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Working Paper

The Korean Corporate Sector : Crisis and Reform

페이스북
커버이미지
  • 저자 조성욱(趙成旭)
  • 발행일 1999/11/01
  • 시리즈 번호 9912
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요약 Since government intervention and poor corporate governance contributed significantly to the
1997 Korean economic crisis, reducing government intervention and improving corporate
governance are the keys to preventing another such crisis. Past Korean governments directly
and indirectly controlled banks and gave low-interest loans to preferred large firms in the
heavy industry throughout the 1970s and 1980s. When these firms could not repay their
debts, the government froze their debts and provided bailout loans in 1972 and 1979-1988.
Given government incentives and guarantees, firms borrowed heavily and expanded beyond
profit maximization levels, resulting in high debt-equity levels.
Poor corporate governance also contributed to the 1997 crisis in the form of (a) inaccurate
company financial information, (b) no credible exit threat, (c) insufficient financial institution
monitoring, and (d) few legal rights and forms of protection for minority shareholders.
Accurate financial information was not widely available because of an inadequate accounting
system, lack of transparency, and firm incentives to exaggerate their size. Second, the
absence of a credible exit threat stemmed from government bans on hostile mergers and
acquisitions, required government approval of foreign M&As, and government bailouts of
failing companies. Third, repeated government intervention impeded independent
decision-making by banks and reduced the utility of financial institution monitoring. Finally,
minority shareholders had few legal rights and protections. The separate majority voting
system for each director, lack of accurate information, and dispersed ownership structure
ensured that the board of directors remained in control of the controlling shareholders (who
often owned less than 20% of the shares) and unaccountable to minority shareholders. As a
result of poor corporate governance, controlling shareholders could pursue private gains at the
expense of the other shareholders, resulting in lower average returns on equity than the
prevailing interest rates for loans.
The combination of poor firm performance and vulnerable capital structure eventually led to a
series of large-scale corporate failures that severely weakened financial institutions. In turn,
foreign investors sold their Korean stocks, and foreign banks demanded repayment of
short-term loans given to Korean financial institutions. In sum, government policies and poor
corporate governance contributed to corporate insolvency, which provoked a domestic financial
crisis and ultimately caused the external liquidity crisis.
To address these problems, the Korean government has reduced its level of corporate
intervention and institutionalized a basic corporate governance system to address the four
issues discussed above. It required more transparent and accurate information, increased exit
threat, increased financial institution monitoring, and strengthened internal corporate
governance through more minority shareholders’ protection and responsibility of the board of
directors. Accurate information will be made publicly available through semi-annual company
financial statements reviewed by independent auditors (chosen in part by the minority
shareholders and the creditor banks). Second, the exit threat to failing companies has
increased through a rigorous bankruptcy law, elimination of laws hindering outside M&As, and
the government’s willingness to allows firms to go bankrupt. Third, with reduced
government intervention, financial institutions will pursue profit maximization by closely
monitoring firms that have received loans. Finally, the government has lowered the minimum
shareholding requirements for many shareholder rights, instituted a cumulative voting system
for boards of directors, and required the use of outside directors.
However, the government still intervenes excessively in the following ways: (a) limited
business licensing, (b) preferential credit, (c) support of the recent “Big Deal” swap of
chaebol subsidiaries, (d) differentiated tax shields, (e) selective informal refinancing of
bankrupt firms and (f) a uniform maximum debt/equity ratio.
Additional issues that remain unresolved include mechanisms for maintaining the independence
of financial institutions, specification of the outside director’s duties, and strong enforcement
mechanisms for these new regulations.
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