CORPORATE GOVERNANCE, MARKET ECONOMY, AND ACCOUNTABILITY

Transcription

1 6 th Global Forum on Reinventing Government Towards Participatory and Transparent Governance May 2005, Seoul, Republic of Korea WORKSHOP VII. CORPORATE GOVERNANCE, MARKET ECONOMY, AND ACCOUNTABILITY Workshop organized by the Korea Development Institute School of Public Policy and Management (KDI) and the World Bank Report Introduction The Workshop on Corporate Governance, Market Economy, and Accountability was composed of six sessions, which covered a wide range of topics. The first session analyzed with the governance of business conglomerates. Session two examined the governance of banks and State-owned enterprises. Session three discussed board of directors issues, and session four discussed institutional shareholder activism. Session five focused on corporate social responsibility, and the last session addressed the issue of enforcement. During the course of the workshop, approximately 70 to 80 people were in attendance. Session 1: Governance of Business Conglomerates Paper 1: How to Define and Enforce Corporate Governance at the Group Level Sang-Jo Kim (Professor, Hansung University; Director People s Solidarity for Participatory Democracy) The first workshop speaker Sang-Jo Kim began his presentation with two key observations. First, a strong sense of distrust currently exists in the Republic of Korea with regard to law enforcement. In other words, introducing new corporate governance laws and institutions is one thing, while enforcing them is another. Second, he emphasized that there is a regulatory deficiency when it comes to the governance of chaebols family owned business conglomerates in the Republic of Korea. To clarify his first point, he introduced a number of recent examples related to the Financial Supervisory Commission s review of financial statements, enforcement of a law on chaebols equity investment through financial affiliates, and chaebols repeated interruption of supervisory agencies investigations. For governance rules and regulations to function properly, he stressed that strict and fair enforcement of law is critical. To elaborate, he pointed out that institutional arrangements need to be improved, but the starting point would be the supervisory agencies will to change. On the second issue, he reported that corporate governance reform measures introduced after the financial crisis of the late 1990s have mainly aimed to address problems at the individual company level. Due to this focus, current company and financial laws are not capable of imposing fiduciary duty on the group controlling shareholders, more commonly known as group chairmen. Although he acknowledged the merits of two existing regulations imposed on chaebols by the Fair Trade Commissions, he pointed out that they have logical shortcomings and are strongly resisted by the chaebols themselves.

2 As a way to address this deficiency in company law, he introduced the approaches taken by United States and Germany. In case of the U.S., he mentioned legal doctrines or case laws, such as shadow directors, piercing the corporate veil, double derivative suits, and the discovery in civil procedures. In case of Germany, he discussed how the externalities of group management can be internalized by explicit provisions in a statutory law. He then discussed the implications of two loopholes found in Korean financial laws. First, he pointed out that Korean chaebols avoid supervision by the Financial Supervisory Commission, even though they are financial conglomerates. Second, he mentioned that the current regulation on capital adequacy, which is at the heart of financial conglomerates supervision, favors insurance companies. In other words, when insurance companies compute capital to evaluate capital adequacy, they do not deduct investments in subsidiaries, while other companies do. He presented a policy proposal to correct this and, as an inducement mechanism, suggested to limit the voting rights of a financial affiliate in proportion to its newly defined capital adequacy ratio. Discussant: Dong-Kyu Lee (Director General, Competition Policy Bureau, Fair Trade Commission) The discussant Dong-Kyu Lee agreed with the speaker that the current legal structure does not function effectively to monitor the abusive behaviors of a controlling shareholder. In this regard, he stressed that a more thorough and comprehensive review is needed to impose strict fiduciary duties and in particular consider the introduction of double (multiple) derivative suits. Although he acknowledged that most chaebols in Korea take the form of mixed conglomerates, and thus need to regulate financial-affiliates, he was not enthusiastic about the idea of linking voting rights to capital adequacy. He emphasized that the purpose behind the capital adequacy rule is completely different from the purpose behind the Fair Trade Commission s regulation on chaebols. Paper 2: Swedish Business Groups and Family Ownership A Corporate Governance Model at Bay Erick Berglof (Professor, Stockholm School of Economics; Director, Stockholm Institute of Transition Economics) The second workshop speaker Erik Berglof introduced the ownership and governance structures of Swedish family firms. First, he gave two contrasting images of Swedish corporate governance. One is the positive image of strong, active controlling shareholders with strong sense of social responsibility with active financial markets. Another is the negative image of ownership structure that significantly separates ownership and control and one business group controlling close to one half of the Stockholm Stock Exchange. He pointed out that the Swedish corporate governance model has been remarkably successful in generating internationally competitive firms and developing financial markets that are relatively large and very active by international standards. He also noted that, given the highly concentrated ownership and control structure in Sweden corporations, this performance is contrary to the predictions of the recent law and finance literature. 1

3 He then explained how the extensive use of dual-class shares to separate control and ownership lead to a very concentrated control structure where a large fraction of listed firms are privately controlled, most often by a family. But, he pointed out that there is little evidence of minority exploitation, despite such control-ownership structure. He accounted for this anomaly by suggesteing that concerns about reputation and social status had had a disciplining effect on their behavior, discouraging minority abuse. Furthermore, he stressed that the crucial governance program is instead the lock-in effect, which is caused by the strong separation of ownership and control. There is a risk that entrenched owners will hang on to loss-making investment segments or subsidiaries too long, particularly if the investment is in prestigious and traditional lines of business, and resist valueincreasing takeovers, due to loss of control rents. He also pointed out the concern that entrenched owners are less likely to actively look for and respond quickly to new profitable opportunities inside or outside their established line of business. Discussant: Sung Wook Joh (Professor, Korea University Business School) Professor Joh made four comments. First, she postulated that the social control mechanism may not be unique to Sweden, pointing out that charities, foundations, and non-profit organizations also exist in Anglo-Saxon countries. Second, she questioned the strength of Swedish financial market. She asked whether many non-swedish firms are willing to be listed in the Swedish stock market. She also questioned the ability of Swedish firms to seize new investment opportunities while keeping their control/ownership structure. Third, she questioned how the Swedish economy will find a new engine for growth. She inquired whether creative destruction works in Sweden. She further asked how new firms with little retained earnings can finance their investment, when a single family controls almost 50% of the economy. Fourth, she asked whether the Swedish model can be applicable to other countries. Also, she questioned whether such model can be sustainable over time with the globalization of capital market and internatioinal convergence of corporate governance. Session 2: Governance of Banks and SOEs Paper 3: Governance of Banks Sung In Jun (Professor, Hongik University) Speaker Sung In Jun gave an overview of a number of common and special devices for solving the agency problems of banks. The professor then highlighted special features within the context of the Republic of Korea. With regard to the institutional aspect of banks in the Republic of Korea, he began by providing a detailed description of ownership restrictions, which are essentially based on two rationales: (i) to protect public safety net from abuse and (ii) to separate banking from commerce. However, this ownership control also acts as a disincentive for an active market for bank control. A presentation followed on the legal provisions that apply to bank boards and other internal staff. According to the Banking Act, banks in the Republic of Korea are required to have at least three outside directors, who should also be at least 50% of all board members. The Banking Act also requires Korean banks to have an outside director nomination committee and an audit committee (at least two thirds of the members should be outside directors). He also explained that the members of the audit committee should be nominated by a special committee, which 2

4 exclusively consists of outside directors. He further pointed out that banks are required to have compliance officers, and various fit and proper tests are applied to the bank president and the standing member of the audit committee. Despite the above, he argued that the regime does not always work as expected. Outside directors are often under-informed, under-motivated, and have insufficient disincentives to engage in inappropriate activities. Sometimes, the current qualification criteria are not strong enough to prevent people involved in illegal activities from becoming bank presidents. However, using the example of compliance officers, he stressed that strong enforcement without giving the players due rights may jeopardize the system. He also questioned the citizenship requirement for bank board members. Even in the United States, which has imposed a citizenship requirement since the 19 th century, now usually exempts the requirement in nearly all cases. He further argued that the citizenship requirement often misused in the Republic of Korea as a means of protecting domestic banks. Discussant: Joon-Ho Hahm (Professor, GSIS, Yonsei University) The discussant Joon-Ho Hahm suggested a number of reform measures. First, he stressed the importance of having outside directors who are accountable, adequately motivated, and equipped with relevant knowledge. Second, he observed that the CEO and outside director search committees remain largely as formalities and are not fully operative. Third, he suggested that the one-year term of office for outside directors of banks needs to be extended. Fourth, he stressed the need to upgrade the current negative list based qualification criteria for outside directors by strengthening expertise qualifications. Fifth, he emphasized that the compensation and the evaluation schemes for outside directors must be re-designed to improve monitoring incentives from a longer-term perspective. Paper 4: The New OECD Guidelines on Corporate Governance of State-Owned Enterprises Grant Kirkpatrick (Senior Economist, Corporate Affairs Division, OECD) The speaker Grant Kirkpatrick introduced the new OECD Guidelines on Corporate Governance of State-Owned Enterprises. The presentation began with a discussion of the rationales behind the development of the Guidelines and types of enterprises that they seek to govern. The process, the main characteristics, and the priorities in the Guidelines were also discussed. Mr. Kirkpatrick then gave a summary presentation of five key priorities: (i) (ii) (iii) (iv) (v) to ensure a level-playing field with the private sector, to reinforce the ownership function within the state administration, to improve transparency of SOE s objectives and performance, to strengthen and empower SOE boards, and to achieve equitable treatment of minority shareholders. To ensure a level-playing field, he stressed the importance of separating regulation and shareholding functions. He also emphasized transparency of special obligations and the competitive conditions in gaining access to finance. To reinforce the ownership function with State administration, he suggested that the ownership function be coordinated at the central level. He also proposed a clear and fully disclosed ownership policy. 3

5 To improve transparency, he mentioned the importance of disclosing financial assistance from the state and transactions with the state. To empower SOE boards, he stressed the importance of structured and skill-based nomination process. He also emphasized that the board should be able to appoint CEO and be accountable. He also pointed out that the number of state representatives should be limited and board chair and CEO should not be served by the same person. Discussant: Taehoon Youn (Fellow, Korea Development Institute) The discussant Taehoon Youn noted that while the efficiency gain through a successful privatization depends heavily upon the existence of an efficient and competitive market, not all countries are equipped with the necessary institutional infrastructure. Against this backdrop, he mentioned that it is a viable alternative to retain the government s control over the stateowned enterprises, while adopting a series of measures to enhance its efficiency before pushing ahead with complete privatization. Dr. Youn pointed out that this approach was used in the Republic of Korea not as an alternative, but as an enabling factor for a successful privatization. In other words, the government improved the efficiency of state-owned enterprises under state control, thereby preparing firms for increased competition in the unsheltered world. Dr. Youn also raised a number of questions about the Guidelines. First, he asked whether all the principles can or should be implemented as a package or whether a sequential approach is recommended. If a sequential approach is preferable, it would be useful to know which principles should be considered priorities. Second, he recommended that the Guidelines be updated to include a description of basic conditions when privatization should be preceded by efforts to improve corporate governance. Third, he stressed that the general public, especially the potential investors, should be informed about any government imposed obligations before the state-owned enterprises become listed. Fourth, he pointed out that in the Republic of Korea the presence of outside directors has helped to protect the company from political pressures. Lastly, he suggested that the Guidelines pay more attention to the reward system. In particular, he stressed the importance of combining the goal of profit maximization and public policy obligations when evaluating managerial performance. Session 3: Board of Directors Paper 5: The Board Revolution: How Global Pressures are Re-casting the Director s Job Stephen Davis (President, Davis Global Advisors, Inc.) The speaker Stephen Davis started his talk by saying that the world of corporate directors is now very much the same, and convincingly gave a serious of recent examples how global pressures work. He structured his talk around the top 10 trends affecting corporate directors. Trend No. 1: Funds Are Under The Microscope. He introduced that new ratings tools x-ray and compare funds based on stewardship. Examples include Morningstar, Mercer, and Planet Ratings. He also mentioned that N-PX forms and like disclosures will speed this trend. 4

6 Trend No. 2: Trend No. 3: Trend No. 4: Trend No. 5: Trend No. 6: Trend No. 7: Trend No. 8: Trend No. 9: Trend No. 10: Trustees At The Wheel. He introduced that UK Pensions Act drives mentioned the case of Universities Superannuation Scheme (USS), the board of which is driving changes through the Enhanced Analytics Initiative. Hands Across The Net. He pointed out that global cooperation between funds and groups of funds is exploding, with implications for more muscular engagement with boards. He gave examples of CII-ICGN, Committee on Workers Capital, 3iG, and Forum for International Cooperation on Climate Change. SRI March. He explained that, driven by European funds and regulation, investor engagement on SRI is now moving mainstream. Examples include WEF/Accountability project, UNEP, the breakthrough UK company law changes, the forthcoming UN summit on climate change, Cleantech of CalPERS/CalTERS, and emerging tools like Trucost and Innovest. Activism to Order. He introduced new services to professionalize and sharpen fund engagement with boards worldwide. Examples include Governance for Owners, Hermes EOS, and Insight Investment s Investor Responsibility Service. Blogs and Governance. He explained alternative sources such as blogs are now supplanting conventional media making fresh scrutiny of directors. Examples include Webb-site.com in Hong Kong, Crikey in Australia, and Moveon.org. He pointed out that a whistleblower at an internet café can now sway market perceptions. Grade Inflation. He mentioned about the rise of governance profiling industry. He stressed that this trend puts companies subject to comparison against global and home standards. Examples include PECC scorecards for Asia, GovernanceMetrics International, FTSE-ISS, TRIS in Thailand, and credit rating agencies, such as S&P and Moody s. Mergers, Acquisitions, and Governance. He stressed that governance now plays a much important role in merger and acquisitions transactions. The Deutsche Borse s bid for LSE was provided as an example. He mentioned that investment banks will now have to include governance considerations and funds may demand Transaction Governance Assessments. Governance License. He talked about the trend of professionalizing governance managers at corporations. As an example, he mentioned about ASCS s re-branding as Society of Corporate Secretaries and Governance Professionals. He also mentioned about the similar work by the UK s ICSA, plus Association of Corporate Governance Officers, which was just founded in London. Class Struggle. He pointed out that the curbs on class action in the U.S. mean law firms are hunting for institutional clients. He stressed that there are a lot of untapped clients abroad. He also mentioned that class action legislation is spreading abroad, with the most recent examples being France and the Republic of Korea. 5

7 As a way of coping with these trends, the speaker advised directors to obtain outside corporate governance ratings, incorporate the best new ideas and emerging standards, and collect information of shareholder concern to anticipate criticism. Discussant: Jinyoung Shin (Professor, Yonsei University) The discussant Jinyoung Shin generally agreed with the speaker, but pointed out that such trends have not yet been in the Republic of Korea for a full year. He mentioned a number of reasons: the role of institutional investors, legal, regulatory, and political environment, qualifications of outside directors, and M&A market. Nevertheless, he stressed that there are a number of lessons to be learned: (i) (ii) (iii) use global eyesight, remember that trends will be soon in full gear, and lead the trends, not just accommodate passively or struggle against them. Paper 6: A View From the Board: The Case of SK Telecom Sang-Koo Nam (Professor, Korea University; President, Korea Corporate Governance Service; Chairman, SK Telecom Audit Committee) The speaker Sang-Koo Nam introduced an interesting case study of a SK Telecom, a major firm in the Republic of Korea. He showed how a shareholder activist group, named Peoples Solidarity for Participatory Democracy (PSPD), prompted a major chaebol-affiliated firm to appoint independent outside directors in 1998, and how these directors changed the way the company is run. He regarded the appointment of independent directors in 1998 as a quiet revolt. He explained that, after the revolt, board meetings, which used to be just a rubber-stamping process, became a forum to discuss major managerial issues, seriously consider the alternatives, and approve management objectives and goals. To curb unwarranted transactions with affiliates, SK Telecom also required outside directors approval for any related-party transactions. This company was also the first Korean firm to introduce an audit committee in Despite the above, Professor Nam argued that the company should still aim to address several additional issues. First, the board still plays a relatively limited role as a top decision-making body. Second, independent directors are not truly independent, as most of the outside directors are still appointed by the majority shareholder. The speaker also mentioned that cumulative voting is all but dead. Third, access to relevant information is often limited and outside directors are still viewed as intruders. To make the corporate board to function effectively in Korea, he stressed that society as a whole should change from a relationship-based system to a rule-based system. He criticized the current system for appealing to personal relationships for problem solving. The speaker stressed that a systematic approach based on explicit rules is more effective. He also emphasized the importance of educating the outside directors, who may not be born independent, but could be trained and educated to become independent and neutral. In particular, he stressed that peer pressure could be used as an effective means to make outside directors truly independent. 6

8 Discussant: Kwangwoo Park (Professor, KAIST Graduate School of Management) In a review of the chaebol ownership structure in the Republic of Korea, discussant Kwangwoo Park emphasized the need to resolve the problem of unfair transactions among the related parties. As one solution, he agreed that the independence of outside directors can make a difference. However, he also stressed that the proportion of outside directors is very important for the peer pressure to have a positive effect. He also emphasized the importance of publicly disclosing how outside directors vote. Session 4: Institutional Shareholder Activism Paper 7: Institutional Shareholder Activism Mark Stoleson (Senior Vice-President, Sovereign Asset Management) The presentation began with a discussion of how responsible investors should be defined. According to the speaker, responsible investors seek to enhance value through the encouragement of ethical leadership and prefer to invest in markets with greater certainty of justice. Several reasons were also provided for one to become a responsible investor, while stressing the beneficial impact that corporate governance reform can have on companies, shareholders, and economies. After giving an overview of Sovereign Asset Management, the presenter addressed certain misperceptions that the Korean public may have about the firm, which is a portfolio investor and not a hedge fund or a private equity fund. Moreover, Sovereign has never engaged in hostile mergers and acquisitions or taken management control of any company. Following the discussion of his firm, Mr. Stoleson countered several misperceptions that the general public has in the Republic of Korea on foreign investors. First, he pointed out that overseas investors do not tend to invest speculatively, but rather hold their investments seven times longer on average than Koreans. Second, statistics were also provided to participants on the relatively inexpensive nature of foreign capital in relation to Korean standards. Third, by showing low dividend pay-out ratios of Korean firms, he pointed out that foreign capital is cheap even by international standards. Fourth, on management right, he pointed out that chaebol heads control 42% of votes with less than 2% of equity. Last, in reference to hostile mergers and acquisitions, the speaker explained that there has never been a hostile takeover of a Korean company by a foreign fund. Discussant: Hyun-Han Shin (Professor, Yonsei University) The discussant Hyun-Han Shin pointed out that responsible investors should not merely ask the companies they invest in to be responsible, but should be responsible themselves. For instance, to be fully responsible, he stressed that responsible investors should pay tax. On the Korea discount, the discussant explained that the root cause is not only the mistrust of corporate governance, but also the mistrust of social governance. He stressed that the increased independence of law enforcement from political influence and stronger protection of property rights would have discouraged corporations from seeking to pay off political parties in the last political election. 7

9 Paper 8: Institutional Shareholder Activism in Korea Woochan Kim (Professor, KDI School of Public Policy and Management; Chair, Center for Good Corporate Governance) Speaker Woochan Kim provided an overview of the key factors that impact institutional shareholder activism and then applied them to the case of the Republic of Korea. Factors identified included: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) the link between activism and investment performance, availability of legal engagement tools, investment size, liquidity, fiduciary duty, conflict of interest, investment horizon, and national antagonism. For the first factor, he showed empirical evidence that justifies activism in Korea: better governance leads to higher firm value. For the second, he explained that the Korean government had introduced a host of legal engagement tools since the financial crisis of The shareholding requirements for minority shareholders rights were significantly relaxed and the class action suite took effect from January For the third and fourth factors, he pointed out that Korean institutional investors tend to be small by international standards and allocate a small fraction of funds into equity, which discourages the activism of institutional investors. However, he noted that the National Pension Fund, which is growing fast, may become an activist, due to its size and the liquidity constraints it faces. He cited one projection that the fund size will peak at US$ 1.7 trillion in 2035, making it one of the largest funds in the world. For the fifth factor, he explained that fiduciary duty has been strengthened recently in the Republic of Korea, but not enough. For instance, he mentioned that there is no provision that imposes fiduciary duty on insurance companies. For the sixth factor, he explained that most of the institutional investors in the Republic of Korea are either controlled by business conglomerates, better known as chaebols, or by the government. As a result, they are unable to engage in activism, due to a conflict of interest. For the seventh factor, he showed statistics that Korean institutional investors have very short investment horizons, making them indifferent about activism. Professor Kim also gave a number of policy suggestions. To motivate investors, he suggested disclosing the corporate governance rankings by the Korea Corporate Governance Service (CGS), adopting the comply-or-explain rule by Korea Exchange (KRX), increasing the weight on equities by National Pension Fund, and encouraging institutional investors to coordinate on corporate governance issues. He also suggested imposing the duty to vote by law or prohibiting shadow voting by Korea Securities Depository. He also proposed that electronic voting be mandatory. To reduce conflict of interest problem, he suggested that the National Pension Fund could be made independent from other government interests by strengthening its governance structure. He also suggested investing more in corporate governance funds and promoting the proxy service industry. 8

10 Discussant: Young S. Park (Professor, Sogang University) The discussant Young S. Park showed statistics on the historical returns of stocks and corporate bonds. Between 1980 and 2005, stocks showed a return of 12%, while corporate bonds showed a return of 12.3%. These returns contrast sharply with many other countries, which show larger equity premiums. Weak corporate governance of firms in the Republic of Korea was offered as one explanation, since weak governance can lead to overinvestment, which has resulted in low profitability. The discussant also examined price discrepancies between common and preferred stocks, which are extremely large in the Republic of Korea at 54.5%. Session 5: Corporate Social Responsibility Paper 9: Corporate Social Responsibilities in Korea Kook-Hyun Moon (CEO, Yuhan-Kimberly) Introducing the Korean best practice of corporate social responsibility, speaker Kook-Hyun Moon argued that an emphasis on ethical management, which takes the social and environmental impact of policy into account, can improve competitiveness. He also explained how the company successfully disseminated and implemented best practices in other countries, such as Mongolia and China. Discussant: Dong-Sung Cho (Professor, Seoul National University) The discussant Dong-Sung Cho mentioned that the BEST Forum, which stands for Business Ethics is the Source of Best Performance, was created in 2003 by admirers of CEO Moon s leadership in ethical and environmental management. At the BEST Forum, 43 CEOs took a voluntary oath that each would manage their companies ethically. Paper 10: Corporate Social Responsibility The Role of the Private Sector and International Financial Institutions Djordjija Petkoski (Head, Corporate Governance and Corporate Social Responsibility Team, WBI, World Bank) Speaker Djordjija Petkoski addressed corporate social responsibility within a broader context. The focus of the presentation was on how this framework can help to provide an innovative approach and address global development challenges. He emphasized that innovative forms of public-private partnership, including the involvement of international financial institutions and civil society are critical to more effectively deal with global development issues. Session 6: Enforcement of Good Governance Paper 11: Corporate Governance and Enforcement: A Korean Perspective Kon Sik Kim (Professor, Seoul National University) The speaker Kon Sik Kim started off with a general overview of enforcement within the context of corporate governance. After describing several types of enforcement mechanisms, the speaker pointed out that each has its own merits and demerits. For example, criminal 9

11 prosecution can be powerful and simple, but can be influenced by political considerations and lack of expertise on the part of prosecutors can be a problem. He also pointed out that various enforcement mechanisms are complements to each other. For example, shareholder derivative suits depend on evidence generated by the Financial Supervisory Commission (FSC). Lastly, he argued that an ideal mix of enforcement mechanisms may change, as the country moves along the path of economic, social, and political development. In case of the Republic of Korea, he mentioned two factors that impede the effectiveness of enforcement mechanism. The first is resistance by vested interests and the second relates to the cultural antipathy toward monetary incentives. In reference to the vested interest problem, he pointed out that the controlling shareholders of Korean chaebols often wield much more voting power than their true economic stakes. Any attempt to correct this would be strongly resisted. He also pointed out that the controlling shareholders of Korean chaebols are less interested in shareholder value, as they have no intention to sell their shares and become passive investors. More importantly, he stressed that chaebols do effectively resist government reform measures by making use of their dominant status in society. On this point, the speaker explained that mass media, audit firms, law firms, courts, prosecutors, institutional investors, politicians, and even academia cannot be independent from the chaebols. With reference to the antipathy toward incentives, the speaker explained the situation by examining different examples of securities class actions and stock options. He partly explained the phenomena by the legacy of the Confucianism. Discussant: Jooyoung Kim (Attorney, Hannuri) The discussant Jooyoung Kim fully agreed with the speaker that law in practice is more important than law on the books, and also stressed that Government should not be misled by popular opinion generated by interest groups. Mr. Kim took the example of Securities Class Action Act, introduced in January 2005, to explain in greater detail how difficult it is to introduce a new enforcement mechanism. He explained how strongly the business community opposed and criticized the Act s adoption, and how the government, the supervisory authority, and the ruling party gradually changed their positions against the Act. He went through a number of changes made by the government and the National Assembly during the first half of this year that greatly weakened the effectiveness of securities class action suit. Mr. Kim also explained in great detail that there exist misperceptions about the Act and how different it is from that of the U.S. Paper 12: Corporate Governance and Enforcement Jesus Estanislao (Chairman, Institute of Corporate Directors, Philippines; Former Finance Minister) The speaker Jesus Estanislao discussed the challenges of enforcement of corporate governance in East Asia. He stressed that additional, country specific efforts, including capacity building, beyond the initial ones on developing codes and principles, are needed to make sure that proper corporate governance practices are actually observed in both companies and banks. Discussant: Hwa-Jin Kim (Attorney, Woo Yun Kang Jeong & Han) The discussant Hwa-Jin Kim pointed out that law enforcement is effective, but costly and very often not applicable to the responsible individual managers. He then stressed that law enforcement should be understood as the mechanism that supports the market discipline. As market solutions, he suggested comply-or-explain and cross-listing at U.S. exchanges. 10