[Reporter's View] The revision of the Commercial Act

Sends a warning to the pharmaceutical industry

The bill on revising the Commercial Act has passed the National Assembly.

 

The bill expands the fiduciary duty of directors to include not only the “company” but also “shareholders,” mandates the introduction of electronic shareholder meetings for listed companies with assets of KRW 2 trillion or more, and changes the title of “outside directors” to “independent directors.” The bill also includes a provision limiting the voting rights of the largest shareholder and related parties to 3% when appointing audit committee members.

 

The pharmaceutical and biotechnology industry has been keenly eyeing the change.

 

This is because many companies in the industry have traditionally been owner-managed.

 

Owner-managed companies have the advantage of being able to make quick decisions and establish long-term strategies.

 

Nevertheless, the absence of proper oversight mechanisms has often led to abuses such as unilateral decision-making and the pursuit of private interests.

 

In fact, there are countless cases where internal transactions with special-related companies controlled by the owner's family are approved by the board of directors without any significant opposition.

 

Many companies have not paid dividends for several years while the owners' compensation increases every year.

 

The second and third generations of owners are appointed to key positions without any verification of their expertise, but the board of directors, which should serve as a check on them, fails to fulfill its role.

 

Even when facing major business decisions such as changes in clinical strategies or whether to apply for approvals, management often unilaterally sets the direction without prior explanation or communication with shareholders.

 

There have also been repeated controversies where clinical results are intentionally delayed or distorted information is leaked to boost stock prices, followed by the sale of shares held by owners or management at that time.

 

These structural limitations are also evident in ESG evaluations.

 

Pharmaceutical and biotech companies have consistently received lower ratings in the governance (G) category compared to the environmental (E) and social (S) categories.

 

This is because the board of directors has lost its oversight function, and internal audits are often conducted merely as a formality.

 

In the process of repeated closed and arbitrary decisions being made, general shareholders are pushed out of the decision-making structure.

 

Such closed decision-making increases the risk of business failure, and its impact is not limited to the losses of the company concerned.

 

It also leads to losses for investors, a decline in overall market confidence, increased risks for partner companies, and ultimately impose a burden on patients waiting for new drugs.

 

The recent revision of the Commercial Act addresses these issues.

 

The revision aims to expand the scope of directors' duties to include shareholders, clarify the status of independent directors, and strengthen shareholder participation through electronic shareholder meetings.

 

Although issues such as cumulative voting and mandatory separation of audit committee elections remain as future tasks, the revision is analyzed as providing a clear direction for frontline companies.

 

The pharmaceutical and biotechnology industry must now recognize shareholder oversight and participation not as a “burden” but as a “responsibility.” Owner-centric quick decision-making is not always the right choice.

 

Especially in industries like new drug development, which require extensive time and resources, the initial direction of decision-making can determine success or failure.

 

A governance structure with checks and balances and transparency is the only way to minimize the costs of failure.

 

In the realm of corporate decision-making, direction is more important than speed.

 

Though change is often uncomfortable, it is essential — and the pharmaceutical and biopharmaceutical sectors are no exception.