July 3, 2003

July 3, 2003

Corporate Governance in Korea

Analyst:

Executive Summary

Calvin R Wong, Hong Kong

Korea has made rapid and significant progress in corporate governance since its economic crisis in the late 1990s. While this progress is set to be maintained, however, further improvements are still needed. The Korean government has placed strong emphasis on raising standards of corporate governance. This is complemented by recent improvements in the legal and institutional framework in Korea, active discussion by (and pressure from) civic groups, and significant efforts by leading companies to improve their governance systems. Furthermore, the inauguration of the highly reform-oriented Roh Moo-hyun administration is expected to add momentum for continuing improvements.

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Nevertheless, corporate governance in Korea remains based on the combined “ownermanager” principle, and the functioning of governance systems and regulation is still not effective. Disagreement over the appropriateness of specific governance reform proposals amongst the corporate sector, led by the chaebols, on one side, and civic groups along with government on the other side, has also slowed the pace of change. Even individual companies that have independently streamlined their governance systems and policies still need to make significant improvement in specific practical areas. On the positive side, access by enterprises to capital markets is good, as the restructuring of the banking industry has been implemented successfully even during Korea’s fast economic recovery since its foreign exchange crisis. At the same time, the opacity of corporate ownership structures and the attitudes of controlling shareholders are key areas that need attention. Efforts by the government, based on recommendations made by international organizations including the IMF, have enabled regulations and systems related to corporate governance to be brought close to international standards. Although regulatory agencies are undergoing integration, overlapping jurisdictions and resulting inefficiencies remain. The information infrastructure in Korea is reasonably developed, with accounting and auditing standards close to international standards, backed by relatively wide disclosure and satisfactory access.

For important information on Corporate Governance Scores, please see the last page of this report.

The financial crisis that hit Asia in the late 1990s uncovered serious deficiencies in the Korean economy. These included: inappropriate supervision of the government-led financial system; indiscreet, “fleet”-type management by Korea’s chaebol; and improper management decisions made by controlling shareholders. While progress has been made, Korea has failed to fully

implement principles of market competition during the process of economic liberalization, and has failed to create a fully transparent economic environment. Continued efforts by market participants to seek legal and institutional reforms and improve efficiency following the economic crisis have helped Korea to record economic recovery at a rate faster than any other Asian country in the aftermath of the crisis. In corporate governance, significant improvement has been made during a relatively short period. However, the speed of fundamental change in corporate ownership structures remains slow and the lack of a strong governance culture points to weakness of governance standards at individual enterprises. Success in Korea’s implementation of stronger corporate governance practices will depend on the degree to which structural reform of the corporate sector, including the chaebol, will succeed in the future.

Current Corporate Governance Issues Following the 1997-98 financial crisis, Korean corporate governance has improved systematically. Nevertheless, systematic changes are not enough to ensure fundamental changes in corporate culture, business ethics, and among interest groups involved in policy making. Discussion on potential improvements in corporate governance practice is continuing while interest groups argue for their own agendas. Reform of the chaebol is challenging the effort to improve corporate governance in Korea while the country is struggling to resolve the following key issues: • Class action suits; • Ceilings on conglomerates’ equity investments; • Corporate governance in public companies; and • Strengthening the rights of shareholders and directors or external directors.

Class action suits. With a draft bill pending in the Korean legislature, the debate between the government (as well as) civil bodies and the business sector is still under way. The former group claims the introduction of class action suits would boost the rights of minority shareholders and transparency in the management of companies. In turn, the business sector argues that the implementation of such a legal system is premature in Korea and could impede corporate restructuring.

Ceiling on large corporations’ equity investments. Under the Monopoly Regulation and Fair Trade Act, large corporations are allowed to own up to 25% equity in their subsidiaries. However, the effect of the ceiling is questioned because of various exceptions allowing business groups to exceed the ceiling. One interest group is calling for an overhaul in the relevant laws and regulations while the business sector insists the ceiling is undermining the growth potential of large corporations.

Corporate governance in public companies. The government is reviewing the possibility of promoting privatized public companies to impose corporate governance as efficiently as in the private sector. The government is considering the use of stakes in companies owned by the government, banks or other institutional investors, including pension funds and other funds, to improve corporate governance in public companies.

Strengthening rights of shareholders and directors or external directors. Issues on expanding directors’ authority, specifying directors’ commitments required to fulfill their duty to shareholders, and defining external directors’ limited responsibility are being discussed. Furthermore, the approval of shareholders for new share issues, transactions with related parties, and the ban on excluding application of the articles of incorporation for cumulative voting are being considered.

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Market infrastructure Korea’s political environment is characterized by the high geopolitical threat from the North Korean regime, a rapidly developing system of democracy, a government which exerts a significant amount of influence over the country’s economic activities, and a lack of autonomy in the private sector as a result of such government influence. Tensions between South and North Korea remain high, despite the “Sunshine Policy” pursued by the former President Kim Dae-Jung. A series of actions taken by North Korea has heightened fears of a conflict on the Korean peninsula. Although the possibility of a war between South and North Korea is considered low, the North’s closed political system makes its future response unpredictable. Korean enterprises in general follow a typical ownership and control form where the founders and their successors and other interested parties manage businesses as majority shareholders. This type of structure has the benefit of enabling quick and unified decision-making. At the same time, the structure does not protect the interests of minority shareholders, and hinders appropriate monitoring and control of management. It also creates problems relating to management succession and the role of family members versus professional managers.

Macroeconomic stability. Korea’s foreign currency sovereign credit rating has returned to the level recorded prior to the economic crisis of 1997, an indication of the extent of its economic recovery. Standard & Poor’s foreign currency rating is ‘A-’, with a stable outlook. The upward trend in the credit rating reflects Korea’s ability to effectively deal with external shocks, its more flexible labor market, stronger financial liquidity, and restructuring initiated by the Korean government. Nevertheless, there are several factors constraining further improvement in Korea’s ratings, including the unfinished restructuring in the private sector and the military threat from North Korea. Korea’s remarkable growth has been quoted as a model case for developing countries. However, the 1997 economic crisis disclosed structural weaknesses, particularly the need for greater liberalization to support a growth-centered policy, and the importance of adopting principles of market competition and creating a transparent economic environment.

Ownership structure. The level of corporate ownership, standing at more than 93% by the private sector as of 2001, indicates that Korean enterprises are privately owned in general. Following the election of Roh Moo-hyun, the basic policy on the privatization of major public enterprises is expected to be maintained. However, the new administration will reexamine these policies for sectors of major public interest, such as transport and power. Ownership structures of Korean enterprises are based on the conglomerates known as chaebol. As of January 2003, there were 43 business groups and 728 subsidiaries subject to restrictions on mutual contributions. The relative importance to, and influence of these enterprises on, the Korean economy is absolute. Korean enterprises in general are governed by a controlling shareholder and manager system under which controlling shareholders and managers act as owner and representative based on a high internal equity ratio resulting from mutual investment. In other words, the controlling shareholders exclusively control enterprises as managers, with ownership and control not separated. Table 1 shows that ownership concentration of leading chaebol (controlling shareholders and their affiliates) has diminished somewhat from 1999-2001. But ownership concentration remains substantial at 45%.

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Table 1 Ownership Concentration in Korea Share Ownership (% of total outstanding shares) (%)

Controlling Shareholders

1999 2000 2001 Source: Fair Trade Commission. 30 chaebol.

Affiliates 5.4 4.5 5.6

Total 45.1 38.9 39.4

50.5 43.4 45

Institutional investors, including banks, play minimal roles as shareholders, investors, and creditors. This is attributable to the high insider equity ratios of the conglomerates, banks’ investment in stocks as relationship investments, and loans influenced by political judgment. Generally, institutional investors have tended to avoid conflict with the chaebols given that many are actually chaebol affiliates. This reality will not change significantly in the near term. National pensions, being subject to strong government oversight and influence, have also avoided conflict with the chaebols, who in turn had historically enjoyed strong government support. In the latter case, however, investors may exert more influence going forward as the government’s position vis-à-vis the chaebols has shifted. The monitoring function of external corporate control bodies is limited. The market for corporate control does not currently constitute a great discipline for company managers, reflecting in part a nonactive mergers and acquisitions market and undeveloped markets for managerial talent. Since the financial crisis, there have been some institutional improvements, including the introduction of a tender offer system, to revitalize M&A activity.

Ease of access to public exchanges. The stock markets in Korea consist of the Korea stock exchange (KSE) and the Korea Securities Dealers Association Automated Quotation (KOSDAQ) market. As of February 2003, there were 685 companies and listed on the KSE and 862 enterprises registered with the KOSDAQ, respectively. KSE listing requirements are prescribed by its securities listing rules. Securities must satisfy the standards prescribed by the operating regulation of the KOSDAQ market and the Korea Securities Dealers Association registration regulations. To qualify for listing stocks on the KSE, an enterprise should have been in operation for three years or more, and have capital stock of W5 billion or more, equity capital of W10 billion or more, sales averaging W15 billion or more during the past three years, with the figure for the recent year being W20 billion or more, and it is required to satisfy stock split requirements and financial standards (see appendix, Article 15, Listing Rules). Requirements for registration with the KOSDAQ market are similar to the KSE listing rules. However, the KOSDAQ registration requirements are far more relaxed than those of KSE because the KOSDAQ market is intended to supply stabilized, long-term funds to knowledgebased enterprises carrying high growth potential and technological power.

Banking system. Banks in Korea have played important roles in supporting industrial development and increasing exports under the supervision of the government. While the government pursued powerful growth-oriented policies, chaebol have enjoyed benefits from large, low-interest loans from the banks controlled by the government. Both chaebol and the banks have posted remarkable growth. In the 1990s, banks gradually began to disclose problems. These problems can largely be classified into three types: management practices that put more emphasis on the size of operating income than profitability, inefficient regulation and supervision by the government, and the failure to adapt to changes in the operating environment. These problems were

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contributing factors to the foreign exchange crisis in 1997. Following the crisis, the industry was reorganized through the restructuring of the banks. After the 1990s, the government implemented a financial liberalization policy, allowing interest rate liberalization, relaxing restrictions on the development of the financial industry, and expanding the business areas of financial institutions. Banks’ discretionary power has increased with respect to their management-- however government support has also reduced proportionately. The survival of banks in the future will be determined based on independent competitiveness and financial solvency rather than on governmental support. After the banks’ first round of restructuring, large enterprise groups including Daewoo and Saehan became insolvent. This triggered a second round of restructuring, with the government injecting additional public funds and introducing a financial group system. A series of bank restructurings have been completed through the establishment of financial groups by Woori and Shinhan Bank, the merger between Kookmin Bank and Housing & Commercial Bank, and the takeover of Seoul Bank by Hana Bank. However, there remains considerable room for bank sector restructuring given that the government still owns a substantial portion of the equity in several banks.

Legal Environment The legal system in the Republic of Korea is based on principles derived from Germany’s civil laws, although it retains elements of Japanese laws applied during the occupation up to 1945. Korea’s commercial code was handed down from Japan based on Germany’s stock-related laws, although the German system contains elements of the U.S. system.

Primary legislation. The basic laws governing corporate governance are as follows: • The Commercial Code (CC); • Securities and Exchange Act (SEA); • Act on External Audit of Stock Companies; and • Listing rules. Korea’s Commercial Code comprehensively prescribes general matters related to the establishment, organization, and the operation of companies. The Commercial Code and the SEA, both of which were amended several times after the financial crisis, reflect major restructuring projects contained in the Memorandum of Understanding signed with IMF and IBRD. The code and the SEA have shifted emphasis to promoting the efficiency of corporate management, acquiring transparency, and strengthening the rights of minority shareholders.

Laws and rulings on corporate governance practices. 1. Directors and non-executive directors Appointment of directors. Directors are appointed at a shareholders’ general meeting, and should be at least three in number. However, in the case of a company of which the total capital is less than W500,000,000, the number of the directors may be one or two. Unless prescribed otherwise in the articles of incorporation, shareholders representing no less than 3% of total voting shares may request the company to elect directors by means of a cumulative voting. The terms of directors may not exceed three years. Duties and liabilities of directors. The duties of directors related to business pursuant to the Commercial Code are mainly classified into the duties to be faithful and duties to keep secret. In cases where a director has caused harm to the company, shareholders representing one percent of total outstanding shares may request the company to file a suit against such director. Composition and appointment of non-executive directors. Stock-listed corporations or KOSDAQ-registered corporations prescribed by Presidential Decree shall appoint non-executive directors not less than one quarter of the total number of

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directors provided that certain stock-listed corporations (with total assets greater than W2 trillion) or KOSDAQ-registered corporations as prescribed by Presidential Decree shall have not less than three non-executive directors. But it shall make the number of non-executive directors not less than half the total number of directors. Regulations are also available for the nominating committee to review non-executive director candidates.

Regulations on qualification of non-executive directors. The Securities and Exchange Law does not prescribe detailed qualification requirements for non-executive directors, but prescribes only passive limitations creating criteria, which prevents certain people from becoming non-executive directors. The provisions related to the disqualifications of non-executive directors, as stipulated in the Securities and Exchange Act, are outlined in considerable detail. The Korea Listed Companies Association established “service standards for non-executive directors” in November 2000. This standard, established on the premise that improved corporate governance strengthens corporate competitiveness and maximizes corporate value, contains comprehensive guidelines regarding the function and legal status of non-executive directors, basic authorities and duties, and remuneration. However, due to the fact that the will of the management is strongly reflected in the nomination and appointment of non-executive directors, there is a limit on the extent to which many non-executive directors are truly independent of company management. Audit committee regulations. The Commercial Code contains relatively detailed provisions governing auditors and the audit committee. The composition of the audit committee shall consist of at least three directors. According to the provisions of the Code, the directors engaged in the company business shall not exceed one-third of the total members of the committee. To guarantee the independent operation of the audit committee, the Code also prescribes that the chairman of the audit committee of securities companies must be a non-executive director (Paragraph 2, Article 54-6, Securities and Exchange Law).

2. Shareholders’ meetings. Notice of shareholders meeting. Shareholders must be notified, in writing or by electronic documents, of any general meetings at least two weeks prior to such meeting. Proxy rights. Shareholder may have proxies to exercise the voting rights on their behalf. In this case, the proxy shall submit a document proving power of representation at the general meeting. Voting procedures. There are no specific provisions within the Commercial Code regarding voting procedures and third party verification of voting results. In general, a system where motions are passed when no objections are heard is used to decide most agenda items at shareholder meetings.

3. Minority shareholder rights. Regulations on minority shareholders’ rights can be considered to have made significant progress during the past few years in that the minimum shareholding requirements for exercising important rights have been significantly lowered. The legally guaranteed major rights of minority shareholders are as in Table 2.

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Table 2 Requirements for the Exercise of Rights by Minority Shareholders Rights of minority shareholders

KSE listed corporations, KOSDAQ registered corporations

General corporations

Derivative suit (promoters, directors, auditors, liquidators)

Holding at least 0.01% of shares for more than 6 months

At least 1%

Rights to demand dismissal of directors, auditors, and/or liquidators

Holding at least 0.5% of shares for more than 6 months (Large corporation: At least 0.25%)

At least 3%

Injunction against directors' illegal acts

Holding at least 0.5% of shares for more than 6 months (Large corporation: At least 0.25%)

At least 1%

Rights to inspect books and related documents

Holding at least 0.1% of shares for more than 6 months (Large corporation: *At least 0.05%)

At least 3%

Rights to convene shareholders' general meeting

Holding at least 3% of voting stocks for more than 6 months (Large corporation: *At least 1.5%)

At least 3%

Rights to demand appointment of auditors to inspect company business and financial conditions.

Holding at least 3% of voting stocks for more than 6 months (Large corporation: *At least 1.5%)

At least 3%

Rights to make proposals

Holding at least 1% of stock (Large corporation: *At least 0.5%)

At least 3%

*Large corporation: corporations having capital stock of more than W100 billion as of the end of the fiscal 2002.

4. Other related regulations Rights of foreign creditors and shareholders. There are no separate regulations governing the status of foreign shareholders. However, the Commercial Code specifies the principle of shareholders equality indicating that shareholders’ rights are not discriminated against according to nationality. Preemptive rights. Shareholders have preemptive rights, but some exceptions are allowed. The commercial code stipulates that, “Pursuant to its articles of incorporation, a company may allocate new shares to persons other than current shareholders. However, such act shall be limited to situations where it is necessary for the company to achieve operational objectives, i.e. the introduction of new technologies, the improvement of financial structures, etc.” Insider trading. Securities and Exchange Law prohibits officers, employees, proxies, major shareholders, or other insiders from providing information to third parties in case they learn undisclosed important information in relation to the business. The provision specifies the effective date of the insider to be one year. The inside trader shall be liable to compensate persons for any damage caused by securities trading and transactions.

Regulatory Environment Government regulatory bodies. There are two main government regulatory bodies in Korea: the Ministry of Finance and Economy (MOFE) and the Financial Supervisory Commission (FSC). The FSC has the Securities and Futures Commission under its control and the Financial Supervisory Services

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(FSS) as its executive body. Monetary policy is the responsibility of the Monetary Board of the Bank of Korea. MOFE has the authority to set the principles and the basic directions of economic policy. The main duties of the Financial Supervisory Commission include the generation of policies for financial industry supervision, oversight of the FSS, and the development of guidelines for financial sector restructurings. The main purpose of the Securities and Futures Commission is to perform duties mandated by the FSC such as investigation into unfair trade in the securities and futures markets, business related to corporate accounting standards and audits, and the management and supervision of the securities futures markets. The FSS was established by the FSC and the Securities and Futures Commission to regulate financial institutions and their functions, inspect the institutions’ financial status, and to order corrective measures as required. The MOFE, the Bank of Korea, and the FSC carry rights to mutually request the submission of related materials. Business cooperation between the regulatory bodies seems to be smooth. However, because some business areas overlap, the efficiency of the overall regulatory bodies still needs to be improved.

Self-regulatory bodies. The self-regulatory bodies include the Korea Stock Exchange (KSE), the Korea Securities Dealers Association, which supervises the KOSDAQ market, and the Korea Listed Companies Association. The Korea Securities Dealers Association established the KOSDAQ Market. The purpose is to perform duties related to market operations, including listed company disclosure, the execution of transactions, and market actions such as the suspension of trading. The KSE was established to form fair prices for securities and to protect investors. It discloses corporate information, monitors unfair transactions, and examines trading. In case the KSE discovers an unfair act through its own monitoring system, KSE is obliged to report to the Financial Supervisory Commission, which has right to take punitive actions. The Korea Listed Companies Association is a nonprofit corporation established under the Securities and Exchange Law to handle matters related to securities. Its main duties include recommending improvement to the system related to securities firms, listed companies, and training. In addition, for use as a reference by listed companies seeking to appoint nonexecutive directors, it distributes a list of persons registered in the manpower bank and recommends candidates for non-executive directors. The Korea Corporate Governance Service (KCGS) has also been established and supported by the KSE to provide analytical services to enhance corporate governance awareness among listed Korean companies.

Enforcement of the law. The FSS’ investigative function is limited, because direct investigative rights with respect to financial institutions are maintained by the Securities and Futures Commission operating under the control of the FSC. However, actual investigative rights may be exercised through business association with the Securities and Futures Commission. The punitive measures that may be taken by the FSS include the cancellation of business licenses or registration for certain institutions, suspension of all or part of a business, closure of business, suspension of part or all of branch business, and the issuance of warnings. Judicial action may be taken by indicting related persons to face prosecution. During 2000 and 2001, there were only two cases of partial business suspension, four cases of reprimand and/or institutional warning, and nine cases of other punitive actions taken by the Financial Supervisory Services. This indicates the relatively minimal level of its practical enforcement activities.

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In case a violation is discovered during the process of examining trading or of monitoring members, the KSE may directly punish, or otherwise take other appropriate measures against, relevant members or related persons, pursuant to the KSE’ Articles of Incorporation and service regulations. However, the punishment shall be limited to suspension of trading for a specific period, imposing fines in an amount not exceeding W1 billion or instructing violators to be more careful in future. In general, KSE reports such cases to the Financial Supervisory Services instead of taking its own investigation and punitive actions.

Informational Infrastructure The Financial Supervisory Commission has the final authority in setting, amending, and interpreting the Korean Accounting Standards (KAS) and the Korean Standards on Auditing. In 1998, the Financial Supervisory Commission introduced major amendments to the then Korean Financial Accounting Standards and an old version of the Korean Standards on Auditing, in an effort to make them compatible with international standards. At the time, those amendments were issued based on International Accounting Standards (IAS). Meanwhile, the Financial Supervisory Commission revised Korea Sub-Standards on Auditing, supplemental schedules of the Korean Standards on Auditing, in 1999 by adopting International Standards on Auditing.

Korean accounting standards. The KAS consist of 91 articles and is supported by supplementary rulings. The Korea Accounting Institute (KAI) has issued 10 statements of KAS based on IAS and has prepared more than 20 draft standards and exposure drafts. In the process of formulating Korean accounting standards, KAI, once it decides IAS inputs are not sufficient for use in Korea, refers to accounting standards generally accepted in the U.S. When the business environment in Korea precludes the application of both standards, KAI comes up with exclusively independent standards.

Korean standards on auditing. The Korean Institute of Certified Public Accountants (KICPA) has set Korean Standards on Auditing, described through 35 articles and Korean Sub-Standards on Auditing, which it believes are consistent with the International Standards on Auditing.

Public auditors and requirements for independent audits. A total of 6,439 CPAs were registered with KICPA as of December 2002. Among them, 4,954 members were working as auditors. Four international accounting firms and six other local firms, which are member firms of the world’s largest accounting firms, make up the mainstream accounting firms in Korea. In total, there are 57 accounting companies, nine of which have more than 100 CPAs, and 3,375 CPAs are working at all accounting firms combined. Remaining members of KICPA are working in private practices. The External Audit Act requires financial statements of resident companies to be audited if their total assets reached a minimum of W7 billion in the immediate preceding fiscal year. The financial audit is to be conducted by a qualified CPA or audit teams of accounting firms. Auditors in turn are responsible for submitting the audit report to their client company, the Securities and Futures Commission and KICPA within the deadline.

Comparison with international accounting standards. Consolidated accounts. KAS are generally deemed to comply with IAS. For instance, both accounting rules specify the same kind of financial information for disclosure requirements. But the former demands individual financial statements for key financial data while the latter requires consolidated financial statements. KAS does not have a clause regarding joint venture accounting.

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Operating data in addition to financial data. KAS does not specify that the disclosure of financial statements should be accompanied by operating information of the company. However, the disclosure of operating data is essential for a company to go public, although it is not required under KAS. Segment data. Standards for the definition of operating segments and reporting requirements set out in Korean Accounting Standards Interpretation 50-87 are consistent with International Accounting Standards. But the requirements for reportable segments differ, making a distinction that KAS does not impose the equity method of accounting for a reportable segment on which the company’s investment is concentrated. Method of asset valuation. Aside from the circumstances under which revaluation of assets is allowed, the way changes in depreciation methods are interpreted and the level of disclosure necessary for related party transactions, there is no significant difference in the way Korean accounting standards and international accounting standards treat revaluation of assets. KAS complies with IAS in many other aspects: definition of income, expense, profit/loss, cash flow statement, and all real and contingent liabilities. As for the accounting for related party transactions, KAS is more detailed by providing examples and sets forth different disclosure requirements from IAS in terms of coverage.

Required timing of disclosure. All residents companies are required to file financial statements with the Securities and Futures Commission to comply with the Commercial Code and publish their balance sheets in a major newspaper under the External Audit Act. Financial statements include a balance sheet, income statement, cash flow statement, and statement of appropriations of retained earnings approved in the general meeting of shareholders. All companies with stocks listed on either KSE or KOSDAQ under the Securities and Exchange Law are required to disclose audited financial reports on a quarterly basis. Under the Securities and Exchange Law, listed companies shall meet the periodic disclosure requirements by filing their audit reports and financial reports. In addition, these companies are also subject to prompt reporting of any material events that may affect investors’ decisions in making their investment. A regulatory system for fair disclosure was implemented in November 2002.

Ease of access to financial statements. All companies are required to keep their audited financial statements as well as the audit report and make them available for their shareholders and creditors, if any of them seek access to the financial information during normal business hours. The Financial Supervisory Service offers financial statements and audit reports of companies subject to the External Audit Act through its web site (dart.fss.or.kr). Other financial activities of these companies, such as buy-back or disposal of shares, M&A plans and purchase of new businesses are also posted. (This report was prepared with contributions from National Information & Credit Evaluation (NICE) of Korea.)

References An, Ye-Hong, “Current Corporate Governance and Directions for Its Improvement”, The Bank of Korea Financial System Review (August 1999) Cho, Jang-yeon, Byung-min Kang, and Kyung-soon Kim, Position Report on Korean Accounting Standards (6th September 2002)

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Jang, Ha-sung, “The Korea Discount and Corporate Governance” (November 2001) Kim, Kak-jung, “Evaluation of Recommendations for Corporate Governance Improvement” (October 2000) Kim, Yong, “A Study on Corporate Governance Since the 1997 Economic Crisis” (February 2002) Kim, Yong-youl, “Corporate Governance Features Necessary for Developing an Advanced Economy” (July 2000) Lee, Sun, “Present and Future Corporate Governance in Korea” (March 2000) Lee, Young-Kee, “Korean Corporate Governance in an Era of Global Competition” (April 1999) OECD, “OECD Corporate Governance Guidelines” (1999) Park, Se-Hyun, “A Study on Corporate Governance in Korea: Problems and Improvements” (August 2002) Seo, Jung-hwan, “Chaebol Ownership and Corporate Governance: Structures, Changes and Implications” (March 2002)

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Corporate Governance Scores Corporate Governance Score (‘CGS’) reflects Standard & Poor’s assessment of a company’s corporate governance practices and policies and the extent to which these serve the interests of the company’s financial stakeholders, with an emphasis on shareholders’ interests. These governance practices and policies are measured against Standard & Poor’s corporate governance scoring methodology, which is based on a synthesis of international codes, governance best practices and guidelines of good governance practice. Companies with the same score have, in the opinion of Standard & Poor’s, similar company specific governance processes and practices overall, irrespective of the country of domicile. The scores do not address specific legal, regulatory and market environments, and the extent to which these support or hinder governance at the company level, a factor which may affect the overall assessment of the governance risks associated with an individual company (see below ‘Country Factors’).

A

A CGS is articulated on a scale of CGS 1 (lowest) to CGS 10 (highest). CGS 10 and CGS 9—a company that, in Standard & Poor’s opinion, has very strong corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, few weaknesses in any of the major areas of governance analysis. CGS 8 and CGS 7—a company that, in Standard & Poor’s opinion, has strong corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, some weaknesses in certain of the major areas of governance analysis. CGS 6 and CGS 5—a company that, in Standard & Poor’s opinion, has moderate corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, weaknesses in several of the major areas of governance analysis. CGS 4 and CGS 3—a company that, in Standard & Poor’s opinion, has weak corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, significant weaknesses in a number of the major areas of governance analysis. CGS 2 and CGS 1—a company that, in Standard & Poor’s opinion, has very weak corporate governance processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, significant weaknesses in most of the major areas of analysis.

GovernanceWatch A ‘GovernanceWatch’ designation may be used to highlight the fact that identifiable governance events and short-term trends have caused a CGS to be placed on review. GovernanceWatch does not mean that a change to the CGS is inevitable. GovernanceWatch is not intended to include all CGSs under review, and changes to the CGS may occur without the CGS having first appeared on GovernanceWatch.

Country Factors

Important Note A CGS is based on current information provided to Standard & Poor’s by the company, its officers and any other sources Standard & Poor’s considers reliable. A CGS is neither an audit nor a forensic investigation of governance practices. Standard & Poor’s may rely on audited information and other information provided by the company for the purpose of the governance analysis. A CGS is neither a credit rating nor a recommendation to purchase, sell or hold any interest in a company, as it does not comment on market price or suitability for a particular investor. Scores may also be changed, suspended or withdrawn as a result of changes in, or unavailability of such information.

Although Standard & Poor’s publishes country governance analyses from time to time, it is important to note that Standard & Poor’s does not currently score individual countries. However, consideration of a country’s legal, regulatory and market environment is an important element in the overall analysis of the risks associated with the governance practices of an individual company. For example two companies with the same Company Scores, but domiciled in countries with contrasting legal, regulatory and market standards, present different risk profiles should their governance practices deteriorate i.e. in the event of deterioration in a specific company’s governance standards, investors and stakeholders are likely to receive better protection in a country with stronger and better enforced laws and regulations. However, in Standard & Poor’s opinion, companies with high corporate governance scores have less governance related risk than companies with low scores, irrespective of the country of domicile. For a full explanation of Standard & Poor’s criteria for measuring corporate governance standards, please refer to the latest edition of “Corporate Governance—Criteria & Methodology”. Published by Standard & Poor’s, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2002 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor’s from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor’s or others, Standard & Poor’s does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities.