THE ROLE OF CORPORATE GOVERNANCE IN SOUTH KOREAN ECONOMIC REFORM

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In South Korea, as in some other troubled Asian economies, banks and large public corporations have been run more in the interest of the government and the controlling share‐holder group than to maximize efficiency and overall shareholder wealth. Any serious attempt to reform the South Korean economy must thus include significant changes in its system of corporate governance.After discussing in general terms how corporate ownership and control can affect economic performance, this article examines the corporate governance institutions that prevail in different countries, with particular attention to the U.S., Japan, and Germany. From such comparative analysis it then develops a set of criteria for appraising the effectiveness of corporate governance systems that are applied to the specific case of South Korea. The article concludes with number of suggestions for reforming the South Korean corporate governance system, including: greater legal protection for minority shareholders from transactions involving potential conflicts of interest; and strengthening of the incentives of management and large corporate holders, such as house or main banks, to maximize value (as the author notes, “charging management or the board with a legal mandate to ‘balance’ the interests of various constituencies or stakeholders is merely to diminish any legally enforceable responsibility to shareholders”). As the article notes in closing, the main beneficiaries of such governance reforms will not be the new shareholders–including those foreign investors who might be persuaded to buy the stocks–but rather the existing owners, whose shares will command a higher price from “outside” investors. And the greatest beneficiary will be the South Korean nation as a whole, since the resulting improvements in corporate performance and reductions in cost of capital will increase productivity and international competitiveness.