Medium-Sized Listed Companies Concerned about Enforcement of New Regulations

Jan 30, 2019

Large-scale listed companies with more than $1.79 billion (2 trillion KRW) in assets are concerned about changes to various systems that are set to be introduced in 2019. Level of concerns towards their internal controls is growing as they will be obligated to publically announce their corporate governance and others.
As amount of pressure from activist funds based on Stewardship Code grows, even medium-sized companies are faced with pressure to improve their corporate governance.
According to Financial Services Commission (FSC) and Korea Institute of Certified Public Accounts (KICPA), listed companies with more than $1.79 billion in assets will be obligated to publically announce their corporate governance starting from this year. After February when a proposal for standard audit hours is officially announced, these companies will be immediately subjected to about 3,000 hours of audit hours annually. Audit for internal accounting management system will be enforced immediately as well.
According to KICPA, there were 156 listed companies with at least $1.79 billion in individual assets at the end of 2017 corresponding to 20% of entire stock market. It is expected that this number will increase after this month when listed companies finish submitting their business reports for 2018.
Major companies are currently busy with restructuring their internal control system since they will receive various sanctions if they do not announce deliberations and decisions made by board of directors and conflict of interests between nonexecutive directors and major shareholders and management.
Corporations with more than $1.79 billion in assets have already started restructuring their corporate governance. Stock industry is expecting policies that will increase stocks of Lotte Holdings, Hanjin Kal, Hyundai Green Food, and Daelim Industrial through improvement in their corporate governance.
However, a bigger problem lies with medium-sized companies that have more than $1.79 billion in assets even though they are not large corporations. There are concerns towards various side-affects rising from additional burden from enforcement of various obligations and systems on top of current regulations.
“Medium-sized companies that lack preparations will be left helpless due to enforcement of many obligations and systems.” said a financial executive for a medium-sized company. “Amount of burden is rising for listed medium-sized companies when they are already having difficult times with lack of procurement of additional funds from stock markets.”
Some medium-sized companies such as Nongshim Holdings are being mentioned as major targets of activist funds by financial investment industry. They can be targeted by minority shareholders due to a regulation that limits major shareholders from exercising only 3% of stocks whenever listed companies appoint audit committee. On the other hand, Nongshim can be exposed to various internal control as its asset is over $1.79 billion.
Hanjin Kal is an opposite case. Hanjin Kal recently increased its asset to $1.79 billion through procurement of short-term debts. Because it is obligated for companies with more than $1.79 billion in assets to appoint audit committee, it used the fact that it can appoint an outside audit committee to its advantage. Hanjin Kal’s asset was $1.72 billion (1.9252 trillion KRW) at the end of 2017.
Some are worried that this issue can lead medium-sized companies to divide their businesses. “Many medium-sized companies such as Hanjin Kal have not increased their assets and divided their businesses to avoid various regulations.” said a representative for a medium-sized company. “When Stewardship Code is enforced, there will be a trend where medium-sized listed companies will look to avoid additional growth.”
Staff Reporter Ryu, Geunil | ryuryu@etnews.com

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