Constituency Directorship as Corporate Governance Reform Tool? - Korean Experiences of MINORITY Directors and Labor Directors

At the core of corporate governance are corporate boards, which have the authority to make the main decisions of a firm. Reforming corporate board composition is a way to change a firm’s corporate governance most promptly and drastically. However, an extremely abrupt reform invites malfunction and fierce conflict in the boardroom, a result that can threaten the sustainability of a firm. Board composition reform requires thoughtful and thorough analysis in advance. Recent agendas on board composition include constituency directors who are expected to partly replace conventional board systems dominated by majority shareholders. This paper reviewed the pros and cons of minority representatives and labor representatives, as well as major legislations on these two types of constituency directors. Minority representatives are integrated to avoid the inappropriate influence of the controller in the boardroom. Typical methods of electing minority representatives include cumulative voting and quota allotment, and this paper favors the latter in terms of simplicity, straightforwardness, and predictability. On the other hand, the labor representative also has the advantage of promptly reflecting stakeholders’ view in the boardroom, and their integration is a possible policy choice. No legislation mandates both minority representatives and labor representatives. However, the two types of constituency directors, whose final goal is somewhat different, may be compatible if the board composition rule is balanced and properly designed. In some countries with prevailing CMS, such as Korea, attempts to mandate various types of constituency directors have been made as a cure for CMS’s agency problem. For the sole purpose of monitoring CMS’s private benefit seeking, labor representatives are not always good watchdogs. They may even cancel out the positive effects of minority representatives’ active monitoring by supporting majority views under explicit or implicit agreement with management. Adding a labor representative on top of a minority representative should be done cautiously, and it should be ensured that the monitoring function of a minority representative is not weakened.