Korea Needs Carrots, Not Just Sticks, for Corporate Governance Reform

The Democratic Party of Korea is pushing forward with legislation to prevent stock price suppression and expand stewardship codes immediately after passing its third Commercial Act amendment mandating treasury stock cancellation. The party aims to overhaul corporate governance structures in anticipation of the "KOSPI 6000" era. Following the forced passage of the Commercial Act amendment that constrains corporate management rights, the legislative push to institutionalize management intervention by institutional investors and pension funds is adding to the burden on businesses. Floor Leader Han Byung-do officially announced the legislative push on the 26th, and the party's K-Capital Market Special Committee plans to strengthen stewardship code implementation ahead of the shareholder meeting season.

Improving the capital market's fundamentals is necessary. However, rushing without fully considering side effects raises serious concerns about undermining management rights. The stock price suppression prevention law, driven by repeated mentions from President Lee Jae-myung, focuses solely on stock price management while ignoring the need to rationalize inheritance and gift taxes, raising concerns about creating new distortions. The bill's core provision would tax listed companies with price-to-book ratios below 0.8 using "unlisted company valuation methods (fair value assessment)" instead of "stock price" for inheritance and gifts. The intent is to prevent behavior where companies avoid shareholder returns such as dividends and accumulate internal reserves, citing inheritance tax burdens. However, it is difficult to conclude that low PBR alone indicates intentional stock price suppression. If fair value assessment is uniformly applied to low-PBR companies, major shareholders may face inheritance tax burdens so large that they could lose management control.

Expansion of stewardship codes also requires caution. If financial institutions' accountability is codified in law, effectively converting it into mandatory rules, and compliance evaluation is entrusted to supervisory authorities, the government's room for intervening in corporate management will inevitably expand. If policy elements such as serious industrial accidents are also included, there is significant risk of transformation into excessive regulation that pressures overall corporate activities.

Having wielded the "stick" on corporate governance through the Commercial Act amendment, it is now time to consider the "carrot." Rather than merely constraining companies and threatening major shareholders, mechanisms are needed to incentivize them to voluntarily change their decision-making frameworks. More urgent than the stock price suppression prevention law is rational reform of the inheritance and gift tax system, including lowering the maximum inheritance tax rate and abolishing the premium for largest shareholders. The mandatory codification of stewardship codes must also be preceded by sufficient social discussion and careful design to ensure it does not result in institutionalizing pension fund intervention in corporate management.