🚨 Analysis of Financial Authority Chief's Reversal on Commercial Law Amendment and Its Impact on Financial Markets

Today Korean Economic News | 2025.03.06

📌 Lee Bok-hyun Expresses Opposition to Commercial Law Amendment... Last Year Said "Must Be Implemented Unconditionally"

💬 Financial Supervisory Service Governor Lee Bok-hyun has officially expressed opposition to the Commercial Law amendment. This represents a complete 180-degree shift from his position last year when he strongly advocated for the law's amendment, causing confusion in financial and political circles.

1️⃣ Easy Understanding

Financial Supervisory Service Governor Lee Bok-hyun has completely changed his position on the Commercial Law amendment, throwing financial markets and political circles into confusion. I'll explain why this situation is important and what it means in simple terms.

The Commercial Law is a fundamental legal framework related to corporate operations, containing important rules about corporate governance, particularly regarding relationships between shareholders and management, board composition, and decision-making processes. The current Commercial Law amendment under discussion mainly includes provisions to strengthen minority shareholder rights, introduce multiple derivative suits, expand the separate election of audit committee members, and other measures to enhance corporate management transparency and accountability.

Until last year, Governor Lee strongly advocated that "the Commercial Law must be amended to align with global standards." However, at a recent official press conference, he stated that "Commercial Law amendment is premature at this point," expressing the complete opposite position. This is like someone who insisted on crossing at a red light suddenly declaring that one should never cross—a dramatic reversal.

This change in position is significant because the Financial Supervisory Service is an important institution that oversees rules in the financial market. The opinions of the FSS Governor have a substantial impact on setting financial policy directions. Such a sudden change undermines policy consistency and predictability, causing confusion among financial market participants.

There are various speculations about the background of this position change. Some analyze that pressure from strong business opposition may have played a role, while others interpret it as a practical judgment based on changing economic conditions. There are also views that it may be a change resulting from political pressure or coordination processes within the government.

This situation demonstrates the difficulty in finding a balance between the long-term goal of improving corporate governance and strengthening shareholder rights, and the short-term goal of overcoming economic crisis. While the lack of policy consistency from financial authorities may weaken market trust, it is also important to flexibly adjust policies according to changing economic conditions. In the future discussions surrounding the Commercial Law amendment, it will be necessary to sufficiently gather opinions from various stakeholders and establish a transparent and consistent policy direction.

2️⃣ Economic Terms

📕 Commercial Law Amendment

The Commercial Law amendment is a bill concerning corporate governance and shareholder rights protection, aimed at strengthening management transparency and accountability.

• It includes measures to strengthen shareholder rights and management checks and balances, such as multiple derivative suits, separate election of audit committee members, and cumulative voting system.
• It has evolved in line with global corporate governance standards and serves as an institutional foundation for enhancing corporate value and international competitiveness.

📕 Financial Supervisory Service

The Financial Supervisory Service is a public institution that supervises the soundness of financial institutions and protects financial consumers.

• It maintains financial system stability through inspection of financial companies such as banks, securities firms, and insurance companies, and by monitoring financial markets.
• It operates under the guidance and supervision of the Financial Services Commission and plays an important role in financial policy implementation and financial industry development.

📕 Financial Policy

Financial policy is the institutional direction established by the government and regulatory authorities for financial market stability and development.

• It pursues a balanced approach to various objectives including financial regulation, consumer protection, and market vitalization.
• It is continuously adjusted and developed as it is influenced by economic conditions, political environments, and international financial orders.

📕 Management Control Disputes

Management control disputes refer to conflict situations that arise between shareholders and management over corporate control.

• They can occur due to conflicts of interest between various parties such as major shareholders and minority shareholders, or management and external investors.
• Corporate governance regulations concerning shareholder meetings, board composition, and voting rights exercise methods have significant impacts on these disputes.

3️⃣ Principles and Economic Outlook

💡 Key Contents and Issues of the Commercial Law Amendment

• The Commercial Law amendment includes several key provisions for improving corporate governance and strengthening shareholder rights, with intense debate on each provision.

  • First, the multiple derivative suit system is one of the most controversial provisions. This system allows shareholders of a parent company to file lawsuits against improper actions by directors of subsidiaries, improving management transparency in large corporate groups with complex corporate structures. Proponents argue that it is effective in preventing unfair internal transactions or tunneling within corporate groups. Opponents worry about the contraction of management and reduced corporate vitality due to frivolous lawsuits. They emphasize that management decision-making could be delayed amid intense competition among global companies.

  • Second, expanding the separate election of audit committee members is a provision to strengthen internal oversight functions in corporations. The amendment includes extending this system, which currently applies only to companies with assets of 2 trillion won or more, to medium-sized companies. The intention is to strengthen checks and balances in corporate management by electing audit committee members independent from major shareholders' influence. Proponents argue it is essential for accounting transparency and minority shareholder protection, while opponents object that it places excessive burdens on small and medium-sized companies. In particular, opinions suggesting the need for flexible application according to company size and situation are being raised.

  • Third, mandatory cumulative voting is a system to increase diversity and representation in board composition. Through this system, minority shareholders can concentrate their voting rights on specific candidates, increasing the possibility of appointing directors different from major shareholders' wishes. Proponents emphasize enhancing corporate value through securing independence and diversity of the board. Opponents worry about management instability and amplified conflicts within the board, arguing that corporate defense capabilities could be weakened especially in hostile M&A situations.

  • Fourth, mandatory electronic voting and dispersed scheduling of shareholder meetings are provisions to expand shareholder participation. The intention is to facilitate voting rights exercise by more shareholders, especially minority shareholders and institutional investors, by mandating these systems currently implemented voluntarily. Proponents argue they are necessary for realizing shareholder democracy and strengthening ESG management. Opponents point to increased administrative and financial burdens on companies, and the risk of interest groups systematically influencing shareholder meetings.

• These key provisions of the Commercial Law amendment present complex issues requiring a balance between the positive aspects of improving corporate governance and strengthening shareholder rights, and concerns about reducing corporate management autonomy and efficiency. A comprehensive approach considering the current economic situation, international competitiveness, and the specificity of Korean companies is particularly needed. Governor Lee's position change can be seen as reflecting the deliberation between these complex interests and economic realities.

💡 Background and Meaning of the Financial Authority's Position Change

• Several economic and political factors are working in combination behind Governor Lee Bok-hyun's dramatic position change on the Commercial Law amendment.

  • First, increased global economic uncertainty and concerns about economic slowdown have led to changes in policy priorities. Recently, global economic outlook has become unclear due to strengthened U.S. protectionism, China's economic slowdown, and increased geopolitical risks. In this situation, maintaining the competitiveness and investment vitality of Korean companies may have emerged as a more urgent task. Particularly amid slowing Korean exports and contracting corporate investment, there might have been a judgment that the additional regulatory burden of the Commercial Law amendment could be burdensome.

  • Second, strong opposition and lobbying from the business and industrial sectors likely had an influence. Economic organizations such as the Korea Chamber of Commerce and Industry and the Federation of Korean Industries have continuously expressed opposition to the Commercial Law amendment. Particularly, large corporate groups have raised concerns regarding management defense and decision-making efficiency. This pressure from the industrial sector may have influenced the perception of policy makers. Some suggest that in a situation requiring cooperation from private companies to overcome economic crisis, it would have been difficult to ignore companies' concerns.

  • Third, it could be a change appearing in the process of overall review and adjustment of financial policy direction. Since Governor Lee's appointment, the Financial Supervisory Service has pursued various policy goals such as financial market stability, financial consumer protection, and support for financial innovation. In this process, there may have been a reassessment of the priorities and implementation speeds of each policy. Particularly, it could be a result of a comprehensive re-examination of the short-term impacts and long-term effects of the Commercial Law amendment on the financial market.

  • Fourth, it can also be seen as a result of changes in the political environment and policy coordination within the government. While the Financial Supervisory Service is officially an independent supervisory agency, it has characteristics of moving in harmony with the overall economic policy direction of the government. As the government's economic activation and regulatory relaxation stance has strengthened recently, corporate regulation strengthening policies like the Commercial Law amendment may have become targets for pace adjustment. Political schedules such as the upcoming general election may also have had an influence.

• This position change suggests a fundamental reconsideration of the direction of Korean financial policy and approaches to corporate governance improvement, beyond a simple policy shift. In particular, it reflects the deliberation on where to set the balance between global standards and the specificity of Korean companies, and between short-term economic vitality and long-term governance improvement. However, if policy consistency and predictability are reduced, it could cause confusion and distrust among market participants, making clear policy direction presentation by financial authorities an important task ahead.

💡 Impact on Financial Markets and Corporate Governance

• The sudden shift in the FSS Governor's position on the Commercial Law amendment is expected to have various ripple effects on financial markets and corporate governance.

  • First, it may have short-term effects on the stock market and investor sentiment. As the position has changed to oppose the Commercial Law amendment, short-term investment sentiment for large corporations could improve. Particularly, it could positively affect the stock prices of controlling companies in large corporate groups as management uncertainty due to governance-related regulatory strengthening is alleviated. On the other hand, some institutional and foreign investors might experience decreased long-term investment attractiveness due to weakened expectations for Korean corporate governance improvement. Especially, global investors interested in ESG investment might perceive this as a retreat in Korean corporate governance.

  • Second, it could affect companies' governance improvement efforts and shareholder-friendly policies. If the Commercial Law amendment is delayed or weakened, there could be concerns about decreased motivation for voluntary corporate governance improvement. Without legal enforcement, companies are likely to prefer maintaining the status quo. Conversely, some leading companies might strengthen voluntary governance improvement and shareholder-friendly policies as a differentiation strategy. This could lead to long-term corporate value enhancement through a 'governance premium.'

  • Third, changes will appear in shareholder activism and management control dispute patterns. If the Commercial Law amendment is delayed, activist investors' corporate interventions might unfold more actively. In a situation where legal and institutional protection is weakened, minority shareholders are more likely to assert their rights through direct campaigns and shareholder proposals. In particular, domestic and foreign activist funds might strengthen campaigns targeting Korean companies, which could develop into new patterns of management control disputes.

  • Fourth, questions could be raised about the credibility and consistency of financial policy. The FSS Governor's dramatic position change could weaken market trust in the predictability and consistency of financial policy. This becomes a factor increasing uncertainty in financial market participants' decision-making. Particularly, foreign investors might question the stability of Korean financial policy and regulatory environment, which could have a negative impact on the credibility of the Korean financial market in the long term.

  • Fifth, it could affect the global competitiveness and evaluation of Korean companies in the long term. Corporate governance is one of the important elements global investors use to evaluate corporate value. If Korean companies' governance improvement is delayed due to the Commercial Law amendment delay, it could negatively affect evaluation in international markets and capital raising costs. Conversely, there is also a positive aspect that companies could focus more on investment and innovation due to reduced regulatory burden. Ultimately, whether companies voluntarily build governance structures that meet global standards will be the key to long-term competitiveness.

• Thus, policy changes surrounding the Commercial Law amendment are important matters that have wide-ranging impacts on the credibility of the Korean financial market, the development direction of corporate governance, and ultimately the global competitiveness of Korean companies, beyond simple legal issues. Constructive dialogue and consensus-building among various stakeholders including financial authorities, government, National Assembly, companies, and investors are more important than ever at this point.

4️⃣ In Conclusion

Financial Supervisory Service Governor Lee Bok-hyun's sudden reversal on the Commercial Law amendment is a case showing the complexity of challenges faced by the Korean economy and the difficulty of finding a balance point, beyond a simple policy change. Setting policy priorities between the long-term goal of building corporate governance aligned with global standards and the short-term task of overcoming economic crisis and enhancing corporate vitality is never easy.

Such a position change by financial authorities can be interpreted in various ways. It can be seen as a practical approach following economic environment changes, or interpreted as succumbing to pressure from the business community and political circles. However, regardless of interpretation, it's hard to deny that policy consistency and predictability have been damaged. This can be a factor weakening financial market participants' trust and reducing policy effectiveness.

A more transparent and inclusive approach is needed in future discussions surrounding the Commercial Law amendment. Social consensus on the development direction of Korean corporate governance should be derived through open discussions with participation from various stakeholders including companies, investors, financial authorities, academia, and civic groups. Particularly, efforts to find a balance between global standards and Korean specificity, and between long-term development and short-term economic vitality are important.

Companies should also seek strategies to gain market trust and enhance long-term corporate value through voluntary governance improvement efforts, not legal enforcement. Transparent management, respect for minority shareholder rights, and ensuring board diversity are now becoming essential elements of global competitiveness, not options.

Financial authorities should make efforts to restore policy consistency and predictability. Even if policy direction changes are inevitable, a process of sufficiently explaining the background and reasons to the market and seeking understanding is necessary. Additionally, policy-making that is faithful to the original goals of sound development of the entire financial market and investor protection, without being biased toward specific interests, is required.

In conclusion, the controversy surrounding the Commercial Law amendment and the position change of financial authorities make us rethink fundamental questions facing the Korean economy. How to balance corporate efficiency and shareholder rights, short-term performance and long-term sustainability, international standards and domestic realities? In the process of finding answers to these questions, it is more important than ever to listen to opinions from various stakeholders and establish transparent and consistent policy directions.