The Cases of Failure in Corporate Governance…Suggestion of Future Direction

© Yoon Soo-min, Invest Chosun, 2021.

Nowadays, ESG(Environmental, Social and Governance) is a hot issue in economic field. Each part is in a different field and looks as if each had no link one another. But, each puts the same meaning: a corporation should weigh an influence on society as well as expects corporate profit. With the change in the perception in assessment of a corporation, investors have put ESG, especially Governance, as a criterion for choosing investments. I’m going to suggest direction that corporations should follow, based on some past cases of failure in corporate governance.

 

 

The Cases of Failure in Corporate Governance

 

The nut rage incident is a good example of a failed governance framework. The incident occurred when Cho Hyun-ah, the then vice-president of Korean Air raised hell in the KAL flight waiting for takeoff. As a result, the takeoff was delayed by 46 minutes. It may seem like just a power trip on subordinates, but there was deficiency in the governance. After the incident, Korean Air didn’t take any disciplinary action against her. Some analysts said that since she was an owner of Korean Air she wasn’t punished, comparing with the case of POSCO whose managing director was dismissed for his air rage. They added that this incident revealed the bad governance structure described as crony capitalism: the absolute power of owner-manager.

 

Here’s another problem of an inappropriate governance structure besides Owner risks: accounting fraud. According to the definition of Investopedia, accounting fraud is the intentional manipulation of financial statements to create a false appearance of corporate financial health. As one of famous examples of accepting fraud, I note the case of Daewoo. Daewoo was once the second-largest conglomerate in Korea, accounting for 14% of national export in 1998. However, It doctored up its accounts in order to show a profit and borrow cash from banks easily. The accounting fraud amounted to about 41 trillion won. Consequently Daewoo was bankrupted as a result of heavy debts after it faced the financial crisis of 1997. About 150 thousands of employees fell into the risk of unemployment.

 

 

Suggestion of Future Direction

 

Then, how can a corporation prevent those problems? First, it’s essential to compose the independent boards of directors. Many of domestic corporations don’t have the independent boards in common. That is to say, a board has often appointed the owner of a corporation as the chairman of the board or has been composed of executive directors mostly. In the case of Koran Air, although the board was composed of 70% of non-executive directors, it wasn’t independent acting as yes man who has never voted down any bill for 6 years. A board should play the role to check whether the owner dominates the corporation, examine whether an enterprise activity accords with the enterprise value and the shareholder value, and finally suggest the way to develop the corporation.

 

Also, it’s required to open transparent enterprise information to public. A corporation shouldn’t conceal or distort any information such as corporate disclosure and management performance because it has a major effect on investment judgment of shareholders. The non-transparent operation, especially account fraud, could even result in the collapse of a corporation like in the case of Daewoo and so on.

 

In conclusion, a corporation should represent interests both of itself and, more to the point, shareholders, applying appropriate governance structure with independency of boards of directors and transparency of operation.

 

2022년 5월 11일
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