The Democratic Party of Korea has decided to promote supplementary legislation that includes the 'cumulative voting system' and 'expansion of separate election of audit committee members,' which were excluded from the recent amendment to the Commercial Act. As analyses suggest that the market stimulation effect of the amended Commercial Act has been fully reflected in the stock market, the National Assembly is now bringing out a stronger KARD.

On the 3rd of this month, the amendment to the Commercial Act (alternative) is passed at the National Assembly in Yeouido, Seoul, with 298 members present, 272 attending, 220 in favor, 29 against, and 23 abstaining./Courtesy of News1

The amendment to the Commercial Act, which passed the National Assembly on the 3rd, includes provisions for expanding the duty of loyalty for directors, mandating electronic shareholder meetings, changing the designation of independent directors, and expanding the 3% rule. Among these, the expansion of the duty of loyalty for directors provides a legal basis to prevent corporations from making decisions that are detrimental to minority shareholders. The mandatory electronic shareholder meetings and the expanded 3% rule are expected to contribute to expanding minority shareholders' participation in decision-making processes. Following the passage of the Commercial Act amendment, expectations have surged that the governance structure risks, cited as the cause of the 'Korea discount,' will be resolved.

However, the securities industry evaluates that the effects of the Commercial Act amendments are weaker than expected. This is because the cumulative voting system and the separate election of audit committee members, the strongest means to enhance shareholder value, were excluded from this amendment.

Kim Jae-seung, a researcher at Hyundai Motor Securities, noted, "Expectations in the market for the amendment to the Commercial Act were high, but there is no confirmation of a substantial entry by individual investors contrary to that. This amendment to the Commercial Act does not affect the composition of the board of directors appointed by controlling shareholders. The board, still composed of those selected by controlling shareholders, will make the decisions."

The reason why the securities industry argues that the existing amendment to the Commercial Act is insufficient for enhancing shareholder value is that dividends and stock buybacks are determined by the board of directors. To increase dividends and stock buybacks in the domestic stock market, a board composition that can represent the opinions of minority shareholders is necessary. If the existing amendment to the Commercial Act prevents the board from making decisions that harm shareholder value, the cumulative voting system being discussed this time could serve as a direct means to enhance shareholder value.

Noh Dong-gil, a researcher at Shinhan Investment Corp., explained, "A decentralized board composition is necessary for increasing dividends and stock buybacks in the domestic stock market. If the cumulative voting system is implemented, a board composition that reflects the opinions of minority shareholders will become possible, allowing distributed shareholders to be represented."

Recently, the market has been paying more attention to President Lee Jae-myung's policies to stimulate the stock market than to the U.S. tariff policy or quarterly earnings. Every time policies like mandatory stock buybacks and separate taxation of dividend income are introduced, the stock market fluctuates. If a stronger amendment to the Commercial Act comes out, there are expectations that it could reach a KOSPI index of 5,000 more quickly.

However, as the business community expresses concerns that the amendment to the Commercial Act may excessively infringe upon management rights, both the ruling party and government are feeling pressure. The business community is asking for additional policies to defend management rights, stating that the amendment to the Commercial Act could threaten management rights.

A person in the securities industry stated, "Since this is still the early stage of the administration, concerns about the relationship with the business community are likely to be as significant as those for general investors," adding, "Whether the amendment to the Commercial Act can be supplemented immediately remains to be seen as the process unfolds."

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