Analysis Of Corporate Governance In South Korea And Australia

ANALYSIS OF CORPORATE GOVERNANCE IN SOUTH KOREA AND AUSTRALIA

INTRODUCTION This essay outlines a detailed analysis of the corporate governance of Australia and South Korea. Both these countries have their own corporate governance but there are some similarities and dissimilarities which have been observed and dealt with. Before we get on to the corporate governance in Australia or South Korea we need to define corporate governance. The OECD provides the most authoritative functional definition of corporate governance: "Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance." (OECD) Corporate governance introduces framework of legislative and regulatory reform to the organisation. It’s a key element of any organization. It enhances confidence of investors and promotes competitiveness among the organization, and ultimately leads to growth in economy. As emphasized by James Wolfensohn, President of the World Bank: ‘The governance of companies is more important for world economic growth than the government of countries.’ (ACCOUNTANTS) CORPORATE GOVERNANCE IN AUSTRALIA Corporate governance is Australia has received a lot of attention from both media and policy makers because of the social and political implications it has on some of the major collapse of corporate which came into light in past eighteen months. Most prominent among them were Alka Sharma, 15973547 1

allegations of illegal management behaviour in the companies like HIH and Onetel adding to the roles are companies such as Harris scarfe and AMP. (Fleming, Number 3, 2003,) Australian corporate governance has shown changes in past forty years. The principal-agent framework has been adopted by Australia to describe features of corporate governance system. In this world of full information managers get contracted to act on best interest of owners but opportunistically he may act to improve his welfare at the cost of owner. Recent characteristics of firm in Australia are its separation between ownership and control. In first half of twentieth century Australian companies were described as ‘family capitalism’. With all the important positions were holds by close knit family. This was then changed in second half of 20th century. Last forty years have also seen changes in some government mechanism like ownership of shares with directors and managers, structure of board of directors like its size and composition. And lastly in block holders. Research has shown that to mitigate agency cost in the firm you need to combine these mechanisms. Board size and component are describes as one of the key components in governance. Board of directors monitors management and adds strategic ideas into the operations, His ability to perform depends on the size and composition of business, as firm increases in size complexity increases. Directors having human capital skills will be needed then. (MILAN, 2007) Board composition in Australia consists of Executive and non executive directors. Executive directors have both executive position and board position within the company because of their dual role they add valuable contributions to the firm as they bring in firm specific knowledge. They are more loyal towards organisation regardless of their non executive counterparts. Non executive directors on the other hand are appointed for their expertise in industry and their decision making abilities. The roles of directors differ from each other. If we have a look at the size and composition of boards, it has changed from the last 40years Table 5 gives the sample of board size of 23 Australian firms in 1964 and 1997. Median board size has increased from 7 directors to 11 directors. (Fleming, Number 3, 2003,) ASX Corporate Governance Council was formed in August 2002 to provide supported framework, to develop and deliver to the industry. It gives practical guide to the companies listed in this and to their investors. 21 stake holders which also include major firms, investors are part of this council. (ASX Corporate Governance Council, 2003: Foreword). It delivered Alka Sharma, 15973547 2

some set of principles regarding code of conduct, auditing, remuneration etc. organisation in Australia formalise and disclose the functions which are reserved to the board and those which have been delegated to the managements. This makes them transparent to its stakeholders. In their board structure majority of board are independent directors. Chairperson and CEO can’t be the same person in Australian companies. Their decision making is very ethical and responsible which enables them to disclose true financial reporting. Audit committee, consists of non executive directors, independent chairperson, independent directors and has at least three members in it. They respect the rights of shareholders, that’s the reason external auditor in any Australian organisation will attend the annual general meeting and will be present to answer shareholder questions regarding auditor’s report if any. Companies here provide full disclosure of remuneration policies, costs and benefits of the policies, code of conduct and compliance guidelines to legitimate stakeholders and to the investors. (Fleming, Number 3, 2003,) In conclusion Australian corporate governance has been termed as outsider system of corporate governance. It’s somewhat same like UK corporate governance. They believe in increasing shareholder wealth keeping in mind organisation goals. CORPORATE GOVERNANCE IN SOUTH KOREA In 1997 after the IMF crisis Kim Dae-Jung administration started with rapid chaebol reform. Two features that describe chaebol is one that it is closed concentration of ownership of founder’s family. And secondly their diversified business structure which was main cause of IMF crisis. Main reason behind Chaebol reform was to diminish old characteristics of chaebol, to introduce Anglo American corporate governance system., Improving framework of the corporate governance, enhancing transparency in organisation, eradicating of cross debt guarantee, improving firm’s capital structure and to increase concentration on core business. The main problem which it faced is lack in market discipline mechanism hence government should intervene and should create an environment where market mechanism will operate effectively. With the introduction of Anglo American style of corporate governance firm is considered as public entity which has to follow certain social responsibilities there may be conflict of interest among stakeholders. So it is necessary to know how growth can be harmonized together with shareholder value and all the other respective cultural values. Alka Sharma, 15973547 3

From past few years South Korean has seen a drastic change on the way of doing business like transparency has improved, minority shareholders right has increased, board of directors has been reformed by nominating independent directors (Yanagimachi, February 2004) From January 2001, South Korean organisation are getting obligation to introduce directors from outside. More than half of the directors should be from outside in large scale chaebol affiliates which result in more than 2 trillion won of assets. Minimum 3 outside directors has to be there in organisation. The regulations and qualification for outside directors were made very strict. Composition of ownership has also seen changes after financial crisis, government ownership has declined. Bank ownership of shares also saw a big increase after 2000. Foreign investors also saw a sudden increase in South Korean organisation before 1998 they were holding 12-15%of shares, it increased from 17.98% in 1998 to 36.01% in 2002. There could be both positive and negative aspects to this rapid increase; positively it is accelerating Anglo American corporate governance system. On the other hand there may be risk of mergers and acquisitions. (LEE, 2004) Audit system in South Korea, a committee is formed with at least three board members out of whom two thirds should be outside director out of which one member have to be sound in professional auditing knowledge. Large firms should have annual auditing done to their financial books from external audit firm. In conclusions, after 1997 financial crisis foreign investment became stronger, with its effect to create Anglo American system corporate governance. Chaebols are getting disappeared I part as there is lack of global competitiveness in them. In short it will be little difficult to create Anglo American corporate governance system without having a deep understanding of Korean business landscape. Both need to be harmonized to flourish in South Korea. RECOMMENDATIONS AND CONCLUSION While examining the corporate governance of South Korea we found out that they are closed family owned business houses and controlled by the family members itself, they have highly diversified business structure and debt leveraged as their capital structure. Their economic concentration is to notice for. They always tend to spread across various industries. They have become conglomerates of many companies in South Korea. South Koreans organisations hold share s in each other companies. They are more centralized in control. Chaebols in South Korea do not have a bank but go to other financial institution like Alka Sharma, 15973547 4

securities and to the insurance companies. In regards Australian firms they haven’t suffered financial crisis as South Korean firms have faced. It was in no doubt affected by ripples from the crisis occurred in the other parts of companies. It was vital for Australian economic growth that countries in Asia pacific region are financially, politically and economically sound. In terms of its corporate governance it has common laws system and it has been developed somewhat along the lines of Anglo Saxon model. Australian system we can say is both insider and outsider dominated. One of the interesting facts about Australian corporate governance is ownership of listed company shares, they have both listed shareholding in all the listed companies and there are several block holders and non institutional shareholding. It is found that regulatory factors in South Korea are considered important for the organisations to follow. They normally impose government rules and regulations on large firms, for them industry size, firm risk are important for large organisations. Riskier the firm is better it would be governed. It is recommended to South Korean firms that in case of foreign ownership, if the company is holding more than 20% of ownership then the audit reports to be disclosed should be both in English and Korean. It is recommended that reforms should work within the system of Corporate Governance, to result in a permanent effect. These policies must focus on the business culture, internal structure and corporate culture of the system. It is suggested that this can be achieved by promoting general awareness of the significance of a strong Corporate Governance and by developing mutual trust and understanding between the parties engaged.

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APPENDICES TABLE 1 : Differences in corporate governance in south Korean and Australia

Differences on the basis of

AUSTRALIA

SOUTH KOREA

Power of Board

Minor

Very weak

Board members from outside the company(independence)

Many

Almost non existent

Incentive to Managers

Large (High)

Low (Small)

Primary methods of financing

Securities issuing

Bank Loans

Type of ownership

Dispersed (Individual and Institutional Investors)

Concentrated ( family group norms)

Capital Market

Very Fluid

Little Fluid

Banking Syatem

Dispersed Transactions

Main Bank system

Role of Small Share Holders

Strong

Weak

Function of the corporate control market

Strong

Almost non existent

Transparency in

Transparent

Semi Transparent Alka Sharma, 15973547 6

management

Separation of ownership from management

Perfect separation

Incomplete separation

Style of Corporate Governance

Uk style

Anglo American

TABLE 2 : SIMILARITIES IN CORPORATE GOVERNANCE OF AUSTRALIA & SOUTH KOREA Basis of

AUSTRALIA

SOUTH KOREA

Participation of banks on the board

small

small

type of ownership

family before 20th century

family/group firms

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REFRENCES ACCOUNTANTS, I. O. (n.d.). INSTITUTE OF CHARTERED ACCOUNTANTS IN ENGLAND AND WALES. Retrieved 08 21, 2009, from http://www.icaew.com/index.cfm/route/122444/icaew_ga/en/Technical_and_Busin ess_Topics/Topics/Corporate_governance/An_overview_of_corporate_governance Fleming, G. (Number 3, 2003,). Corporate Governance in Australia . Agenda, Volume 10,. LEE, S.-H. J. (2004). COMPETITION AND CORPORATE GOVERNANCE IN KOREA. UK: EDWARD ELGAR PUBLISHING LIMITED. MILAN, C. A. (2007). Corporate governance. In C. A. MILAN, Corporate governance (p. 236). Oxford University Press, 2007. OECD. (n.d.). UTS CENTRE OF CORPORATE GOVERNANCE. Retrieved 08 22, 2009, from UNIVERSITY OF TECHNOLOGY SYDNEY: http://www.ccg.uts.edu.au/corporate_governance.htm Yanagimachi, I. (February 2004). Chaebol Reform and Corporate Governance in Korea. JAPAN: Graduate School of Media and Governance.

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