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Corporate Governance Reform in Korea

Corporate Governance Reform in Korea. September 26, 2002 Seoul Finance Forum Hasung Jang Korea University. New Regulation s to Improve Corporate Governance. Outside Director 25% / 50% of the board Outside director candidate nomination committee Improved Disclosure

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Corporate Governance Reform in Korea

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  1. Corporate Governance Reform in Korea September 26, 2002 Seoul Finance Forum Hasung Jang Korea University

  2. New Regulationsto Improve Corporate 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

  3. New Regulationsto Improve Corporate 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

  4. New Regulationsto Improve Corporate 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

  5. Positive Changes in Corporate 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”

  6. Derivative Lawsuit Directors of Samsung Electronics Court Ruling against Directors: $72.4 mil (97.7 bil won) • District court ruled on December 27, 2001 • Illegal political contribution • Chairman KH Lee: $5.6 mil (7.5 billion won) • 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/share • Investment “without business judgments” • 8 directors: $20.4 mil (27.6 billion won) • Debt guarantee to failed company

  7. Positive Changes in Corporate 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 Entertainment worth of 110 billion won. April 26, 2002 • Hyundai Motor chairman’s son, ES Chung cancelled merger of Bontec with Hyundai Mobis. June 12, 2002

  8. Persistent Problems inCorporate 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

  9. Persistent Problems in Corporate 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

  10. CLSA Corporate Governance Score2002 / 2001 1 Singapore 7.4 7.4 12 Korea 4.7 3.8 2 Hong Kong 7.2 6.8 13 Malaysia 4.7 3.7 3 Mexico 6.1 6.1 14 Venezuela 4.6 4.8 4 South Africa 5.9 5.5 15 Columbia 4.6 4.8 5 India 5.9 5.4 16 China 4.4 3.4 6 Taiwan 5.8 5.3 17 Hungary 4.2 4.2 7 Chile 5.7 6.4 18 Thailand 3.8 3.7 8 Peru 5.4 5.4 19 Philippine 3.6 3.3 9 Argentina 5.2 5.2 20 Russia 3.6 2.1 10 Brazil 5.1 4.7 21 Poland 3.5 3.3 11 Turkey 4.7 4.4 22 Czech Rep. 3.1 2.8 23 Indonesia 2.9 3.2

  11. Opacity Index by PWCJan.2001 Country O-Factor Tax-Equivalent (%) Opacity Risk Premium(Basis Points) Singapore 29 0* 0* Lithuania 58 23 584 Ecuador 68 31 826 USA 36 5 0* South Africa 60 24 612 Kenya 69 32 848 Chile 36 5 3 Japan 60 25 629 Czech Rep 71 33 899 UK 38 7 63 Colombia 60 25 632 Romania 71 34 915 Hong Kong 45 12 233 Argentina 61 25 639 South Korea 73 35 967 Italy 48 15 312 Taiwan 61 25 640 Turkey 74 36 982 Mexico 48 15 308 Brazil 61 25 645 Indonesia 75 37 1,010 Hungary 50 17 370 Pakistan 62 26 674 Russia 84 43 1,225 Israel 53 19 438 Venezuela 63 27 712 China 87 46 1,316 Uruguay 53 19 452 India 64 28 719 Greece 57 22 557 Poland 64 28 724 Peru 58 23 563 Guatemala 65 28 749 Egypt 58 23 572 Thailand 67 30 801

  12. CG Rating: Asian Emerging MarketEconomist, April 5, 2001

  13. Rights & Responsibilities of Shareholders by IMD, 2001 Korea 48위

  14. Insider Trading by IMD, 2001 Korea 43위

  15. Efficacy of Corporate BoardsGlobal Competitiveness Report: 2001-2002World Economic Forum75 countries surveyedCorporate boards are (1=controlled by management, 7=powerful and represent outside shareholders) 1 Finland 5.9 17 Singapore 4.8 2 United States 5.7 22 Taiwan 4.8 3 Sweden 5.6 40 Hong Kong 3.9 4 Norway 5.5 41 Thailand 3.9 5 Australia 5.5 43 Philippines 3.8 6 United Kingdom 5.5 51 Malaysia 3.7 7 New Zealand 5.3 54 India 3.5 8 Switzerland 5.3 61 Korea 3.5 9 Germany 5.2 63 Indonesia 3.3 10 Denmark 5.2 67 China 3.3 71 Japan 2.9

  16. Financial 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 4.8 2 Australia 6.5 39 India 4.7 3 Switzerland 6.5 41 Taiwan 4.6 4 United States 6.4 48 Japan 4.4 5 United Kingdom 6.4 49 Philippines 4.3 6 Netherlands 6.4 54 Thailand 4.1 7 Canada 6.3 60 China 3.7 8 Singapore 6.3 61 Korea 3.7 9 Denmark 6.3 68 Indonesia 3.1 10 Hong Kong 6.2

  17. Price to Earning RatioAsian Emerging Markets, UBS May 2002

  18. Price to Book RatioAsian Emerging Markets, UBS May 2002

  19. ROEAsian Emerging Markets, UBS May 2002

  20. CG Score vs PERAsian Emerging Markets Taiwan Singapore HongKong Malaysia Philippine China Korea India Indonesia Thailand

  21. CG and ValuationEmerging market countriesCLSA CG Score & PER

  22. 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

  23. 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 Electronics 5,754 6.7 0.5 4.7 Pioneer 3,128 32.3 0.5 5.9 Humax 518 6.1 1.3 4.5

  24. Country Rating & PERAsian Emerging Markets, May 2002 PER S&P Moody's UBS Warburg Foreign Currency Country Ceiling Philippines 19.6 BB+ Ba1 Thailand 12.3 BBB- Baa3 Indonesia 7.8 SD B3 Malaysia 16.8 BBB Baa2 China 12.8 BBB A3 Hong Kong 17.2 A+ A3 Singapore 21.6 AAA Aa1 Korea 9.0 BBB+ A3 Taiwan 23.0 AA Aa3 India 0.6 BB Ba2

  25. S&P Country Rating vs PERMay 2002 Taiwan Singapore Philippine Malaysia Hong Kong China Thailand India Korea Indonesia

  26. Moody’s Country Rating vs PERMay 2002 Taiwan Singapore Philippine Hong Kong Malaysia China Thailand India Korea Indonesia

  27. Samsung SDI Share PricesJanuary – August 2001

  28. Samsung SDI DisclosureMarch 26, 2001 5:28pm • Purchase of shares from controlling shareholders 1. 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

  29. Loss of Share ValueSamsung 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% - -

  30. Family Control Without OwnershipAverage for Top 10 Chaebols

  31. Source of Controlling PowerTop 10 Chaebols:Public 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%

  32. Control with No OwnershipTop 10 ChaebolsAs 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%

  33. Pyramidal Equity Ownership SK Group Sk C&C SK Marine SKC SK SK Construction SK Global SK Sec. SK Chemical SK Telecom SK Gas SK Enron

  34. Pyramidal Equity OwnershipSamsung Group Samsung Electronics Samsung Corp Samsung Life Ins Cheil Comm. Samsung Mech. Elec Samsung SDI Samsung Foundations S-one Samsung Card Samsung Heavy Ind. Samsung Security Samsung Everland Hotel Shilla Samsung Prec.Chem Samsung F&M Ins Samsung Techwin Cheil Textile Samsung Engineering Samsung Capital

  35. 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

  36. 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 Vision

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