Release of medium-to-long term outlook on respective agenda based
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Research Monograph

A New Discipline for the Inter-Corporate Shareholding

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SUMMARY This monograph studies the governance structure in large business conglomerates, especially focusing on the inter-corporate shareholding between firms affiliated in the same conglomerate. The discipline for the corporate governance starts from monitoring firm’s decision making process, and every stakeholder, including the government, small shareholders, investors, potential investors, and takeover bidders, can join in disciplining. We analyze the discipline process in the view of a collective monitoring system for corporate governance.

The authors examine a lot of equity investment cases for the affiliated firm’s shares, to get qualitative insights on shareholding structure in the large conglomerate. The every case of Samsung, Hyundai, Hyundai Motors since 2000 is recorded in detail in the appendix.

In the earlier part of the monograph, the authors examine the effectiveness of the existing monitoring system for the corporate governance. The regulations by public authorities, like the prohibition of circular shareholding, are not sufficient for disciplining the inter-corporate shareholding. There are many loopholes, including bypass reinvestment, to avoid the public regulations. It implies we need additional monitoring mechanisms, whether in the form of public regulations or private enforcement. In many developed countries, the autonomous disciplines by the capital market have played a regulatory role.

Regrettably, the autonomous disciplines in Korea have not been matured enough. The stock market can punish vicious decisions by the owner-manager through dumping the firm’s stocks. The stock market in Korea has also responded well when the relevant information is properly provided. We, however, also found many cases in which the information delivery malfunctioned. Thus, there is an urgent necessity for improving the corporate disclosure system in the stock market. The stewardship code may be a monitoring tool for the corporate governance, to encourage funds to perform actively.

The M&A market in Korea is not considered as an active market. There are only a few instances to try on M&A and no meaningful success case. We need to reorganize the market in the principle of “who can manage better should manage.” The monitoring efforts by small shareholders should be increased. To do so, we need to reform the class action system: expansion of applicable events, introduction of discovery procedures, curtailment of permission processes, and etc. In addition, the combination of the class action and punitive damage reimbursement can boost the expected benefit from the case, and so enhance the monitoring efforts by small shareholders.

We can consider an ex-post regulation to make up for the existing public regulation. Firm’s decisions may be fruitful or harmful, according to the intention and consequences. Thus, it is helpful to consider the mixture of ex-ante laissez faire and ex-post regulation and punishment. The public interference, however, should fade out gradually and the market discipline replace the public ex-post regulation in the long run.

In the point of public regulations and M&A market reformation, we should examine treasury stocks. Sales of treasury stocks has used as a tool for defense of management rights in Korea, unlike other countries. In fact, the existing law and institution misunderstand the economic nature of the treasury stock. Thus, the law should be revised and sales of treasury stocks should be treated as a new stock issuance procedure. Until the law is revised, we need to regulate sales of treasury stocks incurring small shareholder’s loss.
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