Korean executives evade new laws on disclosure of earnings

New regulations require listed companies in South Korea to report exactly how much individual executives earning over KRW 500 million received the previous year. The rule applies to “registered executives,” i.e. those who have legal responsibilities, as designated by the commercial code. About 2,050 companies are affected.

Income disclosures must go beyond annual paychecks and include retirement benefits as well as other forms of remuneration such as stock options that have not been exercised.

The new regulations target Korea’s chaebol, the family-controlled conglomerates that dominate industry. The measures are part of efforts to improve transparency about corporate remuneration amid criticism that many chaebol pay executives high salaries despite poor performance.

In one widely publicized example, the chairman of the Tongyang Group, and his wife, the Vice Chairwoman awarded themselves remuneration of KRW 4.5 billion shortly before five of their companies filed for bankruptcy with losses for around 50,000 investors.

There is an important exception to the law. Unregistered executives - those without specific legal responsibilities - who make more than KRW 500 million, are exempt from the new disclosure requirements.

To prepare for the changes, since the beginning of this year, chaebol chairmen and senior executives have, one after the other, been stepping down from positions as registered directors.

For example, at Samsung Korea’s largest conglomerate, Chairman Lee Kun-hee and other leading figures are all now unregistered executives. Despite their importance to the company, they will not have to disclose details of what they earn or how they are paid.

Not all are following Samsung’s example. Both Hyundai and the LG Group have announced that their chairmen will not be standing down as registered directors. However, such examples appear to be a minority.

“The law was enacted to improve stockholders’ oversight of company management by revealing the individual compensation of registered directors, but it is being defanged,” said an unnamed Ministry of Finance official.

The company code is designed so that registered directors both have authority over the company’s management and take legal responsibility for theirs and the company’s actions. In fact, the chairmen of major chaebol who were not registered directors in the past were accused of avoiding legal responsibility for their management.

“We must not ignore this tendency for a mismatch between the authority and responsibility of chaebol chairmen,” said Kim Sang-jo, director of Solidarity for Economic Reform and professor at Hansung University.