The Business Judgment Rule: A Missing Piece in the Developing Puzzle of Korean Corporate Governance Reform

Abstract

Following a currency crisis in late 1997 which caused widespread corporate failures, Korea enacted a number of legislations to improve the transparency of corporate governance structure. While laudable in their empowerment of minority shareholder rights, such laws nonetheless had a major flaw in that they did not provide countervailing protections for director discretion. Consequently, derivative suits seeking director liability rapidly multiplied, and in several high-profile cases directors were held accountable for enormous sums based on apparently mere errors in judgment. Risk taking is the centerpiece of entrepreneurial capitalism. And directors bear the ultimate managerial authority for the corporation. However, by indiscriminately imposing personal accountability on directors for inherently risky business judgments, the current Korean laws undercut the fundamental purpose of a corporation, which is to maximize profit based on the principle of risk-and-return proportionality. This is worrisome given the current position of Korea in the global economy and its stated goal to upgrade its laws and institutions to a level that will be internationally competitive.

As a partial solution to this conundrum, this article proposes the adoption of the business judgment rule as developed in the Anglo-American jurisprudence. In its simplest form, the rule represents the courts reluctance to second-guess the business decisions of directors, absent loyalty issues. While the rule has many context-based variations, incorporating as a judicial doctrine the rule at least in its basic form would be a valuable starting point for redirecting Korean corporate laws in the right direction. Incorporating the specific mechanics of the rule, such as the presumption-based shifting of the evidentiary burden and gradated standards of liability, requires an approach tailored to Koreas legal structure and traditions concerning director duties and liabilities. However, Korean judges have a wide discretion in statutory interpreation and should be able find innovative ways to bring the Korean corporate jurisprudence in substantial convergence with international norms.

For example, Articles 383-3 and 399 of the Commercial Code can be read to hold directors liable only in the case of an abuse of discretion or a grossly negligent performance of their duties. The court can also require that the plaintiff in a director liability suit to overcome the presumption of due care as well as establish the foreseeability of harm under Articles 390 and 393 of the Civil Code. These may not be complete solutions. However, given the current anti-business sentiment among the public and the consequent unlikelihood of a major statutory overhaul any time soon, such judicial approach probably would be the most practicable solution. In sum, incorporating the business judgment rule into the current Korean corporate jurisprudence is both desirable and doable as a matter of both law and policy.