Invest in Korea

Recent turmoil in global financial markets is making it clear that companies around the world will need to focus intently on competitiveness to attract capital. That is true for countries, too, as regulators try to create conditions that will give their economies an edge in the eyes of international investors. Korea is not immune from these competitive pressures. So several recent events, although overshadowed by the global financial crisis, bear watching for their positive implications for the competitiveness of South Korea's companies and its stock market.

These new developments all concern corporate governance, either directly or indirectly. Poor corporate governance is unfortunately a broad problem in Asia, where law has traditionally been a bendable reed in the face of strong political winds. It has been a particular concern for global investors looking at Korea. Strong business leaders were until recently looked up to by Koreans as nation-builders, and their corporate-governance lapses were viewed as a cost of doing business, a necessary evil to hasten Korea's development.

For this reason, enforcement traditionally has been weak. Heads of conglomerates, or chaebol, have made several high-profile court appearances in the last few years. Such cases typically result in harsh-seeming fines and suspended jail terms, but these are lenient compared to the hard jail time meted out to white-collar criminals elsewhere, and are frequently reversed on appeal. Commentators claim with some justification that courts are soft on defendants whose businesses contribute significantly to the economy.

The latest case, involving one of Korea's largest companies, was different, however. The charges came out of investigations into alleged irregularities in connection with the sale by the chairmen of several arms of the conglomerate of assets to their family. This case is one of the most high-profile corporate prosecutions in Korea's history. Never before had a top chaebol been so humiliated. In face-conscious Asia, the sentencing in the court of public opinion, which culminated in a highly unusual walk of the gantlet of journalists at the entrance to the court house, arguably hurt the company in question more than the punishment. Whatever the result of the executives' appeals, the message has been delivered.

Some critical analysts see the hand of the state at work in this case, with politics operating behind the scenes. Once the tools of government in developing the nation, the chaebols are often seen as beyond control. But every few years, it seems, the government takes steps to limit them. However, the view that prosecutors were acting under instructions is misplaced because the judiciary has been operating independently for some years. The public has become less forgiving with regard to corporate crime. This change is accelerating in the context of Korea's democratization over the past two decades, which is characterized by a shift of power from officeholders to voters, producers to consumers, and chaebol bosses to shareholders.

The idea that the purpose of a company is to return shareholder wealth has at last started to replace the notion of the company as nation-builder. The 1997 financial crisis kick-started this shift and led to measures to improve governance. Increasing domestic ownership of stocks has more recently become a factor. In the past few years, due to depression in the real estate market -- the customary investment outlet for locals -- we have seen massive investments by ordinary Koreans into stock market funds, with resulting pressure on companies to improve their performance.

Korea's National Pension Fund -- which has recently raised its investments in equities -- earlier this year used its strong position in one company to vote against the reinstatement of the chaebol's boss. While the chairman retained his position and the event was not widely reported outside Korea, this was a very significant step. Previously, Korean institutional investors were criticized for closing ranks with the chaebols. But now there is awareness that corporate misdeeds hurt the profitability of the average Mr. and Mrs. Kim, Park and Lee.

I believe the effect of these developments will be to provide impetus to a process of improving corporate governance. We do not know exactly where we are headed because there is no perfect model for corporate governance, no corporate governance heaven. What we know in Korea, though, is that we could be better than we are, and can be at least as good as the best in the world.

For some time, the Korea Exchange has been encouraging companies to adopt and practice good governance. The exchange's Korea Corporate Governance Services, for example, publishes an annual report on the level of compliance of each listed company. The Korea Corporate Governance Stock Price Index, established in December 2003, consists of 50 companies with good corporate governance scores. This year the exchange also hosted the annual conference of the International Corporate Governance Network.

Now the court cases have given the country a kick to hurry these improvements along. So too has Korea's upgrade to "developed nation" status last month by the FTSE Group. This promotion will, as it has for other markets such as Greece, oblige many of the world's largest funds to hold specific weightings in Korean equities as part of their portfolios. At the time of the announcement, commentators cited poor corporate governance as the main reason for questioning the upgrade. This change in status, and the resulting discussion, is encouraging more attention to corporate governance problems in Korea.

In keeping with this accelerated pace, the Korea Exchange and the regulator, the Financial Supervisory Commission, are working on initiatives to further strengthen standards. Under new rules introduced in September, companies are to be placed on a supervision list for two years if they receive 15 "demerits" for violating public disclosure rules, and will be delisted in the event of further violations. In addition, companies where directors or top management are found guilty of embezzlement, breach of trust or fraudulent accounts will be reviewed for delisting.

The corporate world is now on notice that no individual, no matter how powerful or well-known, will be exempt. This message comes at an inflection point in global markets and also at a seminal time for the Korean market itself as it attains "developed" status in the FTSE ranking.

With Korea's top 10 listed companies more than 50% owned by non-Koreans, the international investment community has a stake in Korea's ability to get corporate governance right. So do ordinary Koreans. We are on the right track. Now we must maintain our positive momentum.

Writer Mr. Lee is the chairman and chief executive of the Korea Exchange.