1. Purpose

A new revision to the Financial Investment Services and Capital Markets Act ("FSCMA") passed in early 2020 will be taking effect this October 21, 2021. This amendment includes a new provision, Article 165-20, which requires that the board of directors of a listed company with a total assets of KRW 2 trillion or more shall not be entirely comprised of individuals of one gender; in other words, diversity is required by law. The actual law is as follows.

Article 165-20. Special provision regulating the gender composition of the board of directors.

A publicly listed companies with total assets [for a company engaging in financial business or insurance business, it shall be the amount of total capital (amount calculated by subtracting total liabilities from total assets in the financial statements) or capital stock, whichever is the greater] of KRW 2 trillion or more at the end of the latest financial year, shall not fill the entirety of its board of directors with members of one gender.

The purpose of introducing this new provision is to promote gender equality for women to expand their roles in economic activities, to ensure diversity in corporate decision making and to encourage changes in the corporate culture.

For reference, according to the G20/OECD Principles of Corporate Governance (jointly ratified by the OECD and G20, hereinafter "OECD Principles"), corporate governance is a system that guides and monitors a corporation, designed to continuously protect the stakeholders' interests to the extent they are consistent with the public interest. According to the OECD Principles, good corporate governance becomes the essential means to create market confidence and business integrity. Applying this perspective, the aforesaid OECD Principles consist of six chapters: (1) Ensuring the basis for an effective corporate governance framework; (2) The rights and equitable treatment of shareholders and key ownership functions; (3) Institutional investors, stock markets, and other intermediaries; (4) The role of stakeholders in corporate governance; (5) Disclosure and transparency; and (6) The responsibilities of the board. Chapter 6 ("The responsibilities of the board") provides that diversity of board's composition and perspective comes from multiple factors (e.g., gender, experience, race, age, problem-solving method, etc.) and gender diversity is a means to encourage constructive discussions and improve performance of the board.

As such, many European countries such as Norway, Finland, Spain, Belgium, France, Germany, Italy, have introduced bills assuring female representation on corporate board of directors. Similarly, the state of California in the United States has enacted a law (California bill SB 826) in late September 2018, requiring that California-based listed companies shall include at least one female officer on their boards. The enactment of this law is deemed be an effort to accommodate the global trends of facilitating women's participation in economic activities.

2. Main Aspects of the Amendment

The new provision requires that listed companies with total assets of KRW 2 trillion or more shall not compose the board in its entirety with directors (registered officers) of one gender. Nevertheless, there is no provision imposing civil/criminal sanctions or duty of disclosure for violating the above provision. However, regardless of any sanction provisions, if a board composition violates the new requirement, a resolution of the board and the management's execution thereon may be denied of the effect and be unenforceable.

3. Anticipated Effects

1. More Female Directors on the Board

As a direct result of the enactment, we have seen a significant increase of female directors being appointed for the publicly listed companies with total assets more than KRW 2 trillion (as of December 31, 2020) in anticipation of the amended FSCMA - the number of companies with female directors went from 37 companies (36 KRX-listed companies, one KOSDAQ-listed company, as of 31 December 2019) to 62 companies (61 KRX-listed companies, one KOSDAQ-listed company, as of 31 December 2020). It is expected that the number of such companies will increase further as the amendment comes into effect this October.

2. Higher ESG Performance Ratings

According to an empirical analysis that examined the relationship between the board gender diversity and the Environmental, Social and Governance ("ESG") corporate ratings published by ISS Corporate Solutions, the analysis shows1 that companies with diverse boards obtained higher ESG scores. This result suggests that a board consisting of diverse genders responded better to risks, provided more comprehensive insight into customer trends and priorities to the key stakeholders, and improved the participation and efficiency of the board.

The ESG rating is significant as this ties into the Korean government's plans. Starting from 2021, the Korean National Pension Service plans to apply ESG ratings to investment decisions with regard to domestic stocks and bonds, and further plans to drastically increase the portion of ESG-based investment to about 50% of the total assets since 2022. By the same token, the Financial Services Commission plans to mandate all KRX-listed companies to disclose their corporate governance reports starting in 2026. Such external pressures will likely impact the number of female directors appointed on the board even for those companies not subject to the FSCMA requirement in order to improve their ESG ratings.

4. Limitations and Implications

One limitation of the amendment is that despite the increase in female directors, this usually stays to outside directors. Among 211 listed corporations with total assets of KRW 2 trillion or more, only 14 companies have appointed female inside directors (14 KRX-listed companies, as of December 31, 2020). Out of the 14 companies, only 4 companies have appointed female inside directors who are not related to the majority shareholders (the other 10 companies' female inside directors are in fact the majority shareholders or their affiliated persons).

Another limitation is that the appointment of female directors does not automatically improve ESG ratings. Thus, it is necessary to implement certain internal measures-e.g., establishing ESG-related rules and implementing related policies, etc.- to create an atmosphere to relax rigid corporate culture and encourage diverse opinions to be presented within the board.


1. Cristina Banahan and Gabriel Hasson. "Across the Board Improvements: Gender Diversity and ESG Performance," Harvard Law School Forum on Corporate Governance and Financial Regulation, 2018.9.6. https://corpgov.law.harvard.edu/2018/09/06/across-the-board-improvements-gender-diversity-and-esg-performance/

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