Background of KT&G`s cumulative voting decision

The decision by Korea Tobacco & Ginseng Corporation (KT&G) to delete the ``exclusion clause`` on cumulative voting from its articles of association, a first among listed companies, is a major cause for concern. The public corporation’s attempt to protect minor shareholder`s rights will have a great influence on other companies both in the public and private sectors.

The cumulative voting system enables minor shareholders to cast their votes to the candidate alone collectively. For example, suppose that a company is going to choose three directors from four candidates, and major shareholders have 300 shares of total 450 shares, and so minor shareholders have the remaining 150 shares. In the usual voting system, each shareholder gives a vote of pros and cons to each candidate (i.e.: four persons: A, B, C. D) respectively. In this case, major shareholders can give their votes for the three favorable candidates, but can vote against the candidate who stands for minor shareholders, thereby enabling to compose favorable board of directors.

However, cumulative voting system selects three directors simultaneously. Voting right per share is given based on the number of directors to be chosen. In this case, minor shareholders can give their whole votes of 450 to the ``candidate D`` collectively (150 shares x 3 directors to be chosen).

After a heated controversy on the introduction of cumulative voting in 1998, the Commercial Law was revised to include the clause ``In the event that there is no exclusion clause, directors can be chosen using the cumulative voting system.`` In consideration of this reserve clause, most companies inserted ``exclusion clauses`` in their articles of association. Currently, 78% of listed companies have the clause. Among the many public corporations, only Korea Gas Corporation doesn`t have an ``exclusion clause``.

As for the 22% of listed companies that have it, they would seem to be obliged to conduct cumulative votes when called upon to do so by minor shareholders. So far, no such case has arisen.

KT&G has 320,000 shareholders, the largest number among listed firms in Korea. Said Lee Young-Tae, chief of the KT&G management strategy bureau, ``In line with the government’s policy to sell off its 53% stake in the company this year, KT&G is preparing a model corporate governance structure.`` KT&G currently has seven standing directors, which is intends to reduce to less than six, and eight non-standing directors. It also plans to establish special subcommittees such as a steering panel, management evaluation and compensation board, auditor committee and outside director recommendation panel.

Meanwhile, regarding the minor shareholder’s movement led by non-government organizations like the People`s Solidarity for Participatory Democracy, those in business circles are concerned that their activities pose a threat to the normal operation of local firms.

The executive deputy chairmen of five major economic bodies, including the Federation of Korean Industries and the Korea Chamber of Commerce and Industry, will hold a luncheon meeting at the Lotte Hotel on Mar. 7 to discuss problems related to the movement and the possibility of putting a stop to it.