A real estate leasing company with annual revenue of about 800 million won invested between 90 billion and 110 billion won, representing 60-70% of its total assets, in stocks from 2013 to 2021. In 2020 alone, there were 518 sales transactions, and in 2021, the company traded an amount 262 times its rental income of 800 million won for that year. Throughout this period, the board of directors never passed a resolution to define the scale, limits, targets, or risk management criteria for these investments. There was only a resolution to approve the profit and loss report after the financial statements were completed.
The company's CEOs set their own compensation from 2013 to 2022. The shareholders' meeting approved only the overall limit, while the board stipulated that individual directors' compensation would be determined through discussions among the CEOs. The board members who established this regulation participated in the decision-making and signed the minutes.
In such cases, directors argue that 'the stock investments were overall profitable' and 'the compensation is a reward for actual work.' It is difficult to dispute the failure to follow the procedures mandated by corporate law, so they attempt to justify their actions post facto by citing favorable outcomes.
However, corporate law requires shareholder meetings or board resolutions not merely for favorable results. It aims to ensure that the company's interests are reviewed before decisions are made and that individuals with vested interests are excluded from the decision-making process to prevent the sacrifice of the company's interests. If procedural violations can be remedied simply because the results were good, then the procedures would only apply in cases of bad luck. This is akin to buying the procedure with results. Of course, to hold directors liable for damages, there must be a loss to the company. However, assessing damages and erasing illegality are separate issues. Resolutions that violate procedures can be invalidated or canceled, and violations of laws by directors can be grounds for dismissal.
In recent years, three Supreme Court rulings have consistently addressed directors' compensation. In 2020, the Supreme Court ruled that delegating matters regarding directors' compensation to the board through bylaws or shareholder meetings is not permitted (2016Da241515, 241522). In December of last year, it ruled that allowing the CEO to determine the distribution of individual directors' compensation is also not permissible under the bylaws (2025Da214605). This is due to the risk that a CEO could promote personal interests by setting their own compensation, and if the CEO determines the compensation for other directors, it would hinder the board's oversight of the CEO. In April of this year, the court ruled that a shareholder who is also a director cannot exercise voting rights in a shareholders' meeting resolution that sets compensation limits, as they have a special interest (2025Da219931). Compensation set by an unauthorized person cannot serve as a basis for claiming compensation, and any money already received may be subject to return as unjust enrichment. Following this series of Supreme Court rulings, it is clear that individuals whose compensation is at stake must be excluded from the decision-making process, and that authority can only be delegated from the shareholders' meeting to the board, not from the board to the CEO.
There are concerns that strengthening procedures may stifle corporate activities. A survey conducted by the Korea Chamber of Commerce and Industry of 300 listed companies regarding the 2025 amendment to corporate law, which expanded the duty of loyalty of directors to shareholders, found that 84.3% reported changes in their board operations, and 21.7% indicated that major decisions were delayed or postponed. However, examining what changed reveals that the establishment and strengthening of legal and compliance pre-reviews accounted for 47.0%, expansion of external legal and accounting advice for 45.7%, and detailed documentation of individual directors' opinions for 43.7%. It cannot be called stifling when decisions are made after thorough review instead of without it.
The trend of requiring explanations for decision-making processes is also evident in the amended Capital Markets Act, which will take effect on December 9. The previous method of determining merger prices through a formula will be replaced by a fair value assessment that comprehensively considers stock prices, asset values, and income values. The Supreme Court previously stated that if the merger price was calculated according to the requirements, methods, and procedures set by law, it would be difficult to deem the ratio significantly unfair. However, with the formula being eliminated, that defense will also disappear. In the future, directors will need to explain how they arrived at a price based on the materials and methods used, rather than relying on a prescribed formula or simply having favorable results.
Meanwhile, discussions have been ongoing for over a year regarding the abolition or narrowing of the elements of the crime of breach of trust, citing that the risk of criminal penalties excessively stifles corporate decision-making. Regardless of the merits of this discussion, to remove criminal oversight, civil oversight must first be established. Breach of trust can be established merely by the risk of loss, while civil liability requires actual damages. If criminal oversight is removed, what remains is only civil liability, which could allow the defense of 'resulting profit' to prevail. Therefore, civil liability should be treated more strictly.
The business judgment rule evaluates directors' decisions based on the process rather than the outcome. Therefore, the reverse should also hold true. A favorable outcome does not erase procedural illegality. Shareholders delegate management to directors not only with the expectation of profit but also with the mandate to operate the company according to established procedures and rules. It is time to part ways with attempts to cover up procedural flaws with favorable outcomes.
* This article has been translated by AI.
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