A Comparative Study on Approaches to the Independence of Outside Directors and Audit Committee in Korea and the U.S.

There has been much debate on the independence of a board of directors in Korea, and for this reason legislatures are planning on adopting laws of electing independent audit committee members separately and double derivative suit, as well as considering to adopt mandatory cumulative voting to improve corporate governance in Korea. This article examines whether mandatory or market based approach to corporate governance legislation improves corporate governance in Korea in terms of strengthening the independence of the board of directors and audit committees. Firstly, this article studies the role of independent outside directors in the U.S. and Korea. While the independence of the board of directors has been weak because of controlling shareholders and circular share-holding ownership structure among big business groups in Korea, there have been attempts to improve this situation. This article examines whether adopting mandatory rules of corporate governance such as selecting independent directors for audit committee can play the role of improving corporate governance i0n Korea. To do so, this article discusses the current role of outside directors and controlling shareholders. This article will then review audit committees in the U.S and in Korea to find out positive changes in corporate governance. Last but not least, this article will discuss that Korea needs a mandatory approach instead of market based approach to improve independence of outside directors and audit committee. This article examines whether a mandatory approach to corporate governance legislation to improve corporate governance in Korea is appropriate, considering its current stage of corporate governance development.