ANALYSIS OF CORPORATE GOVERNANCE IN SOUTH KOREA AND AUSTRALIA

INTRODUCTION

This essay outlines a detailed analysis of the corporate governance of Australia and South
Korea. Both these countries have their own corporate governance but there are some
similarities and dissimilarities which have been observed and dealt with. Before we get on to
the corporate governance in Australia or South Korea we need to define corporate
governance. The OECD provides the most authoritative functional definition of corporate
governance:

"Corporate governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as the board, managers,
shareholders and other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides the structure through which the
company objectives are set, and the means of attaining those objectives and monitoring
performance." (OECD)

Corporate governance introduces framework of legislative and regulatory reform to the

organisation. It’s a key element of any organization. It enhances confidence of investors and
promotes competitiveness among the organization, and ultimately leads to growth in
economy.

As emphasized by James Wolfensohn, President of the World Bank:

‘The governance of companies is more important for world economic growth than the
government of countries.’ (ACCOUNTANTS)

CORPORATE GOVERNANCE IN AUSTRALIA

Corporate governance is Australia has received a lot of attention from both media and policy
makers because of the social and political implications it has on some of the major collapse of
corporate which came into light in past eighteen months. Most prominent among them were

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allegations of illegal management behaviour in the companies like HIH and Onetel adding to
the roles are companies such as Harris scarfe and AMP. (Fleming, Number 3, 2003,)

Australian corporate governance has shown changes in past forty years. The principal-agent
framework has been adopted by Australia to describe features of corporate governance
system. In this world of full information managers get contracted to act on best interest of
owners but opportunistically he may act to improve his welfare at the cost of owner.

Recent characteristics of firm in Australia are its separation between ownership and control.
In first half of twentieth century Australian companies were described as ‘family capitalism’.
With all the important positions were holds by close knit family. This was then changed in
second half of 20th century. Last forty years have also seen changes in some government
mechanism like ownership of shares with directors and managers, structure of board of
directors like its size and composition. And lastly in block holders. Research has shown that
to mitigate agency cost in the firm you need to combine these mechanisms. Board size and
component are describes as one of the key components in governance. Board of directors
monitors management and adds strategic ideas into the operations, His ability to perform
depends on the size and composition of business, as firm increases in size complexity
increases. Directors having human capital skills will be needed then. (MILAN, 2007)

Board composition in Australia consists of Executive and non executive directors. Executive
directors have both executive position and board position within the company because of
their dual role they add valuable contributions to the firm as they bring in firm specific
knowledge. They are more loyal towards organisation regardless of their non executive
counterparts. Non executive directors on the other hand are appointed for their expertise in
industry and their decision making abilities. The roles of directors differ from each other.

If we have a look at the size and composition of boards, it has changed from the last 40years
Table 5 gives the sample of board size of 23 Australian firms in 1964 and 1997. Median
board size has increased from 7 directors to 11 directors. (Fleming, Number 3, 2003,)

ASX Corporate Governance Council was formed in August 2002 to provide supported
framework, to develop and deliver to the industry. It gives practical guide to the companies
listed in this and to their investors. 21 stake holders which also include major firms, investors
are part of this council. (ASX Corporate Governance Council, 2003: Foreword). It delivered

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some set of principles regarding code of conduct, auditing, remuneration etc. organisation in
Australia formalise and disclose the functions which are reserved to the board and those
which have been delegated to the managements. This makes them transparent to its
stakeholders. In their board structure majority of board are independent directors.
Chairperson and CEO can’t be the same person in Australian companies. Their decision
making is very ethical and responsible which enables them to disclose true financial
reporting. Audit committee, consists of non executive directors, independent chairperson,
independent directors and has at least three members in it. They respect the rights of
shareholders, that’s the reason external auditor in any Australian organisation will attend the
annual general meeting and will be present to answer shareholder questions regarding
auditor’s report if any. Companies here provide full disclosure of remuneration policies, costs
and benefits of the policies, code of conduct and compliance guidelines to legitimate
stakeholders and to the investors. (Fleming, Number 3, 2003,)
In conclusion Australian corporate governance has been termed as outsider system of
corporate governance. It’s somewhat same like UK corporate governance. They believe in
increasing shareholder wealth keeping in mind organisation goals.

CORPORATE GOVERNANCE IN SOUTH KOREA

In 1997 after the IMF crisis Kim Dae-Jung administration started with rapid chaebol reform.
Two features that describe chaebol is one that it is closed concentration of ownership of
founder’s family. And secondly their diversified business structure which was main cause of
IMF crisis.
Main reason behind Chaebol reform was to diminish old characteristics of chaebol, to
introduce Anglo American corporate governance system., Improving framework of the
corporate governance, enhancing transparency in organisation, eradicating of cross debt
guarantee, improving firm’s capital structure and to increase concentration on core business.
The main problem which it faced is lack in market discipline mechanism hence government
should intervene and should create an environment where market mechanism will operate
effectively. With the introduction of Anglo American style of corporate governance firm is
considered as public entity which has to follow certain social responsibilities there may be
conflict of interest among stakeholders. So it is necessary to know how growth can be
harmonized together with shareholder value and all the other respective cultural values.
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From past few years South Korean has seen a drastic change on the way of doing business
like transparency has improved, minority shareholders right has increased, board of directors
has been reformed by nominating independent directors (Yanagimachi, February 2004)
From January 2001, South Korean organisation are getting obligation to introduce directors
from outside. More than half of the directors should be from outside in large scale chaebol
affiliates which result in more than 2 trillion won of assets. Minimum 3 outside directors has
to be there in organisation. The regulations and qualification for outside directors were made
very strict. Composition of ownership has also seen changes after financial crisis, government
ownership has declined. Bank ownership of shares also saw a big increase after 2000. Foreign
investors also saw a sudden increase in South Korean organisation before 1998 they were
holding 12-15%of shares, it increased from 17.98% in 1998 to 36.01% in 2002. There could
be both positive and negative aspects to this rapid increase; positively it is accelerating Anglo
American corporate governance system. On the other hand there may be risk of mergers and
acquisitions. (LEE, 2004)
Audit system in South Korea, a committee is formed with at least three board members out of
whom two thirds should be outside director out of which one member have to be sound in
professional auditing knowledge. Large firms should have annual auditing done to their
financial books from external audit firm.
In conclusions, after 1997 financial crisis foreign investment became stronger, with its effect
to create Anglo American system corporate governance. Chaebols are getting disappeared I
part as there is lack of global competitiveness in them. In short it will be little difficult to
create Anglo American corporate governance system without having a deep understanding of
Korean business landscape. Both need to be harmonized to flourish in South Korea.

RECOMMENDATIONS AND CONCLUSION

While examining the corporate governance of South Korea we found out that they are closed
family owned business houses and controlled by the family members itself, they have highly
diversified business structure and debt leveraged as their capital structure. Their economic
concentration is to notice for. They always tend to spread across various industries. They
have become conglomerates of many companies in South Korea. South Koreans
organisations hold share s in each other companies. They are more centralized in control.
Chaebols in South Korea do not have a bank but go to other financial institution like
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securities and to the insurance companies. In regards Australian firms they haven’t suffered
financial crisis as South Korean firms have faced. It was in no doubt affected by ripples from
the crisis occurred in the other parts of companies. It was vital for Australian economic
growth that countries in Asia pacific region are financially, politically and economically
sound. In terms of its corporate governance it has common laws system and it has been
developed somewhat along the lines of Anglo Saxon model. Australian system we can say is
both insider and outsider dominated. One of the interesting facts about Australian corporate
governance is ownership of listed company shares, they have both listed shareholding in all
the listed companies and there are several block holders and non institutional shareholding. It
is found that regulatory factors in South Korea are considered important for the organisations
to follow. They normally impose government rules and regulations on large firms, for them
industry size, firm risk are important for large organisations. Riskier the firm is better it
would be governed. It is recommended to South Korean firms that in case of foreign
ownership, if the company is holding more than 20% of ownership then the audit reports to
be disclosed should be both in English and Korean.
It is recommended that reforms should work within the system of Corporate Governance, to
result in a permanent effect. These policies must focus on the business culture, internal
structure and corporate culture of the system.
It is suggested that this can be achieved by promoting general awareness of the significance
of a strong Corporate Governance and by developing mutual trust and understanding between
the parties engaged.

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APPENDICES

TABLE 1 : Differences in corporate governance in south Korean and Australia

Differences on the basis of AUSTRALIA SOUTH KOREA

Power of Board Minor Very weak

Board members from Many Almost non existent

outside the
company(independence)

Incentive to Managers Large (High) Low (Small)

Primary methods of Securities issuing Bank Loans

financing

Type of ownership Dispersed (Individual and Concentrated ( family

Institutional Investors) group norms)

Capital Market Very Fluid Little Fluid

Banking Syatem Dispersed Transactions Main Bank system

Role of Small Share Strong Weak

Holders

Function of the corporate Strong Almost non existent

control market

Transparency in Transparent Semi Transparent

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management

Separation of ownership Perfect separation Incomplete separation

from management

Style of Corporate Uk style Anglo American

Governance

TABLE 2 : SIMILARITIES IN CORPORATE GOVERNANCE OF AUSTRALIA &

SOUTH KOREA

Basis of AUSTRALIA SOUTH KOREA

Participation of banks on small small
the board

type of ownership family before 20th family/group firms

century

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REFRENCES

ACCOUNTANTS, I. O. (n.d.). INSTITUTE OF CHARTERED ACCOUNTANTS IN

ENGLAND AND WALES. Retrieved 08 21, 2009, from
http://www.icaew.com/index.cfm/route/122444/icaew_ga/en/Technical_and_Busin
ess_Topics/Topics/Corporate_governance/An_overview_of_corporate_governance

Fleming, G. (Number 3, 2003,). Corporate Governance in Australia . Agenda,

Volume 10,.

LEE, S.-H. J. (2004). COMPETITION AND CORPORATE GOVERNANCE IN KOREA. UK:

EDWARD ELGAR PUBLISHING LIMITED.

MILAN, C. A. (2007). Corporate governance. In C. A. MILAN, Corporate

governance (p. 236). Oxford University Press, 2007.

OECD. (n.d.). UTS CENTRE OF CORPORATE GOVERNANCE. Retrieved 08 22, 2009,

from UNIVERSITY OF TECHNOLOGY SYDNEY:
http://www.ccg.uts.edu.au/corporate_governance.htm

Yanagimachi, I. (February 2004). Chaebol Reform and Corporate Governance in

Korea. JAPAN: Graduate School of Media and Governance.

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