Mark Benton participates in the IR Global Guide – International Governance: The Risks You Face as a Global Director
Foreward by Andrew Chilvers
As companies continue to look for opportunities in global markets, directors from diverse jurisdictions are hired to serve on the boards of foreign businesses as well as domestic ones that have operations and assets in other countries.
Enterprises across the world look for directors from other jurisdictions for any number of reasons. Hiring board directors from other countries can help to build investor confidence, for example. Likewise, an enterprise that is headquartered in a different jurisdiction but with a subsidiary in the US or Europe could seek directors to gain expertise and credibility. The director may have valuable international or local geographic expertise regarding business objectives, strategy, operations and risk management.
Nevertheless, serving as a director on the board of a global enterprise can bring major challenges. It’s true that during the past few years corporate governance laws and regulations have started to converge across regions, but there remain critical international differences regarding the responsibilities and liabilities of directors.
With recent data protection legislation across different jurisdictions, companies are now being held to account regarding their use of personal data. Will this result in a more litigious culture for companies and what does this mean for boards?
The GDPR has obviously had a significant impact on South Korea, not least because it is a world leader in ICT with its global companies doing business with the EU and which see huge commercial benefits in potentially obtaining data from EU citizens. South Korea enacted its own iteration of that legislation – the Personal Information Protection Act 2011.
There are of course broad similarities in the impact of technology as it pertains to privacy and data protection in liberal democracies in the EU and in South Korea. There are, however, differences in the way data is treated legally. One is that in broad terms in South Korea, if consent has been given, data can be transferred out of the jurisdiction. The authorities no longer have any control (or interest) over how that information is used. This contrasts with the approach in the EU.
The South Korean framework is regarded as one of the strictest in the world, but it has not prevented scandals. In 2014, for example, there was a massive leak of personal information by a credit card company. The law, of course, is relatively new. There has not been that much litigation, relatively speaking. Litigation has generally related to the definition of personal information, data breaches, what constitutes informed consent and data sharing.
Notwithstanding, corporations and their managers should always be alert to changes in legislation and the legal (and other) ramifications for their business. In general terms, Article 399 of the Commercial Act provides that if a director acts in a negligent manner, then he will be liable to the company. It provides further that if the negligent act is the result of a BoD resolution, then the directors who have assented to it will be jointly and severally liable to the company.
With global directors now increasingly in demand, how important is it for boards and directors to understand the different expectations of directors and different cultures of governance?
Corporations are becoming increasingly global in their outlook and operations. A company may therefore establish a legal presence outside its home jurisdiction whether this be a Liaison Office, Branch, or subsidiary, wholly owned, or otherwise. A global director might therefore include a person appointed by the home company to be a representative in one of its foreign entities. In practical terms, the expression “global director” could also apply to senior managers in similar positions; and likewise to companies which have business with another territory, say online, but have no physical presence there.
The law pertaining to the administration of companies in South Korea is governed by the Commercial Act. The corporate forms permissible in South Korea and the rules governing them are broadly analogous to other jurisdictions. The jusik hoesa is the main corporate form and is similar to a US corporation, UK limited company, or GmbH. The acts of the company and its directors are regulated by the company’s AOI, company Resolutions and any additional company regulations. It is, however, worth noting that there is no specific Corporate Governance Code in South Korea.
Whilst the laws relating to corporations are relatively similar, the foreign directorial appointee should live by the maxim “similar but different”. It is also a truism that if the appointee is from a different jurisdiction, he will need to become familiar with the local laws, regulations and customs which pertain to it.
On a different note, there has been a recent trend in South Korea towards greater transparency and participation. The new Enforcement Decree of the Commercial Act 2019 has brought in significant changes. These include the expansion of electronic voting, strengthening the requirements to become external directors, the submission of business reports before shareholders’ meetings and the filing of corporate governance reports for listed companies.
How important is an effective board that follows core principles of international corporate governance? Does this give boards a shield against litigation and other issues such as bankruptcy and bribery?
It might be propitious to consider briefly what corporate governance is and also its purpose. Corporate governance may refer to the laws and regulations which regulate a company’s affairs both internally and externally. The purpose might broadly be stated as the measures to protect and balance the interests of the various participants for the better performance of the company.
In a way, corporate governance is simply a framework and to that extent it should neither be overstated, nor understated. Intrinsic in a framework is that it needs to be underpinned by real life actualities, one of which might be corporate culture.
A company’s culture may be good or bad or as in most cases somewhere in between. The corporate culture may be driven by the company’s leaders. In a best case scenario, those leaders would be honest and ethical and always act with integrity. These are, of course, universal qualities which pertain beyond a company’s existence; however, if those qualities are espoused throughout the organisation, they can give the best expression to “corporate governance”.
Of course, there will always be bad apples in any organisation. It might be that with a good governance system these apples can be plucked and discarded at an earlier stage. In the same way, we like to advise our clients on both commercial and legal risk as one tends to impinge on the other.
It is not possible to eliminate commercial risk by endeavouring to eliminate legal risk, but again one does impact the other. For example, if a BoD can be shown to have acted in good faith and in compliance with all laws and regulations, it will attract less condemnation if the company fails for some business reason. The conclusion is perhaps that in all things, you need to be strategic. Good corporate governance is not the panacea, but it is the essential bedrock of any well run and successful organisation.