001

Efficacy of Corporate BoardsEfficacy of Corporate BoardsGlobal Competitiveness Report: 2001-2002

World Economic Forum 75 countries surveyed

Corporate boards are (1=controlled by management, 7=powerful and represent outside shareholders)

1 Finland 5.9 17 Singapore 4.82 United States 5.7 22 Taiwan 4.83 Sweden 5.6 40 Hong Kong 3.94 Norway 5.5 41 Thailand 3.95 Australia 5.5 43 Philippines 3.86 United Kingdom 5.5 51 Malaysia 3.77 New Zealand 5.3 54 India 3.58 Switzerland 5.3 61 Korea 3.59 Germany 5.2 63 Indonesia 3.310 Denmark 5.2 67 China 3.3

71 Japan 2.9

Financial Regulation and SupervisionFinancial Regulation and SupervisionRegulations and supervision of financial institutions are (1=inadequate for financial stability, 7=among

the world's most stringent)

1 Germany 6.6 33 Malaysia 4.82 Australia 6.5 39 India 4.73 Switzerland 6.5 41 Taiwan 4.64 United States 6.4 48 Japan 4.45 United Kingdom 6.4 49 Philippines 4.36 Netherlands 6.4 54 Thailand 4.17 Canada 6.3 60 China 3.78 Singapore 6.3 61 Korea 3.79 Denmark 6.3 68 Indonesia 3.110 Hong Kong 6.2

Price to Earning RatioPrice to Earning Ratio Asian Emerging Markets, UBS May 2002Asian Emerging Markets, UBS May 2002

0.0

5.0

10.0

15.0

20.0

25.0

Price to Book RatioPrice to Book RatioAsian Emerging Markets, UBS May 2002Asian Emerging Markets, UBS May 2002

0.0

0.5

1.0

1.5

2.0

2.5

ROEROE Asian Emerging Markets, UBS May 2002Asian Emerging Markets, UBS May 2002

0.0

5.0

10.0

15.0

20.0

25.0

30.0

ROE 2001 ROE 2002

CG Score vs PERCG Score vs PERAsian Emerging MarketsAsian Emerging Markets

0

5

10

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25

0 1 2 3 4 5 6 7 8

CLSA CG Score 2002

Mar

ket P

ER

200

2 (M

L)

Indonesia

Philippine

KoreaThailand

China

Malaysia

India

Taiwan

Hong Kong

Singapore

CG and ValuationCG and ValuationEmerging market countriesEmerging market countries

CLSA CG Score & PERCLSA CG Score & PER

0

1

2

3

4

5

6

7

8

0.0 5.0 10.0 15.0 20.0 25.0

Corporate Governance Score (CLSA)

PE

R (

ML

& C

SFB

)

Semiconductors: ValuationSeptember 20, 2002 UBS Warbrug

Market Cap PER EV/Sales EV/EBITDA

$m 02E 02E 02E

Samsung Electronics 41,298 7.5 1.1 3.9

TSMC 24,572 18.6 5.1 9.0

Rohm 14,536 25.6 4.4 9.9

UMC 11,194 20.0 4.7 9.0

Toshiba 10,240 30.1 0.2 5.6

Micron 7,647 -18.6 34.9

Infenion 4,395 -7.7 15.4

Consumer Elctronics: ValuationSeptember 20, 2002 UBS Warburg

Market Cap PER EV/Sales EV/EBITDA

$m 02E 02E 02E

SONY 40,582 42.4 0.7 9.3

Matsushida 24,398 - 0.4 9.8

Sanyo 6,879 56.3 0.9 11.8

LG Electronics5,754 6.7 0.5 4.7

Pioneer 3,128 32.3 0.5 5.9

Humax 518 6.1 1.3 4.5

Country Rating & PERCountry Rating & PERAsian Emerging Markets, May 2002Asian Emerging Markets, May 2002

PER S&P Moody'sUBS Warburg Foreign Currency Country Ceiling

Philippines 19.6 BB+ Ba1Thailand 12.3 BBB- Baa3Indonesia 7.8 SD B3Malaysia 16.8 BBB Baa2China 12.8 BBB A3Hong Kong 17.2 A+ A3Singapore 21.6 AAA Aa1Korea 9.0 BBB+ A3Taiwan 23.0 AA Aa3India 0.6 BB Ba2

S&P Country Rating vs PERS&P Country Rating vs PERMay 2002May 2002

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10

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0 2 4 6 8 10

Indonesia

IndiaKorea

Philippine

Malaysia

ChinaThailand

Hong Kong

TaiwanSingapore

Moody’s Country Rating vs PERMoody’s Country Rating vs PERMay 2002May 2002

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5

10

15

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Indonesia

IndiaKorea

Philippine

Thailand China

Hong KongMalaysia

TaiwanSingapore

Samsung SDI Share PricesSamsung SDI Share PricesJanuary – August 2001January – August 2001

90

100

110

120

130

140

150

2001

-01-

02

2001

-01-

16

2001

-01-

30

2001

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13

2001

-02-

27

2001

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13

2001

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27

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10

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24

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08

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22

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05

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19

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-07-

03

2001

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17

2001

-07-

31

2001

-08-

14

KOSPI SDI

Samsung SDI DisclosureSamsung SDI DisclosureMarch 26, 2001 5:28pmMarch 26, 2001 5:28pm

• Purchase of shares from controlling shareholders1. Name: JY Lee Relationship: Family of controlling shareholder

2. Purchase of shares E-Samsung International common shares 900,000 Amount: 3,648 million won Price per share: 4,054won

3. Purpose of purchase: Investment

Loss of Share ValueLoss of Share ValueSamsung SDISamsung SDI

SDI KOSPI SDI Loss Market

Market Cap (billion won) Adj-Loss

01-08-17 2,537.6 106.4% 81.5% 575.3 774.9

01-03-30 2,505.2 95.8% 80.5% 607.7 478.0

01-03-29 2,700.0 95.9% 86.7% 412.9 286.4

01-03-28 2,890.2 96.9% 92.8% 222.7 124.7

01-03-27 2,969.1 97.6% 95.4% 143.8 69.2

01-03-26 3,112.9 100.0% 100.0% - -

Family Control Without OwnershipFamily Control Without OwnershipAverage for Average for Top 10 ChaebolsTop 10 Chaebols

ControllingFamily4.3%

AffiliatedCompanies

38.9%MinorityShareholder

56.8%

Source of Controlling PowerSource of Controlling PowerTop 10 Chaebols:Top 10 Chaebols: Public and Private CompaniesPublic and Private Companies

Controlling Affiliated Shares under Shareholder Companies Family Control& Family

1997 9.54% 29.29% 39.57%

1998 7.82% 35.36% 44.16%

1999 5.76% 40.99% 48.07%

2000 4.30% 38.79% 44.72%

2001 4.29% 38.94% 47.61%

Control with No OwnershipControl with No OwnershipTop 10 ChaebolsTop 10 Chaebols As of April 2001As of April 2001

Group Number of Companies with Companies without Companies Family Shares Family Shares

Samsung 64 18 28.1% 46 71.9%Hyundai 26 13 50.0% 13 50.0% LG 43 17 39.5% 26 60.5%SK 54 12 22.2% 42 77.8%Hyundai Motor 16 7 43.8% 9 56.3%Hanjin 19 13 68.4% 6 31.6%Lotte 31 22 71.0% 9 29.0%Kumho 17 4 23.5% 13 76.5%Hanwha 25 10 40.0% 15 60.0%Doosan 18 6 33.3% 12 66.7%

Total 313 122 39.0% 191 61.0%

SKTelecom

SK

Sk C&C

SKC

SKMarine

SKConstruction

SKChemical

SKGas

SKEnron

SKSec.

SK Global

Pyramidal Equity OwnershipPyramidal Equity Ownership SK Group SK Group

Pyramidal Equity OwnershipPyramidal Equity OwnershipSamsung GroupSamsung Group

SamsungElectronics

SamsungCorpSamsung

Life Ins

Samsung Foundations

SamsungSDI

SamsungCard

Samsung Mech. Elec

Samsung Heavy Ind.

SamsungCapital

CheilTextile

HotelShilla

SamsungEverland

CheilComm.

SamsungSecurity

SamsungTechwin

SamsungF&M Ins

SamsungEngineering

SamsungPrec.Chem

S-one

What Will Expedite Changes?What Will Expedite Changes?

• Corporation– Voluntary adaptation of global standard

• Market– Pro-active role of institutional investors

• Government– More direct regulations on corporate governance– Enforcement of regulations– Strengthening minority shareholder’s right

What Will Expedite Changes?What Will Expedite Changes?

• Legal System– Fair and effective court system – Fair and independent prosecution– Security class action suit

• Civil Society– Minority shareholder activist watch dog

Leadership with Global VisionLeadership with Global Vision